The invisible hand theory is a concept described by Adam Smith in the 18th century, and is broadly accepted by today’s economists as a means to explain the forces of a free market. Smith’s description of the invisible hand theory states that individuals pursuing their own interest frequently promote the good of society than when he really intends to promote it.” Smith also provides a more direct scenario of the invisible hand theory, “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
According to the invisible hand theory, each of us, acting in our own self-interests, generates a demand for goods and services that compels others to deliver those goods and services in the most efficient manner so that they may be able to receive compensation from others and make a profit in doing so. In this process, resources are allocated in the most efficient manner, in contrast to a process that relies on a centrally planned system.
The invisible hand theory as used in EcoCommerce 101 refers to the profit motivation of individuals that drive an economy. EcoCommerce 101 also describes the value of applying the invisible hand theory that goes beyond the transaction between two individuals. Since information is generated by each transaction, this economic data is absorbed by the economic participants that allow the most efficient allocation of resources. From this perspective, the invisible hand theory is also credited with the market marvel, the price of a resource.
Economist Leonard Read wrote an essay in 1958 essay in the first-person from the perspective of a pencil. “I, Pencil, the creation of a pencil am a complex combination of miracles: a tree, zinc, copper, graphite and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies – millions of tiny knows-how configuring naturally and spontaneously in response to human necessity and desire, all in the absence of any human masterminding!
This ability to accomplish this in the absence of any human masterminding is explained by the invisible hand theory.
Examine the principles of the invisible hand theory in depth by ordering your copy of EcoCommerce 101 today!