Adam Smith and the Invisible Hand

Adam Smith was a Scottish professor who wrote a book called The Wealth of Nations in 1776. He was strongly influenced by the philosophers of the Enlightenment. Smith looked at the British trade system, which allowed middle-class entrepreneurs to act with some freedoms in the marketplace, and praised it as a model which encouraged competition. He called for a laissez-faire, market system (laissez-faire means leave it alone), which would encourage more competition, and that in turn, would encourage better production in the marketplace.

He theorized that if people were free to invent, produce, and compete for sales of products and services, they would be motivated to produce better products. Better products and better prices would encourage consumers to use their wealth to buy new products. More interaction between producers and consumers would attract new investors, who would risk their capital and create new factories. This would employ more workers generating more wealth in the form of wages. As workers' skills increased, employers who wanted to retain good employees would reward employees with higher wages.