Invisible Hand is a reference to a famous metaphor used by economist and philosopher Adam Smith in his classic 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations,
Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it … 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 society that it was no part of his intention. 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.
The invisible hand metaphor is used to ilustrate how free market dynamics make things happen for the greater good or society. It is often cited as the basis for laissez-faire economics [French for ‘Let them do’]
Using an example of the rose market, how is it that people in snowy, chilly cities have access to beautiful, fresh roses every February on Valentine’s Day? Where all the roses come from?
A rose is a truly global product. Behind every Valentine’s Day rose there’s an extense of network of people from all over the world, from the farmer to the shipper, to the auctioneer, and the retailer, all cooperating to produce and transport roses from field to hand in a matter of days.
This amazing process is not centrally directed
Not single individual even knows how the entire process works. Each individual only sees a small part of the whole. And each individual only acts on their self-interest. But through the price system, each individual’s local knowledge and local interest are coordinated with the whole, as if in Adam Smith’s words, guided by an invisible hand.
Because a rose is not just a symbol of love; it’s also a symbol of global coooperation coordinated by the invisible hand.
This video explains how dispersed knowledge and self-interested actors lead to a global market for affordable roses.
