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HIST-UA 105 Lecture Notes - Invisible Hand

2 pages70 viewsSpring 2014

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Adam Smith- Wealth of Nations
One idea that is prevalent throughout Adam Smith’s Inquiry Into the Nature and
Causes of the Wealth of Nations is the notion of the invisible hand that makes the selfish
desires of individuals into a greater force that benefits society as a whole. Smith claims
that it is in vain for man to expect constant help from “his brethren” and that “it is not
from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,
but from their regard to their own interest.” (Smith, 22). To Adam Smith the concept of
self interests does not have as negative a connotation as it does today. Smith deems the
idea as being perfectly natural and necessary for our societies. Smith believes that we
can’t depend on the conscience and benevolence of people such as the producers of
society to do things for us but instead we should expect them to do things for themselves
and through the force of the invisible hand, their self interests would benefit us as well.
For example, if two butchers are selling meat at the same price then consumers are
willing to buy from either one. However, if one butcher sells the meat at a higher price
then consumers would be more willing to buy the cheaper meat from the other butcher
and so the butcher selling the meat at the higher price would have an incentive to lower
costs to attract customers to buy his products instead. Thus this kind of thinking is what
constitutes a free market.
A free market society is one in which people are forced to consider what other
people want like in the example of the butchers. It is a society based on exchange in
which the one gives something of value in exchange for something else of value. Thus
Adam Smith is very pro laissez-faire because he believes that people make the best
decisions when they are left alone to do so and believes that government should not
interfere in the economy. Smith later lists the example of protectionist tariffs to show how
the government interference in the economy may not be the best thing for society. A tariff
would “give the monopoly of the home-market to the produce of domestic industry” and
is usually “a useless or hurtful regulation” (Smith, 292). Any monopoly in an industry
would harm society especially the consumers because if one company owns all the
smaller companies in the industry, they get to set the price of goods at whatever value
they want. They do not have to deal with the competition from other companies because
they own every company in the industry. This would be a case where laissez-faire should
not be allowed because the interests of the common people, the consumers are hurt.
This example can be traced back to history during President Theodore Roosevelt’s
time when he struck down numerous monopolies and enforced stricter government
regulation of business that clearly had a positive impact on society. The bad trusts “jacked
up rates” and “exploited” consumers and only had their profits in mind. Which brings up
a point about Adam Smith’s theory of the invisible hand and how the selfishness of
people will lead to good things yet in this instance the interests of the big monopolies hurt
the interests of the population. Adam Smith theory of the invisible hand can only survive
if there are competition and free markets in a society. Without competition the invisible
does not provide enough protection for the general public. In such a situation government
needs to stand in and protect its people through the enforcement of regulations such as
antitrust laws.

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