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| Version | User | Scope of changes |
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| Aug 26 2008, 4:54 AM EDT (current) | welkerjason | 602 words deleted |
| Aug 30 2007, 9:02 PM EDT | agoldman | 129 words added, 1 word deleted |
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Invisible Hand: A term Adam Smith, in his 1776 novel, The Wealth of Nations, created to convey the idea that the greatest benefit to society as a whole is achieved by people looking out for their own interests being free to do so. The "invisible hand" would automatically guide markets to the best outcome. When each person or company tries to get the best for himself, he will trade with others out of self-interest, but this selfishness on both parts would ensure that the outcome would be the most mutually beneficial. The invisible hand ensures that when firms maximize their profits and resource suppliers maximize their incomes, these groups also help maximize society's output and income.
In Smith's own words: "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." Explain the virtues of the market system: Efficiency: It's more efficient for a country if it has a market system, instead of a command economy. In a command economy (aka socialism; communism), the central government has to plan the amount of product needed for the whole nation. Thus, the quality of the products may be sacrificed for quantity. Additionally, the central government may require products with no demand to be produced, which will then rot in warehouses. Whereas in a market economy, each company/firm has freedom to choose how much and what they produce. In a market economy, there's also competition, so that the producers wouldn't sacrifice quality over quantity. This leads to efficient allocation of resources in making quality products with high demands which increases profitable gains for both the consumer and the producer. Efficiency also drives the research and development of more efficient methods of production and other important technological advancements.Productive Efficiency: the production of any particular mix of goods and services in the least costly way. Allocative Efficiency: the production of that particular mix of goods and services most wanted by society. Incentives: As greater work skills and effort result in greater production and higher incomes, people would have a greater incentive to work harder, acquire more skills, and be more innovative. This attitude usually leads to a higher standard of living. Also, in the case of entrepreneurs, they may gain substantial profit incomes from the risks that they assume. Also, economics rewards are given to successful innovations. Thus, with such incentives, people would generally work harder, be more creative, and obtain more skills in order to achieve greater benefits and higher incomes. Freedom: Is the major noneconomic argument for the market system. Unlike the command economy, where everything's central planned, the market system allows entrepreneurs and workers to furthur their own self-interest. Supply+Demand Coordination: A free market system allows consumers to express their demands with the 'dollar vote.' Producers, can then get 'feed backs' about the quantities and varieties of their production based on the consumer's demands. Products that satisfy the needs of society will thus be produced instead of unwanted goods.
In Smith's own words: "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." Explain the virtues of the market system: Efficiency: It's more efficient for a country if it has a market system, instead of a command economy. In a command economy (aka socialism; communism), the central government has to plan the amount of product needed for the whole nation. Thus, the quality of the products may be sacrificed for quantity. Additionally, the central government may require products with no demand to be produced, which will then rot in warehouses. Whereas in a market economy, each company/firm has freedom to choose how much and what they produce. In a market economy, there's also competition, so that the producers wouldn't sacrifice quality over quantity. This leads to efficient allocation of resources in making quality products with high demands which increases profitable gains for both the consumer and the producer. Efficiency also drives the research and development of more efficient methods of production and other important technological advancements.Productive Efficiency: the production of any particular mix of goods and services in the least costly way. Allocative Efficiency: the production of that particular mix of goods and services most wanted by society. Incentives: As greater work skills and effort result in greater production and higher incomes, people would have a greater incentive to work harder, acquire more skills, and be more innovative. This attitude usually leads to a higher standard of living. Also, in the case of entrepreneurs, they may gain substantial profit incomes from the risks that they assume. Also, economics rewards are given to successful innovations. Thus, with such incentives, people would generally work harder, be more creative, and obtain more skills in order to achieve greater benefits and higher incomes. Freedom: Is the major noneconomic argument for the market system. Unlike the command economy, where everything's central planned, the market system allows entrepreneurs and workers to furthur their own self-interest. Supply+Demand Coordination: A free market system allows consumers to express their demands with the 'dollar vote.' Producers, can then get 'feed backs' about the quantities and varieties of their production based on the consumer's demands. Products that satisfy the needs of society will thus be produced instead of unwanted goods.
