The most primitive, basic lessons of investment talk about the Invisible Hand of the Market – because it is a concept which rules the market. The Invisible Hand of the Market is the reason behind the fluctuations in the market – but most of us aren’t really aware about this Invisible Hand of the Market and how it works – so here we go, with a detailed explanation.
The Father of Economics has been credited with coming up with this simple concept, which he has explained fantastically in his book – Wealth of Nations. He describes the Invisible Hand of the Market to be the force which influences the market by bringing both the forces of demand and supply to the point of equilibrium. While this force isn’t visible, it’s an intangible concept which regulates the market.
This concept works only in a free market though – where there are no rules, regulations, and interference of the government. The Invisible Hand of the market works best under conditions where people are allowed to buy and sell freely. In such a free market, the market would flourish as those willing to buy are free to buy what they want to without any hesitation and obligation towards the law, tying them down. Also, those selling would be in a better place to offer what the buyer is willing to buy at a price which will ensure maximum buyers buy the commodity. There would be a healthy competition in such markets as the sellers will be in a position to even reduce the price to encourage buyers to buy the commodity from them.
Basically, the concept of Invisible Hand of Market works in a free market economy in this way – when people demand what they require and wish to buy, the sellers will automatically produce those commodities and supply them at a consumer-oriented price. This makes it a win-win situation for both.
Even in markets that are regulated and not free – which is the case these days – the Invisible hand of the Market still works- albeit not in a full-fledged manner. The regulated markets too function based on the equilibrium brought in by the Invisible Hand of the market. The results may not be as obvious as in the free market scenario, but yes, without the Invisible Hand, the functioning of the market will be near impossible.