How does invisible hand create wealth?

Answer 1

The invisible hand was posited by Adam Smith in his 1776 book, The Wealth of Nations. To be more specific, the "invisible hand" is used to suggest the appearance of order that comes about when everyone acts in their own economic self-interest. He uses an example of a baker: Why does a baker rise each morning and bake his bread? Adam Smith answers that it is not because he cares about you and wants you to have bread, but because he wants to sell his bread, and thereby earn money. When everyone follows their economic self interest things fall into place. How? Well, think about it. If you want to make some money you must sell a good or a service. Suppose you want to sell dolls but no one in your town wants to buy any. Very quickly you will have to switch appsoaches and sell something people want to buy. Maybe you'll choose to sell Hamburgers, or corn, or shoes. In this situation, your own self interest (to make money) has forced you into the production of something that society needs. This is the case for every individual in the society. People begin to produce things as cheaply and efficiently as possible, and so long as those things are desired they will be bought, if they can be afforded. So as you can see, self interest leads entreprenuers to produce wealth, in the form of commodities. Of course, he makes a profit and that enables him to spend or to reinvest. In this way the invisible hand of self interest produces wealth.