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60 second adventures in economics: The Invisible Hand

Updated Monday 10th September 2012

In the first of our six short videos on economic theory, watch how an Invisible Hand drives the economy. Eventually.

David Mitchell is waiting to explain six key economic concepts in sixty seconds apiece. Which is pretty economical in itself, if you think about it...

Transcript: An economy is a tricky thing to control, and governments are always trying to figure out how to do it.

Back in 1776 economist Adam Smith shocked everyone by saying that what governments should actually do is just leave people alone to buy and sell freely among themselves.

He suggested that if they just leave self-interested traders to compete with one another, markets are guided to positive outcomes 'as if by an invisible hand'.

If someone charges less than you - customers will buy from them instead – so you have to lower the price or offer something better.

Wherever enough people demand something, they will be supplied by the market – like spoilt children – only in this case, everyoneʼs happy.

Later free-marketeers like Austrian economist Friedrich Hayek, argued that this ʻhands offʼ approach actually works better than any kind of central plan.

But the problem is, economies can take a long time to reach their ʻequilibriumʼ, and may even stall along the way. And in the meantime people can get a little frustrated, which is why governments usually end up taking things into their own more visible hands instead.

 

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