Adam Smith, who considered as the father of modern economics, was born on June 5, 1723 and died on July 17, 1790 in Scotland. He was well-known as not the only pioneer of a political economist but also a moral philosopher. There is no doubt that one of the most influential Smith’s ideas was that explaining how rational self-interest in a free-market economy leads to economic well-being. So, this played a significant role to create the root of the capitalist system. The idea of Laissez-Faire (Let it be) is the key consideration of thought to determine the system of capitalism. Smith argued that when one earns money for by himself he also benefits unintentionally society as a whole since earning income necessitates producing something valuable. According to Adam Smith, “the interests of the businessman who intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end that was no part of his intention.” By pursuing his interest, he frequently promotes that of the society more effectually than when he intends to promote it” (Offer, 2012). We can understand the basic concept of an “invisible hand” from the above passages in The Wealth of Nations. Also, we should emphasize its relation to capitalism and the role of the government in the economy and a certain set of propositions to get the idea deeply.
To begin with, people can control to enhance their incomes when ones are left free to chase their own self-interest by employing the resources, as an invisible hand, to maximize the not only the world’s income but also the future growth of that income through their interaction with other self-interested individuals. Secondly, competition plays a fundamental role to ensure the framework that is essential for the outcomes of proposition (1) to succeed the necessity by corporate and human. The reason is that individuals should perform their tasks in a proper way in order not to lose market sharing since not only managing resources but also providing the best services are all important in terms of people. That is why, competition should be allowed across national boundaries at a considerable level of the goods, services and factors of production as well. Furthermore, the government should not play a major role in the market. It means that they have not to be intervened to promote the self-interested individuals in terms of utilizing resources in a positive way. So, governments minimize the restrictions on the some certain fields such as production, trading, selling and ultimate consumption of goods and services. To prevalence the invisible hand, government exist only the national defense, administration of justice and erect public works and public institutions. In other words, the government should preserve the individuals in their property of those sources and also preserve them for the pleasure of the fruits of prospering utilization of those resources. Therefore, “the government must prohibit slavery, murder, robbery and fraud, but it also must prohibit confiscation of both privately owned capital as well as the profits from capital investments” (Meeropol, 2004).
Last, but not least, according to Smith, when letting the market alone there are competitive pressure and profit rewards to procure encouragements to be excellent. It also can be some punishments for the losses, so private decision- making unit is more efficient that the government decision-makers since it is subjected to the invisible hand (Meeropol, 2004).
We can say that Smith’s metaphor of the invisible hand is arguably the most significant notion in modern social thought. One’s natural instincts channeled by institutions and self-command in terms of the interpretation of Smith’s invisible hand. Therefore, persuasion, sympathy, barter, truck and so forth are the ultimate instincts to the people to get better conditions. These can be invisible passions which guide people, not only in Moral Sentiments but also Wealth of Nation. Although self-interest does not work in isolation since it is dominant and required passion in the economic field. Human instincts are capable of producing not only private benefits but, in most cases, social benefits that are not intended when they are allowed to operate within incentive-compatible environments. Thus, one does not need to start from a virtuous motive such as favor to produce something valuable for society. In a helpful institution, spread out actions leads to an order that gives people growth and freedom. Smith says that there is not exist any political economy system that succeed it. Hence, he claims that a variety of institutions and a series of mixed market systems can be counted as an exhibition of rich industrial democracies. Adam Smith was not pessimistic that the invisible hand instincts would inherently induce progress in the course of events since he was a pragmatic rather than an ideologist. We can see these thoughts from his mentioning the more comprehensive moral and psychological perspectives. In other words, the invisible hand does not form an explanation of selfish individualism. According to Smith’s view, development necessitates that private and public institutions incite moral development that markets and society fail to achieve their potential. “Smith debunked the “greed is good” philosophy, ridiculed the notion that wealth alone could provide happiness, and built an elaborate psychological foundation for behavior that goes well beyond egoism” (Jonathan, 2007).
Moreover, Table 1 shows the modern view of the invisible hand. It means that this shortage will be eliminated by an invisible hand, and there will be an equilibrium in the market again. This demonstrates that one of the most important assertions is about maximizing economic wellbeing of a human. For instance, the market for products plays a major role to determine the production and consumption since not only the producer but also consumer consider calculating their cost and benefits before the actions. Hence, we know that producer desire to propose an additional good for sale if it benefits to them and consumer wish to obtain that good at a minimum amount. The market equilibrium will be occurred at the point of the cost of last good equals to its value. An invisible hand comes into existence in this case by ensuring buyers and sellers benefits. In the light of these circumstances, a free-market economy leads to economic well-being.
Table 1: Demand and Supply Equilibrium
As a result, we can say that human beings maintain the material necessities of life by producing and distributing. According to Smith, this process associated with capitalism since one of the strongest human motivation is to accumulate material wealth. When we consider the today contemporary world, we can say that there is no such a pure Laissez-Faire Capitalist economic system. However, we can give some countries that can be considered closest ones such as United States, Canada, Switzerland, and United Kingdom. In the light of these circumstances, without any doubt, the free-market economy has a critical role to direct economic well-being; therefore, it is significant to take into consideration the government decision and action to conduct. We can easily say that when one of the assumptions is not conducting enough that reflects other ones; therefore, there is significance relationship among them. All in all, in order to understand the fundamental concept of an invisible hand; we emphasized its relation to capitalism and the role of the government in the economy and a certain set of propositions to get the idea deeply.
Meeropol, Michael. (2004). “Another Distortion of Adam Smith: The Case of the Invisible Hand,”
University of Massachusetts Amherst, Working Paper Series, No: 79
Offer, Avner. (2012). “Self-Interest, Sympathy, and the Invisible Hand: from Adan Smith to Market
Liberalism,” University of Oxford, Discussion Papers in Economic and Social History, No: 101
Wight, Jonathan. (2007). “The Treatment of Smith’s Invisible Hand,” University of Richmond, Heldref
Publications, Journal of Economic Education, pp. 341-358