With the name of The invisible hand, the theory, which explains through a metaphor the capacity of the free market economy to self-regulate and thus allow the highest levels of social welfare to be achieved.
This metaphor makes mention of the theory that the economist Adam smith He points out in his book entitled Theory of Moral Sentiments, that he published for the year 1759, however, it is until the year 1776, when this theory became more notorious thanks to the publication of the book entitled La Riqueza de las Nations.
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The author notes that the Invisible hand, expresses the way in which the market economy is able to obtain the maximum social welfare during the process in which each individual seeks his own interests.
In this article you will find:
What is the invisible Hand theory?
The invisible hand is a theory, through a metaphor the market economy is described as a mechanism capable of ordering the production of goods and services based on free supply and demand.
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The author assures that through free competition the problems or contradictions that may arise in the market can be resolved thanks to the system's invisible hand.
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What is the importance of the Invisible Hand?
The importance of this metaphor is manifested when society in its development allows that the free market does not require the action of the government, except for the administration of justice and for the provision of public goods, since it has the ability to regulate itself and the rest of the invisible hand. will do.
The invisible hand it intervenes in production by incentivizing or reducing it as well as manifesting itself on prices and its market.
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How was the theory of the invisible hand exemplified?
For this theory, a very simple example was used, where the economist Smith tells of a man named John, who has the occurrence of make wooden figures of vultures and then sell them, when making them the man opens a store where he aspires to sell for $ 200 each part.
The figures were not to the liking of the public, so the business fails, because the invisible hand He pointed disapprovingly with his thumb down, when John produced an object without demand, which was only his own. like him.
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On the other hand, the price was not accessible, on the contrary, it was exaggerated the solution for Jhon was not to continue elaborating those pieces, which did not allow to cover the costs of their production.
When Jhon goes home upset by his failure, he hits the wooden table that he also made, it occurs to him then that he can make others at a reasonable price, tables, in this case The invisible hand approves the idea and points at it with its thumb oriented upwards, because with the available resources I manufacture valuable elements taking into account the tastes of the society.
What does this metaphor teach us?
Through this story, the theory of the invisible hand shows that in these situations the Entrepreneurs can know what to manufacture, at what cost to do it, which will allow them to set prices for the sale.
Profits or losses will be signals that must be addressed during business to increase production or separate each individual from it.
High prices and profits encourage the production of a certain product, on the contrary, few profits or losses will cause this good to stop being produced.
What is the role of government within the market economy, according to the invisible hand?
One of the bases of this theory is that the government and its action should not be present within legislative activities. related to the market, his approach indicates that his action should be oriented to defense and justice and let the market function as Free form.
The invisible hand, supported by the natural action of supply and demand, will guide the course towards maximum well-being and while less is intervened with controls from the government will be easier this way, where the economic balance will be achieved and the prices.
The invisible hand highlights that, in a market capable of regulating itself, individuals will choose or decide in the best way, so that the population will achieve their well-being.
In other words, the invisible hand manifests a mechanism that allows control to automatically compensate and regulate the actions taken as a whole.
This will facilitate the market to balance and function optimally, since individuals without the intervention of the state will seek and behave to achieve their well-being.
Finally, we can say that the metaphor of the invisible hand is based on the theory of Adam Smith, which is based on the capacity to regulate itself that the free market has, where goods will be produced according to prices, profits or losses that they generate, these factors will be stimuli that encourage or discourage individuals to produce, without further intervention from the condition.
