What does the term "invisible hand" refer to in economics?

The term "invisible hand" refers to a metaphor that describes the self-regulating nature of the marketplace, explaining how individual self-interest in a free market can lead to positive social outcomes. This concept, popularized by Adam Smith in his work "The Wealth of Nations," suggests that when individuals pursue their own economic interests, they inadvertently contribute to the overall good of society.

For example, a baker who wishes to earn a living by producing bread will strive to bake a quality product that consumers want, which in turn satisfies the demand for food while also generating income for themselves. In this way, the invisible hand metaphor illustrates how personal motivations can align with societal welfare without any centralized planning or control.

Understanding this concept is crucial as it highlights the strengths of free markets, emphasizing how competition and consumer choice can lead to efficiency and innovation, benefiting the economy as a whole.