Invisible Hand Metaphor

An Invisible Hand Metaphor is a metaphor that the unintended consequences in a free market are often better outcomes and intended consequences.

• • …
• Counter-Example(s):
  • Tragedy of the Commons.
• See: Economics, Capitalism, Profit Motive, Laissez-Faire, Self-Centered Person.

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References

2014

• (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/Invisible_hand Retrieved:2014-9-28.
  • In economics, the invisible hand of the market is a metaphor used by Adam Smith to describe the self-regulating behavior of the marketplace. Individuals can make profit, and maximize it without the need for government intervention. The exact phrase is used just three times in Smith's writings, but has come to capture his important claim that individuals' efforts to maximize their own gains in a free market may benefit society, even if the ambitious have no benevolent intentions. Smith came up with the two meanings of the phrase from Richard Cantillon who developed both economic applications in his model of the isolated estate. He first introduced the concept in The Theory of Moral Sentiments, written in 1759. In this work, however, the idea of the market is not discussed, and the word “capitalism” is never used. By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for many years, and in this work the invisible hand is more directly linked to the concept of the market: specifically that it is competition between buyers and sellers that channels the profit motive of individuals on both sides of the transaction such that improved products are produced and at lower costs. This process whereby competition channels ambition toward socially desirable ends comes out most clearly in The Wealth of Nations, Book I, Chapter 7. The idea of markets automatically channeling self-interest toward socially desirable ends is a central justification for the laissez-faire economic philosophy, which lies behind neoclassical economics. In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the "invisible hand" is. In alternative models, forces which were nascent during Smith's life, such as large-scale industry, finance, and advertising, reduce its effectiveness.

1776

• (Smith, 1776) ⇒ Adam Smith. (1776). “An Inquiry Into the Nature and Causes of the Wealth of Nations...."
  • QUOTE: By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. …

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