Adam Smith : Invisible Hand

Abhishek Gupta (Group A) Power, Identity & Resistance – Prof. Max Whyte October 13, 2008 The Invisible Hand “The Invisible hand” is Adam Smith’s legendary economic concept where he believes that in a free market, by pursuing one’s self-interest, the individual often promotes the interest of the society much more effectively than what the individual really intends to promote. Initially, this theory seems to suggest an almost “autopilot” like quality which seems to govern the system. But as one probes further, there seems to be some very strong and simple logic that is foremost in Smith’s theory. Employment, self-gain and the security of one’s personal financial investment in the market seem to be the reasons for “The Invisible Hand”. Every individual strives to gain better employment with a higher salary. The individual’s preference for the domestic market as compared to the foreign market furthers the growth of a country’s market. This preference stems from the fact that the domestic markets seems to provide a psychological security where the wealth invested is in one’s own region and gives one the security of knowing the laws of the land if there is ever an exigency that requires legal knowledge. This local investment preference is a far cry from today’s foreign investment that drives many developing economies around the world. The fact that many investors feel more secure investing their wealth in foreign markets rather than just their own is an example of how the economics of our times have evolved from Smith’s Economic models. Another thought that seemed to be very significant was Smith’s idea that if a certain commodity is cheaper when bought than to make it oneself, it should always be bought. The example of a tailor and the shoemaker and how they buy shoes and clothes respectively from each other proves this point. In terms of international trade, as long as one country has obvious advantages in producing a good at a cheaper price, than it always advantageous for other countries to purchase it. The producing country may have many factors such as the climate, the terrain and the natural resources that may facilitate the cheaper production of certain goods. This logic seems to be against the concept of self-sufficiency where a country should have the capability to stand up on its own indigenous resources and talents. So the question arises, when every country imports a part of its workforce as well as commodities from around the world, is local investment any different from foreign investment and has the concept of country become slightly outdated in terms of economics?