1. Decide whether each of the following descriptions most closely corresponds to being part of a command system, a market system, or a laissez-faire system. LO1 Command System – A….
The Invisible hand is a term created by the renowned economist Adam Smith in his popular book The Wealth of Nations. It means that when individual’s pursue their own self-interest they are led by an invisible hand that promotes the society’s interest more than what they intended. It is an important property of a competitive market economy. This idea was created in 1776, the same year of the American Declaration of Independence. It wasn’t random, because at the same time when people were fighting for freedom and independence, Adam Smith was talking about emancipating trade from dictatorship.
Adam Smith had conviction that government interference in the market place could be harmful to the society.
One must not come under the illusion that the world is beyond our control. At the end of the day the invisible hand is a product of the mass population and it can be affected according to the different ideologies that govern countries such as capitalism, socialism and communism.
If socialism is implemented then the effect of the invisible hand will visibly wane. Almost three centuries ago the English pamphleteer Mandeville in a didactic poem The Fable of the Bees laid down what became, a century later, the principle of capitalism.”
Private vices make public benefit. Blind and greedy profit-seeking, Mandeville laid down, advances the public good through the invisible hand. In terms of performance, history has proven Mandeville remarkably right. But morally his principle was never acceptable. And the fact that capitalism has become the less acceptable the more it succeeded—as the great Austro-American economist Joseph Schumpeter pointed out repeatedly—has been the basic weakness of modern society and modern economy. This by the way is why the rhetoric of profit maximization and profit motive are not only antisocial. They are immoral.
It basically is a fact that cannot be falsified even though many economists have recently been trying to trivialize the concept. If an entrepreneur seeks what is in his/her best interest then that business person will inadvertently hire labor and personnel in an effort to maximize profits. Self-interest can be an effective principle of social organization. People often engage in productive economic behavior (working, saving, conducting comparison shopping, providing high-quality goods) outof selfish motives. An invisible hand can lead selfishness to be socially productive.
Smith identified three ingredients to his theory they are freedom, self-interest and competition. Freedom is classified as the right to produce and exchange products. Self-interest is to do what is best for one’s-self. Competition is the right to compete in the production and exchange of goods and services. Adam Smith argues that it was market forces that ensured the production of the right goods and services. This would happen because producers would want to make profits by providing them.
There are concepts that are behind the invisible hand in a free market. Consumers look for the best deals in the market, simultaneously the business people try to maximize profits. The business people may try to decrease prices in order to lure customers. Eventually everyone will be happy since everyone got what they wanted. These market forces determine how much will be produced, what gets produced and how it will be produced. Maximizing profits uses the technique of maximizing utility. So, allowing the market to operate freely, without any intervention, allows the natural market forces to take over and create the optimal market situation.
With the economic crisis (The Great Recession) currently affecting people’s lives it is imperative to analyze how the invisible hand looms over the shadowy dismal situation. As the president, Barack Obama cares about being elected a second time in office. This is normal but the way he seems to be doing out raises concerns. He is using bail out money from the Troubled Asset Relief Program to help weak institutions hold on. This cannot help since for example helping an old person from cancer with medicine will only delay the outcome but not end it. If we were under a Republican party, they would let the losers fails and let the economy fix itself (the invisible hand), it would be hard but it would curtail the damage the current party is doing by drowning the country into bad debt.
The correct policy to stimulate the economy is to let the crises run its course and hope for the best. We cannot keep losing tax payer dollars to firms such as GM thanks to their recklessness while the Japanese take over the automobile industry.
However, the main problem with the concept of the invisible hand is that it only applies to free markets. There are market failures and the free market economy is not always the most efficient. Monopolies are a reason for this. And finally if the income distribution becomes unfair the government will have to step in and mend the flawed invisible hand, but not in the extreme way we are currently witnessing.
Smith, Adam. The Wealth of Nations. W. Strahan and T. Cadell, London, 1776.
“Bernard Mandeville Fable Of the Bees”. May/06/2009 .
“Invisible hand”. May/06/2009 .