Adam Smith was a Scottish economist, philosopher, and author who lived in the 18th century. He is best known for his two works: The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. “The Wealth of Nations” is considered as the bible of capitalism by many economists. In today’s article we’ll take a look at the most recognized interpretation of one of his principles: The Invisible Hand.
In The Wealth of Nations, Smith proposed that in order for a country to do its best, every person should do what is best for themselves when trying to make money. He said that the economy works best when people are allowed to buy and sell freely among themselves. Though Smith only mentioned the invisible hand three times in his work, economists after him have interpreted it as following:
If companies can choose what they would like to sell and for how much, competition will arise between various businesses. When a lot of one product, let’s use corn, is on the market, companies will be forced to lower their prices or else their customers will go to the cheaper shop next door. This would ultimately lead to lower prices which is in the buyers best interest. Store owners are not lowering their prices because they have the consumers interest in mind. Instead they ‘re thinking about what’s best for them: attracting as many customers as possible. Now when corn gets scarcer, prices will go up and the shop owners will want to produce it again since they will be able to sell it for much more than before. This will lead to a lot of corn on the market and the whole “circle” will recommence. The “invisible hand” maintains an equilibrium between the supply and the demand of a product.
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