4 Markets: Guided by an Invisible Hand or Foot? Adam Smith and his disciples today see markets working as if they were guided by a beneficent, invisible hand, allocating scarce productive resources and distributing goods and services efficiently. Critics, on the other hand, see markets working as if they were guided by a malevolent, invisible foot | 4 Markets Guided by an Invisible Hand or Foot Adam Smith and his disciples today see markets working as if they were guided by a beneficent invisible hand allocating scarce productive resources and distributing goods and services efficiently. Critics on the other hand see markets working as if they were guided by a malevolent invisible foot misrepresenting people s preferences and misallocating resources. After explaining the basic laws of supply and demand on which economists of all stripes more or less agree this chapter explains the logic behind these opposing views and points out what determines where the truth lies. HOW DO MARKETS WORK If we leave decisions to the market about how much to produce how to produce it and how to distribute it what will happen Only after we know what markets will do can we decide if they are leading us to do what we would want to or misleading us to do things we should not want to do. What is a market A market is a social institution in which participants can exchange a good or service with one another on terms they find mutually agreeable. It is part of the institutional boundary of society located in the economic sphere of social life. If a good is exchanged in a free market anyone can play the role of seller by agreeing to provide the good for a particular amount of money. And anyone can play the role of buyer by agreeing to purchase the good for a particular amount of money. The market for the good consists of all the potential buyers and sellers. Our analysis of the market consists of examining all the potential deals these buyers and sellers would be willing to make and predicting which deals will occur and which 71 72 The ABCs of Political Economy ones will not. We do this by using four laws concerning supply and demand. The law of supply The first law we use to analyze a market is called the law of supply which states that in most markets we expect the number of units of the good suppliers will offer to sell to increase if
