Question

Explain in depth what Adam Smith meant when he said that the market operates as if “an invisible hand” is guiding the process.

Answer 1

Adam Smith mainly catered to the areas of microeconomics. Thus when he referred to the idea of the invisible hand he referred to how markets correct themselves without government intervention. Thus in case of say an excess demand in the market, the market will correct itself through prices rising until the market clears. In such a situation there is no government intervention and market clears itself. This is an example of the invisible hand. The idea was professed by Adam Smith to say that government intervention is not siignificantly required as the market corrects itself.