Wednesday, June 2, 2010

Ideation of Visible Hand concept

I am an ardent fan of Adam Smith. He was a visionary and a creative thinker. Smith is often regarded as the father of economics, and his writings have been enormously influential. If you can catch up with his book – ‘Wealth of Nations’; you would find relevance of his concepts explained even today. His book is revered and well-sought by economists throughout the world. If you want to understand economics and if you haven’t read this book; then you are missing a lot.

Smith was able to visualize how economies would prosper and also the way it would operate right back in the 17th century.  He had predicted the theories of division of labor, Industrialization then itself. After reading his book, I was very fascinated by his notion of Invisible Hand, which goes like this –
“...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

You could sense that Smith was referring to God as the invisible hand; but even then his concept made sense. Just imagine you buying grocery from a shop; you would be least interested on the grocer’s interest. You would buy the grocery only with the intention of your self-usage; and the grocer is worried only about the profit he makes. This makes the transaction non-altruistic in nature where both the parties have minimum concern about each other’s welfare. But, here comes the invisible hand which serves the customer by providing him satisfaction on his purchase and by improving the business of the grocer; thus generating a wholesome benefit. This process accrues and provides benefit to the entire society. Smith explains how each individual strives to become wealthy "intending only his own gain" but to this end he must exchange what he owns or produces with others who sufficiently value what he has to offer; in this way, by division of labour and a free market, public interest is advanced.

Now the question evolves, does the same concept hold well today? Can organizations still be Ignorant and self-centric and hope that the Invisible Hand will drive their Business. I believe not. The trend has changed to become more selfless and altruistic. And thus, the importance of VISIBLE HAND comes up, i.e. In order to survive and sustain business in current market you need to show that you care about the customer MORE than your business.  Only customer-centric organizations can stand the test of time. Profit centralism will lead to perils and extinction. Now-a-days when you carry out the exchange, it must mean that the other person SHOULD recognize that what you can do or that what you have is of value.

Thus I would recommend the organizations that as economy changes, they need to adapt to it. Gone are the days when profit was the most important motive behind a business. If you want to prosper and sustain your growth, you need to understand your customers, show extensive care and provide services that could ensure maximum customer satisfaction. As goes the old adage – “Customer is King”. J

Some interesting presentations on Adam Smith and his work:


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