Question: The other night on the business news, one of the pundits said that the invisible hand might take care of the market. They didn't stop to explain what that was.

Ted S.

Answer:

Dear Ted,

It does have a mysterious sound to it, doesn't it? Good that you asked.

The "invisible hand" is a philosophy devised by the Scottish economist, Adam Smith. Smith, who lived from 1723 to 1790, wrote the famous treatise, "Wealth of Nations" in 1776.

Invisible hand describes the idea that a natural force guides free market capitalism in a positive way.

According to Smith, in a free market each participant will try to maximize his or her self-interest. And as these participants interact there will be an exchange of goods and services.

Enter the invisible hand...

Smith also said that in a free market, no regulation of any type is necessary to protect the individual. He believed that a mutually beneficial exchange of goods and services would always take place because the so-called "invisible hand" would be there as a positive overall force.

In other words, self-interest guides us first and foremost and public welfare follows -- but as a secondary byproduct. Smith maintained that government efforts to promote social good were ineffectual when compared to unbridled market forces...the individual, acting for his own good, tends to also promote good for everyone.

Here's a direct quote:

Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Bottom Line...

The metaphor of the invisible hand is an argument against government regulation of the market. It could be that the pundit you heard on the news was saying that the government should not interfere -- that there should not be price supports, embargos, quotas and the like -- although that's merely an assumption on my part.