Invisible hand

Invisible hand

 

Invisible hand

Definition of invisible hand

Invisible hand means a free market situation, where economics factors moves freely without the interference of the external factors. The existence of this concept introduced first by Adam Smith. We observe the existence of free market situation in mostly in capitalist economics where there is no government interference in the market force.

Explanation of invisible hand

In free market situation market interference operate freely without the restriction. In such a market economy there are millions of consumer and producer taking independent decisions. These decisions determine the allocation of resources. The market mechanism or price system refers to a form of economic organization through which producer and consumer interact. Here market mechanism solves three basic questions, what to produce, how to produce and for whom to produced?

Adam Smith realize even if there is millions of consumers and producers in the market, there is no chaos in the market and the market system run smoothly in economic Oder. Economic Oder runs smoothly because here individual can able to take decisions privately and individual decisions collectively operate as a public decision. Price occupies an important factor in the market, so it is known as price economy.

In these system if price of any product increases, producer aggressively want to produce more of that product to increase their profit. As a result when a large number of producer produce large quantity of the same product the price of the product automatically reduced. Here the other factor remains constant (i.e., no interference of the government). The mechanism by which the price of the product reduced or increased by only the market system is known as invisible hand. It is assumed that there may be an invisible hand in the market system, which can control the market system and bring it back in the previous situation.

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Example of invisible hand mechanism

Let’s, take an example of real market invisible hand. Suppose in the market alternative commodities are wheat and rice and people prefer both of the commodities as a same manner. Now if the price of wheat higher than the rice, then producers have been thought that they will earn more money to produce more of wheat instead of rice. So producer of rice turn to produce wheat instead of large amount of rice. Here one think must be mentioned that individual producer or consumer decision does not affect the market decision .But collective action of all the consumer and producer make a significant effect in the market. In the market perfect completion prevails.

So if the producer produced more wheat than the rice then automatically the production of wheat  grow up and the price will fall, on the other hand as the production of rice fall its price go up. So now the producer shift towards the production rice to get profits. The market will be achieved a balanced position without the interference of any other external factors. An imaginary hand which controls the mechanism without the interference of any external factor is known as Invisible hand.