The ‘Invisible Hand’ is a theory that proves how there is nothing wrong with people acting in their own self-interest. In a free market, the combined force of everyone pursuing his or her own individual interests is to the benefit of society as a whole, supplementing everyone. I was recently taught about this idea and it helps explain why free markets have been so essential to the growth of complex modern societies.
There are two aspects to the invisible hand theory: a seller/producer trying to make a profit from selling goods and a consumer looking to purchase cheaper goods. Both of these contribute to create a more efficient economy which can lead to market equilibrium in different industries. People pursuing self-interest can contribute towards societies’ well-being even if they don’t mean to.
However, not all implications of the invisible hand are positive. A main problem that can arise from this is monopoly power. With no government regulations and price controls, firms with monopoly power can push prices above the equilibrium. As a result of this, firms can become inefficient due to a lack of competition making them potentially stagnant.
Furthermore, the invisible hand theory can be used to support selfish actions that could actually negatively affect society, which is an incorrect approach. It is important to be able to distinguish between self-interest and pure selfish greed when implementing a free market economy. Someone purely driven by greed might choose to cheat the law in an effort to benefit himself to the loss of others.