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The Invisible Hand

by Pete on June 5, 2013

adamsmithHappy birthday Adam Smith!

Who is that you may ask? He is the father of modern economics and theorist behind capitalism. You may not be interested in economics or historical birthdays but this is a guy you should know. His crazy ideas have led to how we see money in the democratic world. Adam Smith lived and worked in Scotland. He started publishing writings while teaching at the University of Edinburgh. His major work, “The Wealth of Nations,” is known as the first modern work on economics. It was published in 1776. If you remember what else happened that year, you can connect how his view of capitalism molded the United States’ fiscal system.

Adam Smith’s big contribution was the concept of the “Invisible Hand.” The idea is that when everyone in business is free to act in their own self-interest, the market will eventually correct itself to the safest state. For instance, if a business charges an unfair price, eventually people will get fed up and stop buying. Another entrepreneur will see the discontent as an opportunity to make money and will start serving the same product at a cheaper price. The “invisible hand” guides the market and balances out supply and demand.

Although the term “capitalism” didn’t exist back then, interpretations Adam Smith’s ideas certainly led to it. “The Wealth of Nations” ideas are called “pre-capitalism” by some. The Founding Fathers used Adam Smith’s work to create the concept of laissez-faire business, meaning “let it be.” By leaving businesses to act with little regulation, the market would correct itself. This also led to the division of labor and the “you get what you earn” mentality.

Some however, feel this was a misinterpretation of what Adam Smith was saying. Later in “Wealth of Nations” Smith spoke of how dividing labor as such could get dangerous. Extreme differences in wealth in not healthy for society. The Occupy Wall Street movement was based on this idea.

Adam Smith’s work has affected everything we know about how money works. Whether it’s good or bad, we live in a society where you get paid only for what you earn. Fortunately, you can also get paid to try…

 

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