At the end of 1775 and the beginning of 1776, the first edition of the famous two-volume Scottish economist Adam Smith was published in England, devoted to the study of the causes and nature of the wealth of peoples. This fundamental work was first described the basic mechanisms and principles of foreign trade. The author of the work, in his discussions on the dependence of the annual income of the nation on the amount received for the result of labor by each person, formulated a very important principle, now called the “invisible hand of the market”.
Its essence is that people direct all their efforts and energy to that branch of national industry that can give them maximum income. Due to this, underdeveloped industries are rising, and where at the moment an excess of supply has formed, there is an outflow of capital to more profitable and promising areas. Thus, each resident of the country, thinking that he satisfies only his own needs, actually serves the interests of the whole nation. Since that time, the expression “invisible hand of the market” has firmly entered the economic literature and is often found today. In other words, these are economic forces, known to us as supply and demand, that are constantly trying to achieve equilibrium.
How Smith's Invisible Hand Works
Market laws force sellers and buyers to act with mutual interests in mind. So, an entrepreneur will never begin to produce goods that are suitable only for him, and in which consumers are not interested. And he will not be able to set the sky-high price - in this case competitors will easily pass it. It turns out that only those who manage to satisfy the needs of the population with goods of the best quality and at the lowest possible cost win and receive maximum profit.
Entrepreneurs do not care about the welfare of society, but their selfishness is useful to all citizens. Therefore, Smith believed that government intervention in the economy does harm: the "invisible hand of the market" itself copes with all current tasks and problems in the best way. It is necessary to allow everyone to freely pursue their economic benefits, and this will best contribute to the growth of national wealth in a given country. According to the theory that Adam Smith put forward, the “invisible hand” includes six basic elements:
- Market prices formed by balancing supply and demand.
- Fluctuations in rates and masses of profit, i.e. the ability of capital to leave unprofitable and merge into highly profitable areas of business.
- Free competition, encouraging to produce only the goods necessary for the market.
- Demand, which is a powerful engine for the entire economy.
- Supply of goods able to satisfy all available demand.
- CB lending to commercial banks and issuing loans to the latest households and firms.
Invisible hand of the market and modern conditions
It must be borne in mind that A. Smith was creating his theory at a time when the world economy did not yet know what large-scale crises, the Great Depression, large financial frauds, transnational corporations, integration processes, environmental disasters, etc., a fully market economy is not able to think strategically, solve social problems, protect the environment, provide a person with non-profitable services (building infrastructure, maintaining the country's defense capability, etc.), smoothing s wave nature of economic development. That is why in our time, state intervention is simply necessary. The question is only to what extent and with what tools it will be implemented.
