Difference between revisions of "Invisible hand"
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| − | The '''invisible hand''' is the | + | The '''invisible hand''' is [[Adam Smith]]'s name for the [[economic]] trend towards productivity and efficiency that results when [[government]] stops interfering in markets trying to steer them and allows individuals and corporations to fend for themselves and reap the benefits of their own hard work and innovation. |
| − | + | Smith's promotion and popularization of the concept in his 1776 book [[The Wealth of Nations]], and it propelled the [[British Empire]] to become the greatest power in the history of the world in the 19th century. | |
He theorized that the self-interest of individuals acting independently will lead to a socially optimal outcome:<ref>[http://www.econlib.org/LIBRARY/Smith/smWN13.html ''Wealth of Nations'', Book IV, Chapter 2]</ref> | He theorized that the self-interest of individuals acting independently will lead to a socially optimal outcome:<ref>[http://www.econlib.org/LIBRARY/Smith/smWN13.html ''Wealth of Nations'', Book IV, Chapter 2]</ref> | ||
Revision as of 20:33, February 5, 2011
The invisible hand is Adam Smith's name for the economic trend towards productivity and efficiency that results when government stops interfering in markets trying to steer them and allows individuals and corporations to fend for themselves and reap the benefits of their own hard work and innovation.
Smith's promotion and popularization of the concept in his 1776 book The Wealth of Nations, and it propelled the British Empire to become the greatest power in the history of the world in the 19th century.
He theorized that the self-interest of individuals acting independently will lead to a socially optimal outcome:[1]
- "[B]y directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good." (Emphasis added)
However, game theory suggests that this is not always true; in some circumstances each individual acting in their own self-interest does not result in the socially optimal outcome. One such example is the problem of the commons.