The Invisible Hand - Full Video

Summary

This video script explores the impact of Adam Smith's 'Invisible Hand' on modern economies, illustrating how market forces naturally balance supply and demand without central planning. From the historical context of Smith's era to contemporary platforms like eBay, the narrative shows how trust and voluntary exchange drive economic prosperity. The script emphasizes the importance of free markets, competition, and the self-regulating nature of economic systems, highlighting the transformative power of individual actions in global trade.

Takeaways

• 📚 Adam Smith, a Scottish economist, is known for his influential works 'The Theory of Moral Sentiments' and 'The Wealth of Nations', which laid the foundation for modern economic thought.
• 🌐 Smith's concept of the 'Invisible Hand' suggests that self-interested actions in a free market can unintentionally benefit society by promoting economic growth and prosperity.
• 🛒 The market economy functions optimally when sellers consider the interests of buyers, fostering a relationship based on mutual respect rather than antagonism.
• 🌱 Smith believed in the power of the free market to organize complex economic activities without the need for central planning or government intervention.
• 💡 The 'Invisible Hand' metaphor illustrates how individual self-interest in a market economy can lead to collective benefits, such as the timely availability of goods like umbrellas in rain or sunglasses at the beach.
• 📉 Prices act as signals in the market, influencing supply and demand dynamics. For instance, if scones are in high demand, the price increase can incentivize more bakers to produce them.
• 🏭 Adam Smith was critical of monopolies and advocated for free competition and trade, arguing that they prevent businesses from exploiting consumers and lead to a more efficient market.
• 🌐 The internet has enabled new forms of trust and economic interaction, such as eBay, which operates as a global marketplace connecting buyers and sellers across borders.
• 🔍 eBay's success is attributed to its platform fostering economic democracy, where individuals can conduct transactions securely, reflecting Smith's principles of a free market.
• 🌟 The feedback system on eBay exemplifies how a market can self-regulate, with buyers rating sellers to ensure quality and诚信, aligning with Smith's view on the importance of trust in economic transactions.

Q & A

Who is Adam Smith and what is his significance in economic history?

Adam Smith was a Scottish economist and philosopher, known as the father of modern economics. He is famous for his works 'The Theory of Moral Sentiments' and 'The Wealth of Nations,' where he introduced concepts like the 'Invisible Hand,' which explains how self-interested actions in a free market can lead to economic prosperity.

What is the 'Invisible Hand' concept mentioned in the script?

The 'Invisible Hand' is a metaphor used by Adam Smith to describe the unintended social benefits of individual actions in a free market. It suggests that individuals, while pursuing their own interests, inadvertently promote the interests of society as a whole.

How does Adam Smith view the role of the seller in a market economy?

Smith believed that the seller, driven by self-interest, would produce and supply goods that consumers want and need. This self-interest, when aligned with the interests of the buyer, leads to a mutually beneficial exchange, which is the essence of a market economy.

What does the script suggest about the role of government in a free market?

The script implies that a free market operates best without heavy government intervention. Adam Smith argued for minimal government involvement, allowing the market to self-regulate through the 'Invisible Hand' mechanism.

How does the script relate Adam Smith's ideas to modern platforms like eBay?

The script connects Smith's ideas to modern e-commerce platforms like eBay by showing how they operate as self-regulated marketplaces where buyers and sellers interact based on mutual interests, without the need for central planning or heavy regulation.

What is the significance of the feedback system on eBay as described in the script?

The feedback system on eBay is significant as it allows buyers to rate their experiences with sellers, creating a self-policing mechanism that ensures trust and quality within the marketplace. This aligns with Adam Smith's belief in the importance of mutual respect and cooperation in a market economy.

How does the script illustrate the concept of economic democracy through eBay?

The script illustrates economic democracy through eBay by showcasing how individuals from around the world can participate in economic transactions on a level playing field, regardless of their location or size of business, thus embodying the principles of a free market.

What is the 'Man of System' concept mentioned in the script, and what does it represent?

The 'Man of System' is a term used by Adam Smith to describe individuals who believe they know what is best for society and attempt to impose their vision from the top down. Smith criticized this approach, arguing that it disregards individual freedom and the complexity of human behavior.

How does the script explain the role of competition in a market economy?

The script explains that competition in a market economy drives sellers to offer better products at lower prices, as they strive to meet consumer demand. This competition is a natural outcome of the 'Invisible Hand' and leads to a more efficient and dynamic market.

What is the concept of a 'micro-multinational' mentioned in the script?

A 'micro-multinational' refers to small, often family-owned businesses that operate globally, selling their products across borders. The script uses this term to highlight how platforms like eBay enable small businesses to reach international markets without significant corporate or governmental intervention.

How does the script suggest that trust is a crucial element in modern online marketplaces?

The script suggests that trust is a fundamental element in online marketplaces like eBay, where buyers and sellers engage in transactions based on mutual trust. This trust is facilitated and maintained through feedback systems and the platform's commitment to creating a fair and secure trading environment.

Outlines

00:00

📚 Adam Smith and the Invisible Hand

This paragraph introduces Adam Smith, a key figure in the Scottish Enlightenment and the first economist, who conceptualized the 'Invisible Hand'. Born in Kirkcaldy, Scotland, in 1723, Smith studied at Glasgow University and became a prominent figure in the intellectual revolution of the time. His ideas, particularly those in his books 'The Theory of Moral Sentiments' and 'The Wealth of Nations', have had a profound impact on economic thought. The 'Invisible Hand' is a metaphor for how self-interested actions in a free market can unintentionally benefit society. Smith believed that a market economy could extend opportunities for everyone, especially the less fortunate, and that voluntary trade was the essence of a free market. He argued against central planning and for the natural functioning of markets, where supply and demand dynamically adjust prices without government intervention.

05:00

🌐 The Power of Local Behavior and Economic Democracy

The second paragraph delves into Adam Smith's belief in the spontaneous order generated by local behavior, as opposed to top-down planning. Smith argued that complex systems like language and markets emerged from human action, not design. He critiqued the 'Man of System', who attempts to impose an ideal on society, disregarding individual free will and autonomy. Smith advocated for free competition and trade to prevent businessmen from exploiting consumers. The paragraph also discusses the modern application of Smith's ideas, exemplified by platforms like eBay, which enable economic transactions based on trust and mutual benefit. eBay's CEO, Devin Wenig, emphasizes the company's foundation on economic democracy and the free market principles of Adam Smith. The narrative includes the story of Gelb Music, a small business that has expanded globally through eBay, highlighting the platform's role in price discovery and market access.

10:01

🌟 The Self-Regulating Marketplace and the Role of Technology

The final paragraph explores the concept of a self-regulated marketplace, where buyers and sellers interact based on mutual trust and the quality of service. It discusses eBay's feedback system, which allows customers to rate their experiences, thereby influencing seller reputations and driving market dynamics. The paragraph emphasizes the importance of trust in a free market and how technology facilitates global trade without the need for heavy government regulation. eBay's operations center, which handles millions of searches daily, is highlighted as an example of the technological infrastructure supporting such a marketplace. The narrative also touches on the idea of 'micro-multinationals', small businesses that operate globally through platforms like eBay, and how the free market has been a catalyst for their growth.

Keywords

💡Adam Smith

Adam Smith was an 18th-century Scottish economist and philosopher, known as the father of modern economics. He is celebrated for his works 'The Theory of Moral Sentiments' and 'The Wealth of Nations.' In the video, Smith is highlighted for his concept of the 'Invisible Hand,' which illustrates how self-interested actions in a free market can unintentionally benefit society. His ideas laid the foundation for understanding capitalism and economic behavior.

💡Invisible Hand

The 'Invisible Hand' is a metaphor used by Adam Smith to describe the unintended social benefits resulting from individuals' self-interested actions in a free market. In the video, this concept is used to explain how market mechanisms work without central direction, as individuals pursuing their own interests inadvertently contribute to the greater good. The example of the baker raising the price of scones due to high demand illustrates the 'Invisible Hand' at work.

💡Scottish Enlightenment

The Scottish Enlightenment was an intellectual and cultural movement in 18th-century Scotland that emphasized reason, science, and skepticism. Adam Smith was a prominent figure in this movement. The video connects Smith's economic theories to the broader context of the Scottish Enlightenment, suggesting that his ideas were part of a larger shift towards empirical thinking and individual liberty.

💡Free Market

A free market is an economic system where prices are determined by supply and demand with little to no government intervention. The video underscores the efficiency of free markets in allocating resources and satisfying consumer needs. It uses examples like the availability of umbrellas in the rain and scones when in demand to illustrate how free markets respond to consumer signals.

💡Self-Love

In the context of the video, 'self-love' refers to the natural human desire to better one's own circumstances, which Adam Smith believed drove economic activity. Sellers produce goods and services not out of benevolence but because it serves their self-interest, leading to mutual benefit in a market transaction. This concept is central to Smith's defense of the free market system.

💡Market Economy

A market economy is an economic system in which the production and distribution of goods are determined by market forces, such as supply and demand, rather than by central planning. The video presents the market economy as a dynamic system that extends opportunities for everyone, including the less fortunate, by allowing for voluntary trade and exchange.

💡Supply and Demand

Supply and demand are fundamental economic concepts that describe how the quantity of a good or service that producers are willing to supply at various prices interacts with the quantity that consumers are willing to purchase. The video uses the example of scones to demonstrate how increased demand can lead to higher prices, which in turn stimulates supply until equilibrium is reached.

💡Economic Democracy

Economic democracy is the idea that economic decisions should be made in a participatory and inclusive manner, allowing individuals to have a say in the economic activities that affect them. The video references eBay's founding principle as an embodiment of economic democracy, where individuals can engage in economic transactions on a global scale without needing to know each other.

💡Man of System

The 'Man of System' is a term used by Adam Smith to criticize those who believe they can centrally plan and control economic activities for the benefit of all. The video contrasts this figure with the principles of the free market, arguing that individuals should be free to pursue their self-interests rather than being forced into someone else's idealized plan.

💡Trust

Trust is a social lubricant that enables economic transactions to occur, particularly in the context of online marketplaces like eBay. The video discusses how the internet has enabled an explosion of trust, allowing strangers to engage in commerce across borders. The eBay feedback system is highlighted as a mechanism that fosters trust by allowing customers to rate their experiences with sellers.

💡Micro-multinational

A micro-multinational refers to a small business that operates internationally, often through online platforms. The video uses eBay as an example of a marketplace that enables micro-multinationals to thrive, allowing small, independent businesses to reach global customers without significant corporate or governmental intervention.

Highlights

Adam Smith, a moral philosopher and the world's first economist, revolutionized the world's marketplaces with his ideas.

Smith introduced the concept of the 'Invisible Hand' to explain how markets work.

The global economy is based on voluntary trade between buyers and sellers, with the seller considering the buyer's interests.

Smith saw the market economy as a way to extend opportunities for everyone, especially the least advantaged.

The free market is a natural function of voluntary exchange, where both parties benefit from the trade.

Adam Smith explained how market supply and demand dynamically adjust without central planning.

Smith argued that sellers produce goods based on self-interest, which inadvertently meets consumer needs.

The 'Invisible Hand' guides sellers to promote an end that was not their original intention, such as societal well-being.

Smith critiqued the 'Man of System,' who tries to impose an ideal on society from the top down.

Smith advocated for free competition and free trade to prevent businessmen from creating monopolies and deceiving the public.

eBay, founded on Smith's principles, enables economic transactions between strangers worldwide in a trusted environment.

eBay's feedback system allows customers to rate sellers, promoting trust and quality in the marketplace.

The eBay marketplace exemplifies Smith's 'Invisible Hand' in action, with sellers responding to market demand.

Smith's ideas suggest that markets can operate in the interests of both buyers and sellers without excessive government regulation.

The eBay platform has facilitated the rise of 'micro-multinationals,' small businesses selling globally.

Technology has enabled the creation of a global marketplace where trust and cooperation are key.

The free market, as envisioned by Smith, is a powerful force that has transformed the world economy.

Transcripts

The progress of the last two

hundred and fifty years has been

explosive. Year after year, the

world and its people have grown

more connected and more prosperous.

It seems unimaginable. And yet, a

man who lived in a world of sailing

ships and horse drawn carriages, of

great wealth, and great poverty,

imagined our very world. He set pen

to paper and recorded the ideas

that would revolutionize the

world's marketplaces. He was a

Scotsman named Adam Smith - a moral

philosopher, a bold voice of the

Scottish Enlightenment and the

world's first economist. He

recorded his revolutionary ideas in

two remarkable books: The Theory of

Moral Sentiments and The Wealth of

Nations. One of Smith's most

well-known concepts is the

"Invisible Hand," and today, we'll

explore what that means. Adam

Smith was born in 1723, in the

small seaside town of Kirkcaldy,

Scotland, where he learned about

morality and economics at the local

merchants' market. He studied at

Glasgow University, became its top

administrator and then a pillar of

the unlikely intellectual

revolution called the Scottish

Enlightenment. He lived, lectured,

and socialized in Scotland's

capital city of Edinburgh. And he

invented the unique economic

concept of an "Invisible Hand"

which helps explain how the world's

markets work. Well, it turns out

that the entire global economy

boils down to two people: a buyer

and a seller. And surprisingly, it

works best when the seller has the

interests of the buyer at heart.

What we're doing is looking at each

other as potential partners, as

peers, not as enemies. You are my

opportunity, not my enemy. So Smith

saw the market economy as extending

the frontiers of opportunity for

everyone, including and especially

the least among us. Smith knew

that moving products to supply

people with what they needed and

wanted from around the world is a

complicated process, too

complicated even for the most

powerful government to manage. But

he saw it as a natural function of

a free market. The essential thing

about the free market is that it is

voluntary trade between different

people, voluntary exchange. You've

got something which I want and I've

got something that you want, so we

exchange it and then we're actually

both better off. Have you ever

noticed that- when it's raining-

there's someone there selling

umbrellas and when you're at the

beach, it's easy to find sunglasses

and suntan lotion? Adam Smith told

us why. "It is not from the

benevolence of the butcher, the

brewer, or the baker that we expect

our dinner, but from their regard

to their own interest. We address

ourselves, not to their humanity

but to their self-love."

By self-love, Smith means that sellers

want to earn a living in order to

support their families. To do that,

they make the products that they

think you and I will want to buy.

Not because anyone tells them to,

but because it's in their best interests.

So, for Smith, what he saw

was not mutual selfishness.

What he saw was mutual respect,

which is an entirely different

moral paradigm. Here's how it

works: the prices we're willing to

pay send key signals and Smith used

a baker as an example.

Hi, this all looks delicious... Could I have

a cup of coffee? Yeah, of course.

And a scone, please? Thank you.

But let's say we all want scones,

and the baker keeps running out,

well then... she can charge a bit more.

Seeing the demand and money

to be made, other bakers will start

offering scones. All throughout the

supply line, people spring into action.

Farmers see that bakers are

buying wheat so they plant their

fields, and up production. Truckers

see money to be made in delivering

wheat to bakers, so they buy trucks

and hire drivers. Thank you.

So...we vote with our wallets, and

all around the world, people spring

into action, to satisfy our demands.

No one orders them to do this,

but every purchase sends a message.

As the supply increases,

competition forces prices down.

Fewer bakers bake scones and things

stabilize as supply meets demand

dynamically and automatically.

This all happens without government

intervention, without any trade

commissar dictating quotas.

This is Smith's invisible hand at work;

it guides large businesses and even a

small baker. "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."

The invisible hand leads

people to promote an end that

was no part of their intention.

When the baker sees that we want to

buy bread, she makes the bread so

she can make a living; and the

other side of the coin is that we

get bread. And it's a beautiful

place, welcoming... friendly.

There's more to competition than

price alone. One of Smith's great

contributions to humanity is his

realization that things didn't have

to be planned, in order to be orderly.

He believed that many complex

systems can be generated by

local behavior. They don't have to

be- and actually can't be- created

from the top down.

Many of the institutions that we have:

language, markets- you name it-

these are indeed the results of

human action, but they're not the

results of human design. We never

planned these things.

So, note that phrasing: individual human

action, but not individual human design.

Smith thought that those

people who believed they knew what

was best for others were

represented by a figure he called:

the "Man of System." The man of

system is the man who is entranced,

enthralled by his own idea of the

ideal, tries to make that ideal a reality.

And decides that he's

going to impose it from the top

down, whether people want it or

not. And as Smith said, the man of

system makes the mistake of

thinking that he can move people

around the way a hand moves chess

pieces around on a chess board.

And Smith thinks that this is

dangerous for two reasons.

First, he thinks he knows more than he

can actually know. He thinks he knows

what's good for all individuals and

then tries to force them into his

particular boxes. But, of course,

the mistake, Smith says, is that

human beings are not like chess pieces.

They have principles of

motion all their own. They have

their own ideas about what they'd

like to do in life. They have free will.

Far better for the well-being

of the economy as a whole,

far better for actual individuals

to be free to pursue their

own self-interests as they see fit.

Smith thought that entrepreneurs

and businesses create wealth,

but don't get the idea that

he was an apologist for all business.

On the contrary, he saw how many

businessmen were drawn to

create monopolies and deceive the

public interest for their own

benefit and that is precisely why

he argued for free competition and

free trade. Greedy businessmen who

try to rob consumers by raising

prices or lowering quality would be

ruined, if the consumers were

allowed to turn to another competitor.

And that is why Smith

thought that the government

shouldn't be pro-business, it

should be pro-market. But is it

possible to have markets that

operate in the interests of sellers

and buyers, without a lot of

government regulation? The answer

might be yes, if they embody Adam

Smith's ideas. It used to be that

when you wanted to go someplace in

a city you had to wait for a taxi

or rent a car. But now, with apps

like Uber and Lyft, that's all changed.

Lyft? Yes. Hi, are you David? Yes.

People today ride with

strangers in their cars and with

sites like Airbnb they sleep in

strangers' homes. It's just a tiny

part of a much larger and much more

important social trend: an

explosion of trust, enabled by the

internet. And the granddaddy of

them all is eBay. Almost every country

in the world has buyers and sellers

who work inside the eBay marketplace.

Devin Wenig is CEO of eBay Marketplaces.

eBay is founded

on this principle of economic

democracy; that individuals around

the world who don't know each other

and have never met can work in a

system to be able to conduct

economic transactions fairly and

securely and have confidence in

that. eBay was founded in 1995 by

Pierre Omidyar. Pierre thought very

strongly about the notion of the

free market. He believed in Adam

Smith's principles. He believed

that an economic democracy would

not only be a great business, but

it had the potential to do immense

amounts of good around the world.

eBay has hundreds of thousands of

small sellers around the world that

are now doing more than half their

business outside of their national

borders. One retailer that is

profiting in this new era is Gelb

Music. Gelb was started in 1939,

about 75 years ago. Located right

here in Redwood City, California...

it's been here ever since.

And about, carry about a little over

50,000 products here. Mike Craig is

Gelb's e-commerce/marketing manager.

We have a complete line of drums,

bass guitars, recording equipment.

We were waiting for our own website

to be built, we took about 200

products, mostly snare drums, did

about $200,000. The test definitely

worked. The following year we put

up about a thousand products, maybe

a little bit over and we did about

$750,000 in sales. We now have

about 160 million active consumers

who buy and sell in our marketplace

every day. We now sell a little

less than $90 billion of goods

every year. And consumers access us

from over 190 countries. Well eBay

has... saved the store number one.

But has also opened our eyes to

markets that we didn't think were

obtainable. One of the great things

about marketplaces is that they act as

an incredible price discovery mechanism.

Because if you're looking

at a collectable or a coin,

or a comic book or a rare

automobile, the likelihood is that

there were more sales in eBay for

that particular item- than in any

other marketplace in the world.

Adam Smith would have said that an

"invisible hand" guides eBay

sellers around the world. As prices

are on the rise- because buyers

want a particular item- sellers

stream into the market to satisfy

that demand. And when demand

drops... prices go down.

Imagine a world where there are

screens everywhere. Those screens are

connected to a global marketplace,

that global marketplace has all the

worlds' inventory, priced fairly

because it's an open marketplace.

And you're one click away from

buying anything you want at any

time for a fair price. There are

millions of exchanges, each minute,

all of them without regulation:

among strangers, across borders and

oceans. It's an enormous amount of

business... based solely on trust.

Let the buyers and sellers in the

marketplace determine who the best

buyers and sellers are. So the eBay

feedback system was born. The way

ratings work is that when you sell

a product the customer can go back

and rate you: was it a good

experience; was it a bad

experience? And that goes onto your

record where everyone sees it.

"Public services are never better

performed than when their reward

comes in consequence of their being

performed, and is proportioned to the

diligence employed in performing them."

I think being judged by your

customers is a wonderful idea.

I think that keeps us as

sellers on our toes.

You have to deliver on what you promise

and if you do that you're rewarded

by more customers... and you'll grow.

The free market isn't about

robbing people or cheating them...

stealing from them; it is about

cooperating with them. If people

trust you, if you're giving them a

good service, they will do business

with you. If you're trying to cheat

them, they might deal with you

once- but once they've been

cheated- you'll never see them again.

Part one of the promise is a

fair, open, fast, trusted marketplace

that's enabled by technology.

Coordinating a global marketplace

like this, takes one of the largest

site operation centers in the world.

We do about 300 million searches

a day on the eBay marketplace.

There are computers and people,

and systems and processes

that all have to work in sync to

make sure that that's working 24/7.

When we look at forecasting-

and eBay's going to

make up anywhere from 50 to 80% of

our-our sales... that's- that's a

huge number. There is a concept of

a micro-multinational, which I

think is fascinating. And there are

hundreds of thousands of them alive

inside the eBay marketplace.

It's that family-owned, independent,

just homegrown kind of store.

We're just being able to sell around

the world now. So, without either a

strong corporate intervention in

the sense of eBay, or a strong

governmental regulatory

intervention, this is a community

that has grown enormously because

in essence- it's self-regulated.

A free market is one of the most

powerful forces on earth. And we've

seen that with our business.

The whole world economy, with its

trillions of dollars of activity,

all boils down to two people: a

buyer who is looking for something,

and a seller who constantly has the

needs and wants of her customers in

mind. But it all starts with a cup

of coffee and a scone.