Overview
This lecture explains Adam Smith's theory of the "invisible hand," which suggests that individual self-interest and competition in free markets drive economic growth.
Adam Smith and Capitalism
- Adam Smith is considered the father of capitalism and laissez-faire economics.
- Smith’s major work is "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), often called "Wealth of Nations."
- Laissez-faire economics advocates for minimal government interference in markets.
The Invisible Hand Explained
- The "invisible hand" is a metaphor for how individual choices guide economic activity and growth.
- Self-interest motivates consumers and businesses to make decisions that, collectively, benefit the economy.
- Competition between businesses leads to lower prices and better products for consumers.
Example: Cheese Shops
- When two shops sell the same product at the same price, consumers choose based on convenience.
- To attract more customers, shops might improve quality, variety, marketing, or lower prices.
- Consumer choices and business responses are examples of the invisible hand in action.
- When businesses grow, they create jobs, which further stimulates the economy.
Self-Interest, Competition, and Profit Motive
- Self-interest drives both consumers and businesses.
- Competition encourages businesses to improve and lower prices.
- The desire for profit motivates economic activity, leading to consumer benefits.
Key Terms & Definitions
- Invisible Hand — The idea that individual self-interested actions in markets lead to collective economic benefits.
- Laissez-Faire Economics — An economic philosophy advocating for minimal government intervention in markets.
- Self-Interest — The motivation for individuals or businesses to act in their own best economic interests.
- Competition — Rivalry among businesses to attract customers, leading to improved goods, services, or prices.
- Profit Motive — The drive for businesses to make money, which fuels economic growth.
Action Items / Next Steps
- Consider: To what extent does the invisible hand operate in today’s real-world economy?