Question

What assumptions about the economy must be true for the invisible hand to work? To what extent are those assumptions valid in the real world?

Short answer

'Invisible hand' theory works on the basis of following assumptions - all individuals are rational & work in best self interest. These are not much valid in reality.

Step-by-step solution

Basic Concept 

Invisible hand is a theory given by Adam Smith. It states that if all individuals work in their best self interest, it accumulates to attain whole social economic desirable outcomes. Government or any other intervention is not needed.

Detail Explanation 

The theory is based on following assumptions :

• All individuals are completely rational
• All individuals are self driven & have self initiative to act in their best self interest.

These assumptions are not valid in real world, as all individuals are not fully rational in real sense.

Economic decisions are taken on the basis of information. There are many market failures regarding information (like asymmetric information), which distort the choices of consumers & dilute the extent of implicit rationality needed.