When you hear the term “invisible hand,” is your first thought economics? Or Harry Potter and his invisibility cloak? If you belong to the latter group, no need to freak out. We’re hear to teach you all you need to know about Adam Smith’s famous economic theory.
What is it?
When Adam Smith wrote “The Wealth of Nations,” he described the invisible hand as an unseen force that caused individuals to act in their own self-interest, therefore determining the allocation of goods.
When Smith says the term “self-interested,” he doesn’t mean you have to have an ego as big as Gilderoy Lockhart’s hair to be economically successful.
It simply means that everyone is trying to maximize their own wealth, and this in turn has unintended benefits to the economy as a whole. Basically, Smith is saying that when you do you, the economy wins.
Breaking it down
The invisible hand keeps things in check by naturally balancing supply and demand. Each person’s self-interest creates a domino effect of market exchanges. Others will supply goods in order to make a profit off of other peoples’ demands.
For example, Mr. Ollivander’s wand shop wouldn’t exist without a demand for first year Hogwarts students needing wands (or people that accidentally break them – looking at you, Ron Weasley!). The customer gets what they came for and Ollivander gets a nice cut of the profits, enabling him to buy goods within his own demands. Everyone wins.
According to Smith, the power of the invisible hand does a great job of monitoring the free market on its own. When people have an increased demand for a certain product, the market will acclimate to the price adjustments of supply and demand. It is necessary to note, though, that while Smith did champion market self-regulation, he was also supportive of government intervention in certain scenarios.
Why it matters
The invisible hand was the basis for laissez-faire economic policy, laying the foundation for modern capitalism and steering us from a mercantilist system. However, some economists argue that the invisible hand theory has been expanded beyond what Smith originally intended.
Economic pundits position that with the rise of modern market forces such as industry, finance and advertising, the invisible hand is more antiquated than the Mirror of Erised. These three factors consequently reduce the power of the invisible hand and make it less effective.
With all this in mind, it does beg the question of whether we should revere Smith as the creator of capitalism or, more simply, just value his theory for creating the basis of modern capitalism.
And who said you couldn’t learn anything from Harry Potter?
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