Which economic system is based on the principle of invisible hand?
Question: Which economic system is based on the principle of invisible hand?
The invisible hand is a concept rooted in economics, particularly associated with the free market economy. Let me explain:
- The invisible hand represents the unseen forces that operate within a free market system.
- In this system, self-interested individuals (both consumers and firms) interact through a system of mutual interdependence.
- Despite their focus on personal gain, these individuals unintentionally contribute to the greater good of society.
- How does this work? Through voluntary trades, the market generates widespread benefits.
- These benefits are often greater than what a regulated or planned economy could achieve.
- The invisible hand concept was introduced by Scottish Enlightenment thinker Adam Smith in his works, including The Wealth of Nations (1776) and The Theory of Moral Sentiments (1759).
- Each free exchange in the market provides signals about valuable goods and services and their difficulty in reaching the market.
- These signals guide consumers, producers, distributors, and intermediaries to fulfill the needs and desires of others.
- Critics argue that the invisible hand doesn't always lead to socially beneficial outcomes and can sometimes encourage negative externalities and inequalities²³⁴.
In summary, the invisible hand operates within a laissez-faire approach, allowing the market to find equilibrium without government intervention. It's a fundamental concept in understanding how self-interest can lead to collective well-being in a free market economy.
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