INVISIBLE HAND(Adam smith)

• NAME – Dibyajyoti Mohapatra

• CLASS – XI
• SECTION – G
• SCHOOL NO. – 9124
Who Was Adam Smith

Adam Smith was an eighteenth-century Scottish

economist who lived from 1723 until 1790.While his ideas
were controversial and often dismissed during his day,
Smith laid the foundation for free market economic theory.
He was one of the founder of classical school of economics.
“An inquiry into the nature and cause of the wealth of
nations” (1776) represents the first tried to study the
economy as a separate doctrine form policy ethics and the
law and the law and description of what builds nations
wealth.
 Smiths concept of the invisible hand was likely influenced
by earlier economist Richard Cantillon.
 Invisible Hand
• Invisible Hand of the market is a figure of speech envisioned by Adam Smith.
• The concept was first introduced in his book “The Theory Of Moral
Sentiments” in 1759.
• This concept was again used in his book “The Wealth Of Nations” in 1776.
• This concept aligns with economics, which comes from “laissez-nous faire,”
meaning “let us do it.”
• The anecdotes behind the origin of this term, which describes the
meaning, is that a French governmental minister asked a group of
businessmen what help the French state could provide, to which the
businessmen replied “laissez-nous faire.”
• In modern economies, some political leaders have pushed the concept
further to paint a board brush against governmental interference or
regulations.
Assumptions
• For the existence of “invisible hand”, the market
needs the following preliminary conditions
• An open market: no barrier to entry for producers or buyers .
• No seller big enough to move prices up.
• No buyers big enough to move prices down.
• Perfect (even truthful) information for everyone .
• Government ensures property rights .
• No externalities
 Invisible Hand- The Model
Economy
• A free market scenario where there are no regulations or
restrictions imposed by the governments, if someone charges less,
the customers will buy from him.th
• So prices have to be lowered or something better than your
competitor has to be offered.
• Whenever enough people demand something , It will be supplied
by the market and everyone will be happy.
• The seller end up getting the price and the buyer will get better
goods at desired price.
 Market Failure
• Market failure occurs when allocation of goods and services by a
free market is not efficient
• Market failures can result in:
o mass unemployment,
o Pockets of poverty
o Externalities i.e pollution
o And failure to generate economic growth
 Limitation Of Invisible Hand
The main limitation of the invisible hand is that it is largely based on
assumptions that markets are efficient and people are rational. For
instance prices increases may not always lead to lower demand.
People do not always react in the same rational way we would expect.
• 1. Negative Externalities
One of the main drawbacks of invisible hand is that by pursuing their own
self-interests, people businesses can create external costs. Such
examples include pollution or over such as over-fishing.
• 2. Monopolies
Some industries such as utilities and trains are prone to monopoly power
as they can be considered natural monopolies. In such markets and
many more, business can exert monopoly power and distort the supply
and demand equilibrium- thereby invalidating the invisible hand
Conclusion
 Although Smith’s theory is very profound and
insightful. We cannot overlook shortcomings of
this theory.
 When Adam Smith came up with this concept the
world was different place.
 There were not many market imperfections but in
today’s economies the application of this theory is
hardly possible.
 The intervention of government is necessary to
avoid disequilibrium and structural bottlenecks.