Loading the player...

What does 'Invisible Hand' mean

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'

The invisible hand metaphor distills two critical ideas. 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."

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."

RELATED TERMS
  1. Invisible Hard Market

    An invisible hard market refers to a rising property and casualty ...
  2. Invisible Supply

    Invisible supply refers to an unknown amount of stock of a commodity ...
  3. Promotion

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

    The free market is an economic system based on competition, with ...
  5. Economy

    An economy is the large set of interrelated economic production ...
  6. Building Society

    A building society is a type of financial institution that provides ...
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

    How 5 Influential Economists Changed Americas History

    Find out how five economists made contributions to financial theory that crossed over into many aspects of social history in America such as Adam Smith.
  3. Personal Finance

    Roles and Functions of Modern Investment Banks

    Discover the different roles and functions that surrounds investment banks, and the role they have played throughout the evolution of the modern system.
  4. Insights

    Four Misconceptions About Free Markets

    These free market fallacies have hounded economists since the days of Adam Smith.
  5. Personal Finance

    Are College Honor Societies Really Worth It?

    College honor societies may offer substantial benefits to members and alumni, but they are not the only way for you to achieve your goals.
  6. Insights

    Introduction to Supply and Demand

    Learn about one of the most fundamental concepts of economics - supply and demand - and how it relates to your daily purchases.
  7. Insights

    Seven Decades Later: John Maynard Keynes' Most Influential Quotes

    It's been 72 years since the influential economist died; here are some of his most influential quotes.
  8. Investing

    The Hidden Investment Fees of Mutual Funds

    Learn about the hidden fees to watch out for when considering mutual finds and so you can buy smart and increase your rate of return.
RELATED FAQS
  1. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  2. 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 >>
  3. What are some common features of a mixed economic system?

    Look at a brief overview of the defining features of mixed economies and its perceived advantages and disadvantages Read Answer >>
  4. What role does the government play in capitalism?

    Take a deeper look at the role of government in a capitalist economic system and about competing ideas about the proper amount ... Read Answer >>
  5. What is the history of the market economy?

    Take a quick tour through the history of the market economy -- the system of voluntary economic exchanges guided by private ... Read Answer >>
  6. Is the United States a Market Economy or a Mixed Economy?

    The United States is a mixed economy, combining elements of a true free market economy with governmental, economic controls. Read Answer >>
Trading Center