The invisible hand of Adam Smith

The capitalist system has offered better welfare results than the communists system, but the Invisible Hand is not without disadvantages.

The Soviet Union and other communist countries had attempted to design an economic system where the government determined the quantities of all goods and services produced. The government also determined the level of wages, interest rates and so forth. This system ultimately failed completely. The West, with its capitalist system, proved for more successful in practice. The market mechanism is left to determine the quantities of goods and services produced and the levels of salaries, interest rates and so forth. This system also has its disadvantages, however. Experience has shown that if you leave the free market forces entirely to their own devices, things can get very difficult for the weaker parties in society and there can be frequent major shocks. In other words, the system is based on the fact that if, for instance, too little of a product is produced and demand exceeds supply then its price rises. As a result, it becomes attractive for either existing or new manufacturers to start producing more and, at the same time, the consumer can afford less of it. Often, after a while, supply then exceeds demand and the opposite process sets in. The system is continually seeking a balance between supply and demand. Not only in terms of goods and services, but also with regard to wages, interest rates and so forth. More than two centuries ago, Adam Smith called this the invisible hand. In practice, however, the system proved to regularly incline to one side or the other. There was too much supply or too much demand for some while, in other words. This occasionally reached extreme proportions, causing depressions.