The Invisible Hand Theorem

The invisible hand was an idea introduced by Adam Smith in multiple works, including The Wealth of Nations.

It says that each individual pursues their own goals in the economy, but together, those efforts promote the good of society as if “led by an invisible hand”.

When enough consumers want a good or service, entrepreneurs and producers are incentivized to provide those things.

No government agency is telling bakers how much bread to produce.

But when customers and business owners act in their own interests, they end up creating the right amount of bread for the right price.

Those prices act as a signal between supply and demand (which we’ll talk about more in a later video.)

But what’s even more interesting, as later economists discovered, is that this "accidental system” can work a lot better than fully centrally regulated ones.

That’s the entire premise of the invisible hand. The self interest of businesses and consumers, guided by prices, accidentally creates a working economy.