Invisible hand

The Invisible Hand is an economic concept that describes the unintended greater social benefits and public good brought about by individuals acting in their own self-interests.[1][2] The concept was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759. According to Smith, it is literally divine providence, that is the hand of god, that works to make this happen.[3]

By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for many years, and in this work, the invisible hand is more directly linked to production, to the employment of capital in support of domestic industry. The only use of "invisible hand" found in The Wealth of Nations is in Book IV, Chapter II, "Of Restraints upon the Importation from Foreign Countries of such Goods as can be produced at Home." The exact phrase is used just three times in Smith's writings.

Smith may have come up with the two meanings of the phrase from Richard Cantillon who developed both economic applications in his model of the isolated estate.[4]

The idea of trade and market exchange automatically channeling self-interest toward socially desirable ends is a central justification for the laissez-faire economic philosophy, which lies behind neoclassical economics.[5] In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the "invisible hand" is. In alternative models, forces that were nascent during Smith's lifetime, such as large-scale industry, finance, and advertising, reduce its effectiveness.[6]

Interpretations of the term have been generalized beyond the usage by Smith.