"Invisible hand of the market": concept and principle of action

At the end of 1775 and the beginning of 1776In England, the first edition of the famous two-volume book of the Scottish economist Adam Smith was published, devoted to the study of the causes and nature of the wealth of nations. In this fundamental work, the basic mechanisms and principles of foreign trade were first described. The author in his discourse 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 theirefforts and energy in the branch of national industry that can give them the maximum income. As a result, underdeveloped industries are rising, and where there is an oversupply at the moment, capital flows to more profitable and promising areas. Thus, every resident of the country, thinking that only his own needs are met, in fact serves the interests of the whole nation. Since that time, the expression “the invisible hand of the market” has become firmly established in economic literature and is often found today. In other words, these are economic forces known to us as supply and demand, which are constantly trying to achieve equilibrium.

How Smith's Invisible Hand Works

Market laws force sellers and buyersact according to mutual interests. So, an entrepreneur will never release products that are suitable only for him, and in which consumers are not interested. Yes, and the exorbitant price, he can not set - in this case, it will easily bypass competitors. It turns out that only those who manage to meet the needs of the population with a product of the best quality and at the lowest possible cost win and receive the maximum profit.

Entrepreneurs don't care about welfare at allsociety, but their selfishness is useful to all citizens. Therefore, Smith believed that state intervention in the economy was harmful: the “invisible hand of the market” itself copes with all current tasks and problems in the best possible way. It is necessary to allow each person to freely pursue his economic advantage, and this will best of all contribute to the growth of national wealth in a given country. According to the theory put forward by Adam Smith, the “invisible hand” includes six basic elements:

1. Market prices formed by balancing supply and demand.
2. The fluctuation of norms and masses of profit, i.e. the ability of capital to leave low-profit and join high-yielding businesses.
3. Free competition, prompting to produce only the goods necessary for the market.
4. Demand, which is a powerful engine for the entire economy.
5. The supply of goods that can satisfy all existing demand.
6. Lending securities of commercial banks and issuing loans to the latest households and firms.

Invisible hand of the market and modern conditions

It is necessary to take into account that A.Smith created his theory at a time when the world economy still did not know what large-scale crises were, the Great Depression, large financial frauds, transnational corporations, integration processes, environmental disasters, etc. Moreover, the market economy was not completely able to think strategically, solve social problems, protect the environment, provide a person with services that are not profitable (building infrastructure, maintaining the country's defense, etc.), smooth out the wave nature of onomical development. That is why in our time the intervention of the state is simply necessary. The only question is to what extent and with what tools it will be implemented.