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Demand And Supply

The Theory of Invisible Hands

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The Theory of Invisible Hands

Adam Smith introduced the term “invisible hands” in 1776. He argued that there exists an unforeseen force in the market that aids in balancing the demand and supply (Karlson, 2017). Smith adds that people are likely to apply their resources where they are likely to receive the highest return. He also suggested that, if people could be allowed to trade freely, self-centred traders would venture into activities, to increase the gain to capital, while enhancing market productivity (Stiglitz, 1991). However, these individual actions result in unforeseen consequences that benefit society. Although some economists have criticized Smith’s arguments, the theory has proved meaningful because most economies today result from unintended consequences that he postulated.

Modern economists argue that the unintended benefits associated with the invisible hands have four significant features (Aydinonat, 2009). First, the consequences of the invisible hand must relate to a social phenomenon and felt at the macro-level. Secondly, individuals have to make independent decisions in response to the market forces of supply and demand. Lastly, the decisions must never be communal. The actions must be as a result of an individualized decision.

Consider the scenario of the wheat market: Several cost-benefit decisions exist for wheat production and consumption. Sellers are seeking for more profits, and are willing to offer an extra unit of wheat for sale – if it is profitable to do so. An increase in price automatically leads to more profits on the part of the sellers, especially if the buyers can purchase. Consequently, the invisible hand shows up; the sellers will increase the quantities of rice supplied – in an attempt to earn an extra profit. Accordingly, the supply will increase because suppliers are bringing more wheat to the market. Ultimately, the excess wheat quantities in the market lower the prices, and so, buyers can purchase higher amounts at low prices. In this scenario, the price reduction is the unintended consequence, while the invisible hand is the force behind the increase in the market supply of wheat.

In conclusion, the “invisible hands” theory advanced by Adam Smith is the unseen force that controls the supply of and the demand for commodities in a free market. The unintended consequences of the invisible hands illustrate how most capitalistic economies usually operate. The market responds to a commodity shortage by increasing the levels of its supply. Although some economists have criticized Smith’s arguments, the theory has proved to be meaningful because most modern economies result from unintended consequences.

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