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Explaining a Concept: Concept of the Invisible Hand in a Laissez-faire
economy “By preferring the support of domestic to that of foreign industry, he
intends only his own security; and by 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 it.” Adam Smith, Inquiry into the Nature and Causes of
the Wealth of Nations 1776. What business does a government have in commerce and
trade? Why would a government want to interfere between two countries benefiting
from each other by trade? What right does the government have in two individuals
wanting each other’s products or services? According to some, commerce and trade
should be permitted to operate free of controls of any kind; there should be no
tariffs or other barriers. This is where the term laissez-faire is introduced.
It’s direct translation in French, “leave alone to do”, is self-explanatory. A
strong believer in this type of economics is Adam Smith, both a philosopher and
an economist. Born on 1723 in Kirkcaldy, Fife, he studied at Oxford, and became
a professor of logic at Glasgow (1751), but took up the chair of moral
philosophy the following year.
In 1776, he moved to London, where he published
An Inquiry into the Nature and Causes of the Wealth of Nations (1776), the first
major work of political economy. This examined in detail the consequences of
economic freedom, such as division of labor, the function of markets, and the
international implications of a laissez-faire economy. Adam Smith is most
remembered today for his explanation of our market system. A majority of people
saw confusion when they observed economic activity in England during the middle
of the 18th century. They saw everyone doing whatever they pleased and deemed
necessary. Businesses produced whatever they wanted to make. Consumers purchased
whatever they wanted to buy. No one told anyone what had to be bought and what
had to be sold especially the government. And yet, somehow, businesses seemed to
be providing the goods and services that consumers wanted and needed. Some might
have called it luck; Adam Smith called it an “invisible hand”. And today, it is
considered the laissez-faire economy.
The “invisible hand” is a term for the
unseen process of co-ordination which ensures consistency of individual plans in
a decentralized market economy (Pearce, 220). Adam Smith introduced this phrase
in his book, An Inquiry into the Nature and Causes of the Wealth of Nations
(Book IV, Chap. II), who stressed the role that the “invisible hand” played in
attaining a harmony of interests. Imagine this “invisible hand” suspended above
everyone. This “invisible hand” encourages businesspeople to pursue profits and
it pushes consumers to buy goods and services. And at the same time, that
“invisible hand” discourages government from directing the economic activity.
This “invisible hand” that Adam Smith refers to as a guiding force was the
people and their attitudes. It all started with profit-seeking individuals.
Using self-interest to feed their drive, people started businesses.
When a
business would become successful, others would notice and enter into the same
field. As a direct result, growing consumer demand was satisfied while
competition controlled rising prices. As demand grew, businesses were
established in which workers shared tasks. This is called division of labor, in
which one worker handled the first stage, another the second, and a third
finished the product. The result was mass production, more efficiency, and lower
costs. Mass production meant that people no longer had to grow there own food
and remain on the farm; there would be enough to supply a large workforce.
Paying all those laborers resulted in an army of consumers with money to spend.
Adam Smith argued that an individual acting purely out of self-interest, would
be a progressive force for the maximization of the total wealth of a nation. The
role of the government should be permissive, creating a legal defensive setup
sufficient to allow individual action. Interference with the free working of
this natural order will reduce the growth of wealth and misdirect resources.
hough Smith argued for laissez-faire, he recognized the need for minimal
government intervention. For example, a tariff for infant industries and for the
three functions of the state- security, justice and certain public works
(Pearce, 397). Our economic system today seems to lean toward another philosophy
called Keynesian economics. Keynesian economics is based on a belief that the
economy can possibly fall into a recession and not be able to pick itself up.
The solution is, without the aid of the government; an economy will stay in the
“trough” and will never reach the “peak”. Though laissez-faire has not been a
very popular belief since the mid-19th century, we as a people are able to do
business independently. For “he intends his own security” and “…intends his own
gain.”
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