In this passage, Adam Smith, often regarded as the father of economics, wrote about the ‘invisible hand’ that defines his view of the economic society, particularly how it operates. According to this theory, individuals strive to achieve their own interests but in doing so, they must interact with other people in the society through their properties and products. As a consequence, in a free market society, public interest is elevated. Smith was profoundly religious. He believed that the ‘invisible hand’ was that of God who administers the universe. His theory of the ‘invisible hand’ encompasses not only economics but it is now used to explain almost all sorts of phenomena which are affected by or as a result of human behavior.
In economics, the ‘invisible hand’ explains a complex mechanism which the market operates. The main essence of the ‘invisible hand’ is that for any particular person working to maximize his economic wellbeing also maximizes the economic wellbeing of the whole society. A simple example to illustrate this is the queue in a supermarket counter. Each of the customers tries to selfishly get ahead of the other customers by choosing the shortest line in the row. In effect, the lines fall on the same length which exhibit orderliness even without the slightest direction.
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As seen from the above example, invisible hand plays an important role in maximizing the public interest. It is clear though that our best interest is enough to benefit all of society. How? Even without direction, except for the pursuit of interest, we are able to contribute to the goals of the society. In the above example, the end result is having the customers fall in line and checkout in an orderly fashion.
However, in a democratic society, it is not always the good that happens. Other things might happen such as cheating. In the above example, a customer may cut the line through so that he or she can checkout early. As a result, there will be disorder as other customers also want to checkout early. The reason we don’t usually observe this is because our society today can enforce contracts through the courts. We have rules that prevent anyone from cheating, and among others, theft. For Smith, theft is the worst crime man can ever do.
Stewardship, as defined in The Stewardship website, is the “assumption of responsibility for the welfare of the world.” It means that each individual is aware of his responsibility in serving the wellbeing of others. The United Nations, Red Cross, OneWorld.net, and a lot more organizations, local or international, show this kind of behavior. In connection with the ‘invisible hand’, stewardship is important in order for it to function effectively. Even if people are promoting there personal interest, they are still aware of their limitations. Using the example above, others may be tempted to cheat. But since they are aware of their responsibility, as in a society promoting wellbeing of everyone, cheating is not a good option.
Equilibrium of Market Forces
However, this equilibrium can shift resulting from changes in demand and supply of a particular product. The equilibrium point can shift up or down depending on which force increases or decreases. If the demand for a particular product increases, quantity increases for a particular price and a new, higher equilibrium point is reached. Producers are more than happy in increasing the supply of the good. However, if the opposite takes effect, the producers will be forced to sell the goods at a lower price. If it is the supply that increases, the quantity increases but the price decreases and a new, lower equilibrium point is observed. Under this condition, the consumers are more than happy in buying the product as in most cases, prices will drop drastically.
The equilibrium point reflects the function of the invisible hand. The society, composed of consumers and producers, is actively involved in the shifting of the demand and supply curves. The effect brought by the interests of the consumers affects the movement by the producers and vice-versa. Both forces affect each other. The end result is the balancing of the market forces even without central planning.
The Will of the People
Again, the invisible hand in economics work to elevate the interest of the individual and the over-all interest of the society. In the marketplace, it plays important role in creating equilibrium between supply and demand forces. This is due to the interaction between the individuals—both consumers and producers. However, in order for the invisible hand to function effectively, there must be powerful rules that will protect the individuals from others who want to get something for nothing, that is, theft. In the absence of rules, however, stewardship can solve the problem as each member of the society has the responsibility of taking care of other people’s properties.
As we see it, invisible hand has a big impact on the thinking of the individual. It makes the individual carefully think about what to do and not. A lot of factor affects the individual’s interests and cause of action. One of which is the ‘will of the people’ where the individual reacts to the collective choices made by the society. An example of which is buying fad things.
Another important implication of the ‘invisible hand’ is to allow people to think ahead. When we want something, we think before we do it. Each action is carefully chosen based on the present conditions. Decision-making is some sort of a game. For example, it’s rainy season and everything is wet. A producer would certainly choose to sell umbrellas, raincoats and the like as it is what the consumer is in need of. Here, considering the ‘invisible hand,’ the action of the producer benefits himself and the society as a whole.
Gorman, Tom. ‘Equilibrium: Mr. Demand, Meet Mr. Supply.’ The Complete Idiot’s Guide to Economics. Indiana: Alpha Books, 2003.
Joyce, Helen. ‘Adam Smith and the Invisible Hand’. Plus Magazine. 2001. 4 Oct 2007. ;http://plus.maths.org/issue14/features/smith/;
The Stewardship. 4 Oct. 2007. ; http://the-stewardship.org/stewardship.htm;
Henderson, David R. ‘Biography of Adam Smith 1723-90.’ The Concise Encyclopedia of Economics. 2002. Liberty Fund. 4 Oct. 2007. ;http://www.econlib.org/Library/Enc/bios/Smith.html;