Invisible Hand Property 1 tells us that in a competitive industry, the total industry costs of production are minimized. But we could minimize the total costs of producing corn and still have too much or too little corn. It’s good to know that if 20 or 200 million bushels of corn are produced, we get those bushels at the lowest cost, but how many bushels is the right amount? It’s the second invisible hand property that ensures the right amount of corn is produced.

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Consider two industries, the car industry and the computer industry. Both industries use labor and capital to produce goods. Labor and capital, however, are limited. Recall from Chapter 7 that the great economic problem is to arrange our limited resources to satisfy as many of our wants as possible. So how do we allocate our limited labor and capital across the computer and car industry to satisfy as many of our wants as possible?

Profit in the computer industry is total revenue minus total cost. Total revenue measures the value of the output of the computer industry, the computers. Total cost measures the value of the inputs to the computer industry, the labor and capital. High profits, therefore, mean that outputs of high value are being created from inputs of low value. Profit is a signal that our limited labor and capital are being used productively in satisfying our wants.

Now suppose that the computer industry is more profitable than the car industry—then a unit of labor and capital in the computer industry is creating more value than in the car industry. What we would like, therefore, is for labor and capital to move from the car industry to the computer industry. Or, in other words, to use our limited resources most effectively, we would like resources to flow from low-profit industries to high-profit industries.

Of course, moving labor and capital from low-profit to high-profit industries is exactly what entrepreneurs would like to do! Recall that our condition to enter an industry is P > AC, but as we showed in Chapter 11, that’s equivalent to TR > TC (divide both sides of TR > TC by Q). So, in a competitive market, the incentives that entrepreneurs have to seek profit and avoid losses align with the social incentive to move labor and capital out of low-value industries and into high-value industries.

Notice that profits encourage entry, but what happens to price and profits when firms enter an industry? As firms enter, supply increases and the price declines, which reduces profits. Losses encourage exit, but what happens to price and profits when firms exit an industry? As firms exit, supply decreases and the price increases, which increases profit (reduces losses). Thus, there is a tendency for the profit rate in all competitive industries to go to zero (normal profits). Since the profit rate tends to the same level in the car and the computer and all other industries, the marginal value of resources in all industries is the same. That’s just another way of saying that the total value of production is maximized because if the profit rate in one industry were greater than in another, total value would increase if resources were to move from the less profitable to the more profitable industry.

Invisible Hand Property 1 showed how self-interest worked to minimize the total costs of, say, corn production. Invisible Hand Property 2 shows how the self-interest of entrepreneurs causes them to enter and exit the car, computer, corn, apple, and other industries in such a way that the total value of all production is maximized. An implication of Invisible Hand Property 2 is that the profit rate in all competitive industries tends toward the same level.