Invisible Hand
Name: Pham Tan Vuong
ID: S3411932
Lecturer: Antoine Goupille
Word count: 1625
INTRODUCTION
Adam Smith (1723-1790) was one of the greatest economists in the world with his concept of the “Invisible Hand”. The “Invisible Hand” explains the reasons why people do things in the market based on the principles of supply and demand. This theory also creates an economic system called free market or liberal market. This type of market has some main features namely, no governmental interventions and high competition. Adam Smith’s theory is interesting because he was the first one to set up the idea of a “market” that still exists now. The aim of this essay is to give an overview of the “Invisible hand”, analyze advantages and disadvantages of Smith’s theory. Furthermore, may give some comments on his theory, its application in Vietnam context and make some possible recommendations for the current situation.
UNDERSTANDING OF THE “INVISIBLE HAND”
In the Wealth of Nations, Smith (1776) mentions an invisible hand by describing a certain condition in which the invisible hand may or may not be present in an occurrence on a free market. The condition in which a person who wants to gain something beneficial for himself only in a particular way may, in the act of pursuing his will, create a different kind of benefit for everyone regarding himself. For example, a trader engages in domestic trade instead of investing in foreign and which, in turn, constitutes the wealth of the nation. The reason why he does so may be because he understands that he will contribute to domestic capital which is a source of military power and that power is beneficial for everyone and the trader himself (Smith 1776). In essence, there are two main functions of price underlie Adam Smith’s theory of the invisible hand of the market: allocative and rationing. The first, the allocative function of price, is to distribute productive resources to different parts of the economy (Frank & Bernanke 2009). It
ID: S3411932
Lecturer: Antoine Goupille
Word count: 1625
INTRODUCTION
Adam Smith (1723-1790) was one of the greatest economists in the world with his concept of the “Invisible Hand”. The “Invisible Hand” explains the reasons why people do things in the market based on the principles of supply and demand. This theory also creates an economic system called free market or liberal market. This type of market has some main features namely, no governmental interventions and high competition. Adam Smith’s theory is interesting because he was the first one to set up the idea of a “market” that still exists now. The aim of this essay is to give an overview of the “Invisible hand”, analyze advantages and disadvantages of Smith’s theory. Furthermore, may give some comments on his theory, its application in Vietnam context and make some possible recommendations for the current situation.
UNDERSTANDING OF THE “INVISIBLE HAND”
In the Wealth of Nations, Smith (1776) mentions an invisible hand by describing a certain condition in which the invisible hand may or may not be present in an occurrence on a free market. The condition in which a person who wants to gain something beneficial for himself only in a particular way may, in the act of pursuing his will, create a different kind of benefit for everyone regarding himself. For example, a trader engages in domestic trade instead of investing in foreign and which, in turn, constitutes the wealth of the nation. The reason why he does so may be because he understands that he will contribute to domestic capital which is a source of military power and that power is beneficial for everyone and the trader himself (Smith 1776). In essence, there are two main functions of price underlie Adam Smith’s theory of the invisible hand of the market: allocative and rationing. The first, the allocative function of price, is to distribute productive resources to different parts of the economy (Frank & Bernanke 2009). It