Question

When describing "the invisible hand" of the market, summarize two assumptions of free markets and then give an example of a real-life market, business, or transaction that violates each of these assumptions.

Answer 1

The concept of invisible hand theory introduced by the well-known economist Adam Smith in his work "Wealth Of Nation" based on following the assumption.

1. In the economy, people will work based on self-interest and it promotes division of labors and specialization
2. The unregulated economy will produce goods and service based on demand and supply mechanisms.

The above argument valid in a simple economy, but when working of the economy becomes complex the argument becomes invalid.

1. The people do the job which they have self-interest but while employing the employer give importance to the productivity and skill or competencies of the workers and thus employer employ those skilled laborers in the production process.
2. The present economic system of many national governments regulated economy. 1930 great depression and 2007-09 great recession showed the failure of the free market economy.