Economic science knows several fundamental areas of economic thought, arranged in chronological order as follows: school of mercantilism, classical economics (the principle of the invisible hand of Adam Smith), school of physiocrats, neoclassicism, Marxist school, Keynesianism and monetarism.
Among these economic schools , classics occupy a special place, especially Adam Smith with his “Study of the Nature and Causes of the Wealth of Nations”. It was his writings that laid the foundation for modern economics as a science; it was he who first brought forth the laws of interaction of such basic forces in the market as supply and demand. Smith also substantiated the principle of the invisible hand.
In order to better understand how this principle works, it is necessary to understand the meaning of the laws of supply and demand introduced by Smith. According to the law of demand, buyers will purchase a larger quantity of goods at a lower price, and a smaller quantity of goods at a higher price. Graphically, this can be shown in the form of a decreasing straight line, the slope of which is determined by the elasticity of demand, that is, the degree of consumer reaction to price changes. The elasticity of demand can be zero (consumers will purchase the same quantity of goods regardless of changes in price levels), less (a change in price by one percent will provoke a change in demand by less than one percent) and a larger unit (a one percent change in price will change the demand more than one percent).
Similarly, the law of supply works, according to which the manufacturer will sell more goods at a higher price, and fewer goods at a lower price. Graphically, this can be shown by an increasing straight line, the slope of which will be determined by the degree of price elasticity of the offer.
The principle of the invisible hand says that market equilibrium will be established at the intersection of supply and demand, while it will be achieved automatically due to the influence of consumers and sellers in the market. Thus, Smith rejects the need for government intervention in the economy as an instrument harmful to economic development and market processes. According to him, for some period, sellers and buyers will change points on their supply and demand curves, accordingly changing prices and the number of goods bought and sold, until they reach the equilibrium point, after which they will begin to make stable transactions of purchase and sale of an equilibrium amount goods at an equilibrium price.
Unfortunately, the principle of the invisible hand of the market, although it is theoretically absolutely correct and justified, does not find confirmation in modern economic realities. This is due to the fact that this principle works only in conditions of perfect competition, which is, in fact, a purely theoretical model, in which there are infinitely many sellers and buyers on the market, and the sale and purchase of an absolutely homogeneous product is carried out. In real life, the achievement of such conditions is in principle impossible, therefore the principle of the invisible hand is not suitable for use in the modern economy. In contrast to Smith's theory, theories of John Maynard Keynes and the monetarists, allowing state regulation of the economy, were developed. Keynesianism considers state budget expenditures to be the main regulatory force, the increase of which multiply increases aggregate demand, while monetarists prefer to regulate the economy through regulating the money supply in the country.
Despite this, the principle of the invisible hand is an important theoretical work, and its understanding opens up wide opportunities for market economists to analyze markets taking into account modern economic realities.