ACT Reading Practice Test 34

SOCIAL SCIENCE: Adam Smith and the “Invisible Hand” Doctrine

In An Inquiry into the Nature and Causes of the Wealth of Nations, Scottish economist Adam Smith asserts the power of the “invisible hand,” the notion that a society benefits from people acting in their

Line 5 own self-interest, without regard to community service. Wrote Smith, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” So, the butcher does not cut meat because the

10 community desires it, but rather because it is a means to earn money. Smith points out that in the absence of fraud and deception, a mercantile transaction must benefit both parties. The buyer of a steak values the steak more than his money, while the butcher values

15 the money more than the steak. The “invisible hand” is harshly criticized by parties who argue that untempered self-interest is immoral and that charity is the superior vehicle for community improvement. Some of these people, though, fail to

20 recognize several important aspects of Smith’s concept. First, he was not declaring that people should adopt a pattern of overt self-interest, but rather that people already act in such a way. Second, Smith was not arguing that all self-interest is positive for society;

25 he simply did not agree that it was necessarily bad. Standing as a testament to his benevolence, Smith bequeathed much of his wealth to charity. Additionally, the “invisible hand” has come to stand for the resilience of the market after apparently

30 ruinous circumstances. Smith posited that markets naturally recover without intervention on the part of government or similar regulatory bodies. For example, should a product be in excess production, its price in the market would fall, providing incentive for the public to

35 purchase it, thus reducing the stock. This kind of reaction leads to the “natural price” of a good or service, which, Smith believed, was the production cost plus a reasonable profit. This idea would become central to the doctrine of the laissez-faire economists several

40 generations later. Adam Smith’s Wealth of Nations was written for the masses and is generally accepted as the first treatise on economics. For these reasons, the book is thoroughly studied; for the theory within, Smith’s magnum

45 opus remains controversial. It stresses low government intervention and personal action as the roots of a prosperous market. As societies balance the question of whether and how to manipulate their markets, Smith presents a valuable warning, saying of man, “he intends

50 only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”