What are the advantages and disadvantages to the invisible hand theory?



  1. 0 Votes

    From the perspective of promoting your own community or even your own societal interests – there are many advantages.  If someone shops in there own community, or shops for things that were grown or produced locally, they are supporting the community in a number of ways by providing income and job security, paying into a tax base that benefits that community, lowers the cost of transportation and reduces energy use overall.  If someone shops a foreign industry the local community or society loses out on those tax dollars, local workers cannot benefit in that industry, and it will increase the energy and transportation costs to produce that product.

  2. 0 Votes

    The invisible hand theory goes beyond domestic vs international trade and is usually meant to describe the benefits society enjoys through each person acting in their own self-interest. This theory is helpful in that it allows very neat models to be constructed — models in which markets always clear. So, operating under this theory, demand is met at the lowest price the market will bear. This is a very helpful starting point for more advanced economics.

    On the other hand, many have criticised the theory for its oversimplification. It does not take into account externalities, nor does it allow for basic research or a government role. Furthermore, it assumes that all agents in a market are perfectly rational, which is arguably not the case at all.

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