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What does the invisible hand in the marketplace do?

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October 17, 2009 5:31PM

The invisible hand is a term coined by Adam Smith in the 1700s

to describe the operation of free markets. The general idea is that

individuals pursuing their own self interest ends up doing what is

best for society "as if guided by an invisible hand".

As an example, when the price of a goods increase due to higher

demand or lower supply, more people will start producing this

goods. They do this out of self interest, tempted by the high sales

price, but it also benefits society as a whole since the larger

supply will make the goods available to more buyers as well as

driving the price down again.

The short answer would be 'allocation': The invisible hand puts

more resources into producing goods for which there is a shortage,

as evidenced by high profit margins, at the expense of goods for

which there is a surplus, as evidenced by low or negative profit

margins. And the invisible hand keeps doing these adjusments

continously without anyone planning or ordering that society should

produce more of what it needs and less of what it doesn't

need.

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