Discussing Adam Smith's Invisible Hand

According to Adam Smith, when private individuals are left free to seek their own interests in free markets, they will inevitably be led to further the public welfare by an â??Invisible Hand.â? What is this â??Invisible Handâ? and why does Smith believe that it will further the public welfare? Give two arguments for or against his position using real business examples.

The Invisible Hand

It is important to note that in his original discussions of the invisible hand, the context within which Smith was writing pertained to domestic versus foreign trade. He argued that rather than stifling foreign trade or subsidizing domestic trade governments should allow the "Invisible Hand" to guide individuals because this would also benefit the public welfare. In his mind the "Invisible Hand" was guided by three forces working together in balance. These forces were self-interest, competition and supply and demand.

Smith argued that when consumers are free to choose based on their self-interest and producers are free to make products and set the prices according to competition and self-interest, a balance will be found and the public welfare will be improved. The consumer will always try to seek the best price and consumers will always try to maximize profits. As supply and demand work in a free market equilibrium will be achieved. If prices are too high consumers will not buy until these prices fall. Consumers will realize that they are not selling their products and will be forced to lower them until balance has been achieved and consumers again choose to buy. This interplay between self-interest, competition and supply and demand always benefits the consumer in Smith's mind.