Smart businesses would react by offering quality products at reasonable prices. Customers would show their displeasure by fleeing to a competing business. In theory, if a company that sought to dominate an industry continued to offer inferior merchandise at exorbitant prices, the public would rebel. Smith promoted the idea that would-be monopolies would fail so long as the public could buy products from whomever it pleased. Smith argued that free competition in the marketplace could serve as a defense against the rise of monopolies. It was also a time when privileged people were using international trade and colonization to amass immense wealth. Smith’s book appeared at a time when Europe and America were exploring the idea of giving a greater voice to the ordinary person. Often the title is shortened to The Wealth of Nations. It appeared in a famous book written by Scottish philosopher Adam Smith entitled An Inquiry into the Nature and Causes of The Wealth of Nations. The concept of the invisible hand dates back to 1776. Those less inclined to put faith in Smith’s invisible hand economic model tend to believe that government action can mitigate and even prevent national and local economic struggles such as recessions. Those who believe in the invisible hand are more likely to favor a hands-off or laissez-faire approach by the government regardless of the condition of the economy. Detractors argue that if you allow business owners great freedom, they’ll behave in a manner that will harm more vulnerable people. Some believe that if you leave market forces alone, it will help everyone. They can choose to spend their hard-earned money only with sellers who are willing to offer them products that they want at a price they are willing to pay.īoth the supporters and critics of the invisible hand theory can influence the way that nations tackle economic downturns. They can also set their own prices for those products.Ĭonversely, buyers are free to bypass sellers who offer items in which they have no interest or that they feel are priced too high. If a seller currently offers a product that is no longer popular, they have the option to switch to an item that customers are willing to purchase. The concept of the invisible hand allows sellers the freedom to meet the demands of buyers. The market becomes more efficient as buyers and sellers move in the same direction - as if directed by an invisible hand. The buyer then rewards the shop owner by making purchases. When a savvy shop owner notices that certain items are no longer popular, they’ll replace them with merchandise that’s in demand. The self-interests of the buyer and seller determine the marketplace. However, they will soon stop shopping at places that do not carry the merchandise that they want or that they feel are overcharging. They will purchase from a shop owner who stocks the items they like and offers them at reasonable prices. They don’t want to waste their money on products that aren’t right for them. So, self-interest is the motivating factor.Ĭustomers are likewise typically looking out for their self-interests. The owners are selling those items because they want to make money. They may want their customers to be happy, but they’re still primarily operating out of self-interest. Naturally, they’re going to choose items that they believe have the best chance of selling. When an economy works under the concept of the invisible hand, shop owners choose which products they want to offer. Their actions will result in correcting and improving the marketplace - As though an invisible hand directs the buyers and sellers to do exactly the right thing in the public interest and to boost the overall economy. Individual buyers and sellers will act according to what is in their own best interests. Supporters of the invisible hand approach believe that if the economy is left alone, it will regulate itself in most cases. The invisible hand is the concept that economies work best without direct governmental control or planning.
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