The "invisible hand" refers to the tendency, in a "free market" (that is, one not regulated by a sovereign), for the players in that market to find its own equilibrium, and for that equilibrium to accrue to the net benefit of society.
... every merchant would pursue the most profitable trade available to him, making the most efficient use of his own time and money. Granted, he would act with an eye only toward his personal “security” and “gain,” but in so doing, he would “render the annual revenue of the society as great as he can.” He would be “led by an invisible hand to promote an end which was not part of his intention,” namely, to benefit society and the broader welfare of its citizens.So far, so good. What's the catch?
The wealthy, says Smith, spend their days establishing an “economy of greatness,” one founded on “luxury and caprice” and fueled by “the gratification of their own vain and insatiable desires.” Any broader benefit that accrues from their striving is not the consequence of foresight or benevolence, but “in spite of their natural selfishness and rapacity.” They don’t do good, they are led to it.Worse for "small government" advocates, Smith didn't believe "the invisible hand" could replace many government functions, including those that seem eminently privatizable to those advocates today.
The moral paradox of the invisible hand often seems lost on those who speak loudest in its favor. Take the stubborn rhetoric of the “jobs creators.” Insofar as it portrays a conspicuous group of people who act with conscious moral purpose, it bears no resemblance to the phenomenon Smith describes. We might as well call this vision of development the “visible hand” of capitalism, for it has the original theory backward.
Smith held that the sovereign had a role supporting education, building infrastructure and public institutions, and providing security from foreign and domestic threats — initiatives that should be paid for, in part, by a progressive tax code and duties on luxury goods. He even believed the government had a “duty” to protect citizens from “oppression,” the inevitable tendency of the strong to take advantage of the ignorance and necessity of the weak.This is an excellent piece that has more insights than I've quoted here. Check it out.
In other words, the invisible hand did not solve the problem of politics by making politics altogether unnecessary.