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PARADOX OF THRIFT: The notion that an increase in saving, which is prudent for an individual during bad economic times, is not the best course of action for the macroeconomy. If total saving in the economy increases, then consumption and aggregate expenditures decline, which causes a decline in aggregate output.

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INVISIBLE HAND:

The notion that buyers and sellers, consumers and producers, households and businesses, by pursuing their own self-interests do what is best for the economy automatically without any government intervention, as if guided by an invisible hand.
The invisible hand is an essential component of the economic analysis of markets developed by Adam Smith in The Wealth of Nations. It continues to be a cornerstone of more conservative economic policies that call for limits on government intervention in the economy.

How Does It Work?

The logic of the invisible hand is best illustrated through market competition among buyers and sellers. On the demand side of a market, "selfish" buyers seek to obtain the most output at the lowest price. On the supply side of a market, "selfish" sellers seek to obtain the highest price for the least output. Both sides are guided by the "selfish" goal of getting the most and giving up the least.

Competition among buyers and sellers generates equilibrium and results in equality between the maximum demand price that buyers are willing to pay and minimum supply price that sellers are willing to accept. When the demand price and the supply price are equal, the market is efficient. When markets throughout the economy are efficient, there is an efficient allocation of resources.

The invisible hand of market forces is thus guiding the economy to economic efficiency without the need for government intervention.

A Few Qualifications

The invisible hand of competition does tend to move markets and the economy toward efficiency, it is very effective, unless it encounters roadblocks along the way. The primary roadblocks come under the heading of market failures. They include: (1) goods that are characterized by nonrival consumption and/or problems excluding nonpayers from consumption, (2) limited competition and market control by either buyers or sellers, (3) external costs or benefits that are not reflected in demand price or supply price, or (4) limited or imperfect information about the product or market transaction by either buyer sellers.

In each of these cases, the invisible hand of the market does not achieve efficiency without government intervention.

A Word About Politics

The invisible hand notion has long been a rallying cry for those who favor little or no government intervention in the economy. The logic is relatively clear--if the markets and the economy can achieve efficiency without actions by government, then government actions are not needed to achieve efficiency.

Political conservatives, who champion limited government intervention, tend to embrace the invisible hand notion a great deal more than political liberals, who promote activity government intervention.

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Recommended Citation:

INVISIBLE HAND, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 22, 2024].


Check Out These Related Terms...

     | capitalism | free enterprise | laissez faire | pure market economy |


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And For Further Study...

     | seven economic rules | specialization | division of labor | economic analysis | economic goals | mixed economy | political views | dismal science | government functions |


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