Adam Smith has once offered the idea that society is guided by the ‘invisible hand’ which helps to control and regulate it. As he stated in his Theory of Moral Sentiments, “the rich … are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants” (Farrer, 2009, p. 142). The issue of the invisible hand is rather controversial because some economists deny its existence. I believe that the invisible hand perfectly regulates the performance of the four main functions of an economic system, even though some people reject this idea and claim that the invisible hand is invisible because it simply does not exist.
To begin with, the invisible hand indeed helps to regulate the market helping to perform four main functions of the economic system. Any economic system is organized around “four economic processes – production, distribution, exchange, and consumption – and four economic functions – transforming, moving, transferring, and using” (O’Boyle, 2000, p. 74). The fulfillment of these functions is exercised through the correlation between demand and supply which is constantly changing (Sloman, 2006). The invisible hand helps to regulate demand and supply using self-interest which the consumers and the traders tend to exhibit.
Smith believed that self-interest, in general, is beneficial for promoting the good in the society, which cannot be disagreed with and which can be proven by the effect of the invisible hand on economics. For instance, due to self-interest, each consumer decides what to buy, thus regulating the demand; the producers, in their turn, are interested in meeting this demand because this will bring profits to them. At this, the market sets prices for the products making them beneficial for the producers, the consumers, and the development of the market. Each actor, being guided by the desire to reduce expenses and increase profits changes supply and demand balancing it at the same time. Thus, each of these actors, aiming to maximize his/her profits, contributes to the profits of somebody else.
However, there exist criticisms to Smith’s theory of the invisible hand. For instance, Joseph Stiglitz posited that the invisible hand either does not exist or is palsied for the market is always inefficient and quite often requires government correction (Skousen, 2003). Though Stiglitz denies the influence of the invisible hand on economics, he still supports Smith’s idea that the actions of individuals have an impact on others. He explains his view stating that when Smith was offering this theory, he was aware of the limitations of the free markets, which modern researchers are hardly aware of. Therefore, Stiglitz believes that the invisible hand cannot exist because free markets as such cannot be beneficial.
In conclusion, Adam Smith believed that society is led by an invisible hand that promotes the good in it and balances four main functions of the economic system. These functions, transforming, moving, transferring, and using, are regulated by self-interest which the consumers and producers exhibit. Though opposing views to Smith’s theory deserve attention and are quite convincing, I still keep to the idea that the invisible hand not only exists but is beneficial for economics and society in general.
Reference List
- Farrer, J.A. (2009). Adam Smith (1723-1790). Charleston, SC: BiblioBazaar, LLC,
- O’Boyle, E.J. (2000). Personalist economics: moral convictions, economic realities, and social action. London: Springer.
- Skousen, M. (2007). The big three in economics: Adam Smith, Karl Marx and John Maynard Keynes. Armonk, NY: M.E. Sharpe.
- Sloman, J. (2006). Economics. London: Pearson Education.