#ADAM SMITH INVISIBLE HAND DIAGRAM SERIES#

The bread you buy at the store arrived as the result of hundreds of self-interested people cooperating without a government bread agency managing production at each step along the way. The amazing part of this process is that there is very little government control. When you work, your goal is to earn money, but in the process you provide a valuable good or service that benefits others and society. While producers and consumers are not acting with the intent of serving the needs of others or society, they do. Thus, competition is the regulator, a check on self-interest because it restrains my ability to take advantage of my customers.Īdam Smith described the opposing, but complementary forces of self-interest and competition as the invisible hand. If I were the only baker in 100 miles, I might be able to charge a high price, sell inferior products, or treat my customers rudely - but even in that case, another self-interested person might see an opportunity to earn a profit and open a competing bakery in town. You will notice that this assumes I have competitors. In order to earn your money I must provide a high quality good or service at a reasonable price. If my bread were moldy or inferior in any way, you will likely buy from my competitors. If I were to treat you poorly when you enter my store, you would likely buy from my competitors.

If I were to increase my price too much, you would likely buy bread from my competitors. For example, if I were a baker, the only way I would be able to earn your dollars is to produce bread that is better, cheaper or more convenient than the bread produced by the other bakers in town. Because other self-interested people are competing in the marketplace, my self-interest is held in check. In fact, your self-interest might lead you to study hard for your math test, give money to your favorite charity or volunteer at a local school.Ĭompetition is the regulator of economic activity.ĭoesn't self-interest lead to price gouging, corruption and cheating? Sometimes it does, but most often it is held in check by competition. Self-interest just means that you seek your goals. Is being self-interested greedy? Is it immoral? While the term self-interest has negative connotations, it does not necessarily imply greedy or immoral behavior. The miracle of a market system is that self-interest produces behavior that benefits others. The baker while serving his self-interest has produced a good that is very valuable to you. In fact his bread has to be good enough and the service friendly enough that you are willing to give up your money freely in exchange for his bread. The baker wants to earn enough money to feed his family and buy the things he wants and the most effective way he has found to do that is to bake bread for you. So why does the baker choose to bake? The answer is self-interest. 'It is not from the benevolence (kindness) of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.' Adam Smith described it this way in his book, The Wealth of Nations: In fact, most of the economic activity we see around us is the result of self-interested behavior. You go to school so you can get a better job someday and earn more money to buy the things you want. You go to work because you want to get paid so you can buy the things you want. To be self-interested simply means that you seek your own personal gain. Why do you go to work? Why do you go to school? There may be many reasons, but at their core you probably go to work and school because you are self-interested. Self Interest is the motivator of economic activity.

The role of self interest and competition was described by economist Adam Smith over 200 years ago and still serves as foundational to our understanding of how market economies function. In this type of economy, two forces - self-interest and competition - play a very important role. It is a system in which the government plays a small role.

#ADAM SMITH INVISIBLE HAND DIAGRAM SERIES#

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Adam smith invisible hand diagram