Adam Smith and "The Wealth of Nations"

The invisible hand is not actually a distinguishable entity but the sum of many phenomena that occur when consumers and producers engage in commerce.

• The invisible hand theorem suggests that the means of production and distribution should be privately owned and that trade will flourish organically without regulation.
• The government affects the invisible hand, not the other way around. It is prescriptive and intentional and pursues defined goals through coercion.

The lack of market mechanisms frustrates government planning. This is also known as the economic calculation problem.

When people and businesses make their own decisions based on their willingness to pay money for a good or service, the information is captured. In turn, resources are automatically allocated toward the most valued ends.

Governments' interference causes unwanted shortages and surpluses. However, the forces that guide voluntary economic activity toward the benefit of societies are the same forces that curb the effectiveness of government intervention.

Smith believed a nation needed three elements to bring about universal prosperity.

1. Enlightened self-interest. He thought most people would naturally practice thrift, hard work, and enlightened self-interest.
2. Limited government. Smith viewed the government's responsibilities as being limited to the defence of the nation, universal education, public works, the enforcement of legal rights and the punishment of crime.
3. Solid currency and a free-market economy. Smith hoped backing the currency with hard metals would prevent the government from depreciating the currency.

The Wealth of Nations is an influential book that started free-market economics but has some weaknesses. For example,

• it is lacking proper explanations for pricing or a theory of value
• Smith failed to notice the importance of the entrepreneur in breaking up inefficiencies and creating new markets

However, both opponents and beliers in Adam Smith's free-market capitalism have added to the framework. The theory gets stronger with each reformulation and continues to be a powerful force today.