Invisible Hand and Economics

Submitted by Ahmed Bagigah on Tue, 07/05/2011 - 9:50pm.
Ahmed Bagigah's picture

Economics can be defined as the study of how individuals make choices and how those choices interact. There are two types of economics: microeconomics explains the basic concept of day to day life while macroeconomics holds the concept of globally viewed economics. Supply and demand is a major concept of economics; it demonstrates how the recourses are distributed throughout the market. Englishman Adam Smith ideas as a philosopher played a key role in the infrastructure of economic as it is known today.

In his landmark book, The Wealth of Nations, Adam Smith argued that the importance of economics is freedom as he believed that self interest will bring about a better functional and productive market economy. The idea of self interest will open the door for a free market economy or free enterprise. Moreover, Adam Smith illustrated how the economy must be a laissez faire economy which is free from government control such as the one of a command economy. Furthermore, Smith used the argument of the invisible hand, which is another significant concept in economics.

The concept of invisible hand has been a great factor in understanding the basics of economics. The invisible hand is a natural force that self regulates the market economy. The concept explains that an individual decision in a market economy to benefit them will actually make the economy better off as a whole. An example of invisible hand is an individual making a decision to buy coffee and a bagel to make them better off, that person decision will make the economic society as a whole better off. The decision of buying the coffee and the bagel will make the seller better because of profit and it also makes the production market that distributes the goods better. This pattern will benefit everyone because it will make the firms (companies) and the factor market (labor) that produce resources better off.



Pengfei Li's picture
Pengfei Li Says:
Wed, 07/06/2011 - 9:17am

John Nash pointed out a mistake of Adam Smith. Individual decision to pursuit the best profits for oneself will not always lead to the best profits of society. Because of competition, sometimes they will harm each other. Hope you have seen "The beautiful mind", an excellent movie about John Nash.


Ahmed Bagigah's picture
Ahmed Bagigah Says:
Wed, 07/20/2011 - 11:04am

oh ok,, i will look forward to watching the movie