According to Adam Smith, self-interest and competition act as what, guiding firms in a market-based economy?

• A. a visible hand
• B. government intervention
• C. market failure
• D. an invisible hand

Answer: (D)

Verified step by step guidance

1. Understand the concept introduced by Adam Smith regarding how self-interest and competition influence firms in a market economy.
2. Recall that Adam Smith described a mechanism that guides firms to make decisions that, while driven by their own self-interest, also benefit society as a whole.
3. Identify that this mechanism is metaphorically called the 'invisible hand,' which suggests that individual pursuit of profit leads to efficient allocation of resources without direct intervention.
4. Recognize that this concept contrasts with ideas like 'government intervention' or 'market failure,' which imply external control or problems in the market.
5. Conclude that according to Adam Smith, self-interest and competition act as an 'invisible hand' guiding firms in a market-based economy.