• Gabriella Orriols

The invisible hand

It is not from the benevolence of the butcher, the brewer, or the baker that we get our dinner- but from their regard to their own self-interest” - Adam Smith, “The Wealth of Nations” 1776

What drives our economy is us. A society’s individuals make an impact on its economy through multiple day-to-day activities, such as purchasing a loaf of bread. Philosopher Adam Smith furthered his studies into what drives the economy and resulted with the explanation that the individual choices we make about what we buy and sell are thanks to the invisible hand that guides the capitalist economy forward.

In 1776 Adam Smith introduced the Invisible Hand theory in “An Inquiry into the Nature and Causes of the Wealth of Nations.” In his book, the idea that the government should leave markets as free as possible, and that the self-interest of individuals will ultimately grow the economy, hence the Invisible Hand. The metaphor of the Invisible Hand dictates that the sum of the individual choices on the part of businesses and consumers inevitably guides economic growth. A common analogy that clearly explains and underlines the principles of The Invisible Hand is the baker. The baker benefits by collecting a profit from selling his bread, and his clientele benefit by acquiring a good: the bread. Adam Smith understood that the value customers gained from the bread exceeded the price they paid for it, this is called a value-added exchange. In a value-added exchange both parties, buyer and seller, are better off after the exchange. This same transaction type is repeated millions of times every day throughout the globe, but Adam Smith grew concerned about the moral implications of the exchange. Smith recognized that the exchange of goods and services between the baker and his customers must be voluntary, meaning both parties must complete the transaction by the means of their own free will. The right to a voluntary transaction must mean both parties acquire access to an opt-out option. An opt-out option is the right to decline the transaction and go elsewhere.

Self-interest between two different options drive our choices, for example, you want to purchase a loaf of bread and two bakeries sell the sample loaf of the same quality for the same price, the bakery you will find most appealing to make a transaction with will most likely be the one most convenient to you. The choice between choosing one bakery over the other could raise competition between both bakeries, implementing the choices of the losing bakery. The bakery losing you as a customer could proceed to raise their quality of bread for a lower price which might become a conflict of interest for the customer. This example demonstrates the Invisible Hand at play.