The principle of the invisible hand: a popular explanation

Economic science knows several basic directions of economic thought, arranged in chronological order as follows: school of mercantilism, classical econometeorology (the principle of the invisible hand of Adam Smith), the school of physiocrats, neo-classical, Marxist school, Keynesianism and monetarism.

Among these economic schools , classics take a special place, especially Adam Smith with his "Exploring the Nature and Causes of the Wealth of Nations". It was his work that started the modern economy as a science, it was he who first brought out the patterns of interaction of such major forces in the market as demand and supply. Smith also justified the principle of the invisible hand.

In order to better understand how this principle works, it is necessary to understand the meaning of the laws of supply and demand put into circulation by Smith. According to the law of demand, buyers will purchase more goods at a lower price, and a smaller quantity of goods at a higher price. Graphically, this can be shown in the form of a descending line, the slope of which is determined by the elasticity of demand, that is, the degree to which the consumer reacts to the price change. The elasticity of demand can be zero (consumers will purchase the same quantity of goods regardless of the change in the price level), less (a change in the price by one percent will provoke a change in demand by less than one percent) and a larger unit (a one percent change in price will change the demand level by more than By one percent).

Similarly, the law of supply, according to which the producer will sell more goods at a higher price, and fewer goods at a lower price. Graphically, this can be shown as an increasing straight line, the slope of which will be determined by the degree of price elasticity of the offer.

The principle of the invisible hand says that the market equilibrium will be established at the point of intersection of supply and demand, while it will be achieved automatically due to the impact of consumers and sellers on the market. Thus, Smith rejects the need for government intervention in the economy as an instrument harmful to economic development and market processes. According to his statements, during a certain period, sellers and buyers will change points on their supply and demand curves, respectively changing prices and the number of goods bought and sold until they reach the equilibrium point, after which they will start to make stable transactions for the purchase and sale of an equilibrium quantity Goods at an equilibrium price.

Unfortunately, the principle of the invisible hand of the market, although theoretically absolutely correct and justified, does not find confirmation in modern economic realities. The reason for this is the fact that this principle works only in conditions of perfect competition, which is, in fact, a purely theoretical model in which there are infinitely many sellers and buyers on the market, and the sale of an absolutely homogeneous product is carried out. In real life, the achievement of such conditions is impossible in principle, therefore the principle of the invisible hand is not suitable for application in the modern economy. In contrast to Smith's theory, the theories of John Maynard Keynes and monetarists that allowed state regulation of the economy were developed. Keynesianism regards the state budget as the main regulatory force, the increase of which multiplies the aggregate demand, and monetarists prefer to regulate the economy through regulation of the money supply in the country.

Despite this, the principle of the invisible hand is an important theoretical development, and its understanding opens up for students of economics extensive opportunities for analyzing markets taking into account modern economic realities.