Loading the player...

What does 'Invisible Hand' mean

The term “invisible hand” is a metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large. It was introduced by Scottish enlightenment thinker Adam Smith in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776).

BREAKING DOWN 'Invisible Hand'

There are two critical ideas behind the invisible hand. First, voluntary trades in a free market produce unintentional and widespread benefits. Second, these benefits are greater than those of a regulated, planned economy.

Each free exchange creates signals about which goods and services are valuable and how difficult they are to bring to market. These signals, captured in the price system, spontaneously direct competing consumers, producers, distributors and intermediaries — each pursuing their individual plans — to fulfill the needs and desires of others.

In “The Wealth of Nations,” Adam Smith wrote:

"Every individual necessarily labors to render the annual revenue of the society as great as he can ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention ... By pursuing his own interests, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Smith only mentioned the invisible hand three times and just once in “The Wealth of Nations,” leaving a rather nebulous concept. Later economists better explained Smith's invisible hand, especially F.A. Hayek's “spontaneous order” and Joseph Schumpeter's “creative destruction."

Invisible Hands Guide Business Productivity

Business productivity and profitability are improved when profits and losses accurately reflect what investors and consumers want. This is well-demonstrated through a famous example in Richard Cantillon’s “An Essay on Economic Theory” (1755), the book from which Smith developed his invisible hand concept.

Cantillon described an isolated estate that divided into competing leased farms. Independent entrepreneurs ran each farm to maximize their own production and returns. The successful farmers introduced better equipment and techniques, and brought to market only those goods for which consumers were willing to pay. He showed that returns were far higher when the estate was run by competing self-interests rather than the previous landlord's command economy.

Invisible Hand, Economics and Regulation

“The Wealth of Nations” was published during the first Industrial Revolution and the same year as the American Declaration of Independence. Smith’s invisible hand became one of the primary justifications for an economic system of free market capitalism.

As a result, the business climate of the United States developed with a general understanding that voluntary private markets are more productive than government-run economies. Even government rules sometimes try to incorporate the invisible hand. Former Fed Chairman Ben Bernanke explained the "market-based approach is regulation by the invisible hand" which "aims to align the incentives of market participants with the objectives of the regulator."

  1. Invisible Supply

    Physical stocks of a commodity that are available for delivery ...
  2. Invisible Hard Market

    A property/casualty insurance market phenomenon in which the ...
  3. Promotion

    A promotion can refer to the advancement of an employee's position, ...
  4. Capitalism

    A definition of capitalism, describing its history, how it differs ...
  5. Promoter

    A promoter is an individual or company that, for a fee, helps ...
  6. Social Entrepreneur

    A social entrepreneur is a person who pursues an innovative idea ...
Related Articles
  1. Insights

    Pros and Cons of Capitalist vs Socialist Economies

    Capitalism relies on the markets. Socialism, on government planning. Each system has its pros and cons.
  2. Investing

    Could Chinese Stocks be the Next Big Short?

    Crescat Capital has pointed to signs that the Chinese stock market may reach a crisis point.
  3. Personal Finance

    Odd eBay Sales

    Whether you need a ghost in a jar or a celebrity-owned socks, eBay can hook you up.
  4. Insights

    The History of Economic Thought

    Economics is a vital part of every day life. Discover the major players who shaped its development.
  5. Investing

    Box Inc: How Two Best Friends Launched a Potential Empire (BOX)

    Learn how Aaron Levie and Dylan Smith, along with other childhood friends, came up with the idea for Box Inc. in a backyard hot tub.
  6. Insights

    Can Socialism Work In America?

    Capitalism has its shortcomings, but pure socialism is not the answer. The American system of capitalism with socialistic touches might be good for the US.
  7. Insights

    Sinclair Alters Executive Leadership Roles (SBGI)

    To focus on the company's growth strategies, Sinclair Broadcast Group reshaped its executive leadership structure with three internal promotions.
  1. How does the invisible hand affect prices in the Microeconomic Pricing Model?

    Find out why the microeconomic pricing model cannot accurately describe economic phenomena, and how it misses the real causes ... Read Answer >>
  2. How is the invisible hand affected in a communist or socialist economy?

    Discover why the invisible hand of the market is compromised by socialist and communist economies, where the government controls ... Read Answer >>
  3. Who coined the term "entrepreneur"?

    For one, it wasn't Adam Smith. One person strangely overlooked in Smith's free market masterpiece, The Wealth of Nations, ... Read Answer >>
  4. What are the advantages and disadvantages of a command economy?

    Learn about the basic tenets of a command economy and what its inherent advantages and disadvantages are versus a free market ... Read Answer >>
  5. What impact does industrialization have on wages?

    Discover the impact that industrialization has on wages, and how the Industrial Revolution changed human standards of living ... Read Answer >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center