• Adam Smith was born in

Scotland in 1723. He was

a philosopher and an
economist.
• He was one of the founder
of classical school of
.
economics.
"An inquiry into the nature
and causes of the wealth
of nabons" (1776)
represents the first tried
to study the economy as a
separate doctrine from
policy, ethics and law and
ADAM SM a first description of what
ITH
builds nat ion s' wealth.
In his book Smith pointed out the power he thought
dominates a market economy: THE INVISIBLE HAND.
''...Every individual neither intends to promote
the
public interest, nor knows how much he
is promoting it... He intends only his own gain, and
he
is in this, as in many other cases, led by an invisible
hand to promote
intention. an end whichwas
By pursuing his own no interest
part of
his
frequently promotes he of thesociety
effectually
that than when he really intends to promote
more
I••t II
• Smith is saying that participants in the economy
are motivated by self-interest and in this they are
guided by a supreme power - the invisible hand -
which takes on the balancing role between
demand and supply.

• So the invisible hand is able to make the market

reach the equilibrium point (quantity demanded
and quantity supplied are equal) because it has
the ability to coordinate the millions of
households and firms that make up the economy.
The it
price
acceptable determines is considered
by both the seller and the
buyer and the exchange advantageous as well.

 The selfish behaviour of each household

and
firm acting in the market will eventually
provoke the maximum general economic
well-being.
 According to the great abilities of the invisible
hand to make the market efficient the
governments have very few tasks:
• The State has no say in the economy because
any action would restrain the economic
development and the general well-being.
• However, it should ensure institutional
its
functions such as national defense, safety and
justice.
The invisible hand has its powers in perfectly
competitive markets. However, the condition
for perfect competition are very strict so that
there are few if any of them. In a real market
economy is more probable to have other
situations in which the invisible hand loses its
ability.
 The market failure is the situation in which
the resources aren't allocated efficiently.
This happens when there are:
• Externalities
• Market power
• Unfairly distribution of economic well-being

A market failure shows an unable invisible

hand to rule the market in a efficient way.
Governments can decide to intervene in order
to fill the deficiencies of the market system
promoting efficiency and equity.
• We have a moment in the history which showed
all the weakness of the liberalism and so even of
the invisible hand: the Great Depression.
• It started with the Wall Street Crash in 1929 and
it reveals that a market left on its own is not able
to allocate its resources efficiently.
• In 1936 John Maynard Keynes will elaborate a
new economic theory -the keynesian economics­
in which the State has the main role.