Index

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Amisha ma’am, Just make an index on 1 page as shown, I will fill it up by myself

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Introduction

The invisible hand is a metaphor for the unseen forces that move
the free market economy. Through individual self-interest and
freedom of production and consumption, the best interest of society
as a whole is fulfilled. The constant interplay of individual pressures
on market supply and demand causes the natural movement of
prices and the flow of trade.

The term "invisible hand" first appeared in Adam Smith's famous

work, The Wealth of Nations, to describe how free markets can
incentivize individuals, acting in their self-interest, to produce what
is societally necessary.

Adam Smith introduced the concept in his 1759 book The Theory of
Moral Sentiments and later in his 1776 book An Inquiry into the
Nature and Causes of the Wealth of Nations

Critics argue that the invisible hand does not always produce socially
beneficial outcomes, and can encourage greed, negative
externalities, inequalities, and other harms.
On the 3rd page
How the Invisible Hand Works?
The invisible hand is part of the "let do/let go," approach to the
market. In other words, the approach holds that the market will find
equilibrium without government or other interventions forcing it
into unnatural patterns. Scottish Enlightenment thinker Adam
Smith introduced the concept in several of his writings, such as the
economic interpretation in his book An Inquiry into the Nature and
Causes of the Wealth of Nations or also known as The Wealth of
Nations published in 1776, and in The Theory of Moral
Sentiments published in 1759. The term found use in an economic
sense during the 1900s.

The invisible hand metaphor distills two critical ideas.

 First, voluntary trades in a free market produce unintentional

and widespread benefits.
 Second, these benefits are greater than those of a
regulated, planned economy.

Each free exchange creates signals about which goods and services
are valuable and how difficult they are to bring to market. These
signals, captured in the price system, spontaneously direct
competing consumers, producers, distributors, and intermediaries—
each pursuing their plans—to fulfill the needs and desires of others.
On the 4th page
The Invisible Hand and Market Economies
Business productivity and profitability are improved when profits
and losses accurately reflect what investors and consumers want.
This concept is well-demonstrated through a famous example in
Richard Cantillon’s An Essay on Economic Theory (1755), the book
from which Smith developed his invisible hand concept.

Smith's An Inquiry into the Nature and Causes of the Wealth of

Nations was published during the first Industrial Revolution and the
same year as the American Declaration of Independence. Smith’s
invisible hand became one of the primary justifications for an
economic system of free-market capitalism.

As a result, the business climate of the U.S. developed with a general

understanding that voluntary private markets are more productive
than government-run economies. Even government rules sometimes
try to incorporate the invisible hand.

Former Fed Chair Ben Bernanke explained the "market-based

approach is regulation by the invisible hand" which "aims to align
the incentives of market participants with the objectives of the
regulator."
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Example of the Invisible Hand

An example of a small business facing stiff competition. To best
position itself in the market, the small business decides it will invest
in higher quality materials for its manufacturing process as well as
reduce its prices. though the small business may be doing so out of
the best interest of its company (to drive sales and steal market
share), the invisible hand is at work as the market now has access to
more affordable yet higher-quality goods.

Another example of the invisible hand is the ripple effect a retail

company can have when attempting to meet consumer demand.
Consider a hardware store that anticipates demand for yard
maintenance tools. The hardware store will coordinate with a
manufacturer to secure the appropriate goods. Meanwhile, the
manufacturer will communicate with a raw materials distributor to
ensure it has the items it needs.

In this second example, each entity acts in its best interest.

However, each entity is also creating economic activity for other
parties. In addition, the entities are stringing together a process that
results in a consumer receiving a product it needs. Though each
action taken by itself may not amount to much, the invisible hand
helps move resources along a process to deliver a final product.
 On the 6th page
Why is the invisible hand so important?
Well, there are various reasons as to why the theory is so important.
It is not only a theory that affects the market. All aspects of life are
directly tied to an ungrabbable hand since technological and societal
progress means better conditions for humanity as a whole this
theory drives the end goal of capitalism.

In economics, the result produced by this theory has aroused

interest above all concerning its application to the market and, more
precisely, to the possibility that individuals motivated solely by the
objective of maximizing their material benefits (in particular, for
producers, profits) may be led by the forces of the market to
contribute to the well-being of society as a whole.

In fact, on the one hand, the market is referred to as a system of

decentralized decisions in which each agent pursues their interests
by taking prices into account exclusively, and, on the other hand,
social benefits are identified with the efficiency corresponding to
the Pareto efficiency (a situation where no one can be made better
off without making someone else worse of ) The invisible hand
theorem, also known as the first theorem of welfare economics,
determines the conditions under which this result can occur and,
therefore, allows us to state that in the market, in a sense specified
above, an invisible hand operates for the progression of the world as
a whole.
On the 7th page
How the 'invisible hand' Affects the Economy
The invisible hand concept is based on the idea of free markets and is said to
benefit consumers by creating market equilibrium by people pursuing their
self-interest. In theory, people acting based on their interests creates supply
and demand and market efficiency, creating a positive outcome for the whole
of the economy. Without government intervention, the markets work on their
own based on consumer preferences and actions. However, the invisible hand
theory assumes that consumers are rational when making economic decisions.
But that's not always the case. As humans, we don't always behave logically
but based on emotions or needs. Consider any time you have gone to the
grocery store and overspent because you're hungry or sleep-deprived.

Additionally, some critics note the possibility of greed and exploitative

practices that could be justified due to "self-interest" and the invisible hand.
"The invisible hand promotes individual self-interest and competition. While
this sounds nice, in practice, it's not a good thing, because economic theories
also point out the 'irrational consumer' making choices say emotionally,
impulsively, with incomplete information, and most importantly, generally not
being mindful in the moment of what's best for the overall good of society,"
says Nick Thorsch, founder of environmental sustainability

While Smith's invisible hand theory is still relevant today, it has also come
under scrutiny during the Great Recession and financial crisis of 2008. Given
the current pandemic, economic fluctuations, and crypto boom, there is more
debate about the role of government in the market.
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Limitations of the invisible hand
 Monopoly Power - Adam Smith was aware that firms with
monopoly power could cause prices to be pushed above the
equilibrium. Without sufficient competitive pressure, firms could
become stagnant, and inefficient and exploit customers through
higher prices.

 Externalities - The invisible hand can lead to an efficient outcome if

there are no external costs/benefits. For example - pollution costs,
then the free market can lead to the over-production of goods with
these external costs.

 The tragedy of the commons - This is a situation where people

pursuing self-interest can lead to the depletion of natural resources.
Example – overfishing in the sea.

 Irrational behavior - The theory of the invisible hand and free

markets suggest consumers and firms are rational. However, in
industries, such as finance, individuals can get carried away with
irrational exuberance. This can lead to booms in asset prices and
prices distorted from economic realities.

 Time lags and immobilities - If an industry closes down, then the

invisible hand may push the unemployed to move and get a job in
another industry. However, in reality, there are occupational and
geographical immobilities, therefore, resources (labor and capital)
can become unemployed for a long time)

 Limitations of selfish actions. The invisible hand could be used to

justify selfish actions. But, to some, this is the wrong approach. You
could argue that motivation is important and individuals should be
aware of the actions of the rest of society – rather than gaining
justification to be just selfish.
On the 9th page
Why Is the Invisible Hand Controversial?
Critics argue that the idea that self-interested, profit-driven actors
will converge on some social optimum is false and that instead it
naturally leads to negative externalities, economic and social
inequalities, greed, and exploitation.

Moreover, competition driven by the invisible hand can ultimately

result in monopolies and the concentration of economic power,
both of which are undesirable for society.

Other critiques hone in on the concept's assumption that producers

can easily switch from producing one type of good to another,
depending on its relative profitability at a given moment. This does
not account for the sometimes-enormous costs of switching and the
idea that people may engage in a business that they enjoy doing, or
which has been passed down in a family, regardless of profitability.
On the 10th page

Advantages of Invisible Hand

The invisible hand has been in action for centuries. It has brought billions of
people together to work in their interests and create goods and services for
each other. Its success is clear to see through the advancement of the global
economy throughout the last century and beyond.

Some of the main advantages of the invisible hand include:

1. Efficiency
Under the invisible hand, producers follow the profit motive, so there is an
incentive to make production as efficient as possible. On the other hand, this
may also encourage producers to cut corners in a bid to make more profit. Yet
such businesses will not last long. After all, if the company doesn’t make a
good or provide a service that the customer wants, it will go out of business.

If the firm reduces the quality to increase profit, the demand for such goods
will adjust to the new quality. Any benefit to the firm will be short-lived. So
over the long term, there is an active incentive to not only improve efficiency
but also maintain and improve quality.

2. Freedom
The invisible hand relies on the self-interest of each individual. However, this is
based on the free choices of each person. It is not from the goodwill of the
baker that he provides bread to his customers. Nor is the baker coerced into
doing so. It is through the entrepreneurial nature of the baker that he
identifies a gap in the market that needs to be fulfilled.

Those filling the gap in the market are doing so because they can see demand
for such. At the same time, they are driven by their self-interest to earn some
profits. Yet without that self-interest, it is likely that nobody would exploit that
gap in the market. After all, why go through the hardship of creating and
delivering a new product to market?
3. Socially Optimal
The invisible hand allows supply and demand to fluctuate, drawing the market
to equilibrium. This is seen as the socially optimal point because it avoids
shortages as well as oversupply.
Through the invisible hand, supply increases in response to an increase in the
price. This incentivizes producers through their self-interest to produce more
of the demanded good. Similarly, when demand is low, they are incentivized to
reduce prices to match supply with demand.

This is socially optimal because if prices are too low, we end up with a shortage
in the market – meaning consumers have to ration and go without. Similarly,
producers may overproduce, meaning they must reduce prices to attract
customers – thereby making an effective loss.

On the 11th page

A short glimpse into how Adam Smith’s invisible
hand is supposed to work in theory?

Adam Smith is often called the father of laissez-faire economics or

what we call capitalism. Many of these ideas came from his major
work published in 1776 titled an inquiry into the Nature and Causes
of the Wealth of Nations which we often call the Wealth of Nations.
The idea behind laissez-faire economics is that the government
should leave markets free as possible the self-interest of individuals
will ultimately grow the economy. the process by which happens is
an invisible hand. this metaphor of the invisible hand explains that
the sum of all individual choices on the part of businesses and
consumers inevitably guides economic growth. Let’s look at an
example here –let’s imagine two cheese shops here Thermopolis and
Cheezyorama. each of these is selling a pound of mozzarella cheese
for Rs 50. if price and quality are equal, we will probably shop at the
one most convenient for us like maybe if cheezyorama is nearby my
residence then that’s where I’ll go.
But Cheesopolis is starting to lose its customers, what will it do?
It will try to gain the attention of customers by giving more good
quality cheese or giving some freebies like cheddar and parmesan
cheese cubes or try to advertise their shop by having a model or a
person in trend recently to advertise their products