[The invisible hand_Cassidy
reading]
Cassidy Reading
According
to Adam Smith, invisible hand entails natural forces that regulate the free
market capitalism. The forces compete for scarce resources coupled with
unlimited wants. According to the invisible hand principle, every individual in
the economy strives to maximize its own good without necessarily worrying about
public interest (Cassidy, 2013). However, the whole society benefits as
individuals optimize their gain while trading and in entrepreneurship.
According to Adam Smith, government intervention is not required to control the
economy since the invisible hand acts as the forces of supply and demand
regulate the economy. Invisible hand mostly operates in free market economy
whereby consumers choose goods at the lowest price while entrepreneurs choose
at the highest profit rate. There is usually limited government regulation and
taxes are set to the lowest level probable to run the economy (Cassidy, 2013).
Thus excess in supply and demand insufficiency direct market prices that
regulate investments and consumer decisions.
There
is always a spontaneous order that follows pricing according to Adam Smith. He
argues that, consumers will be willing to purchase at the lowest price levels.
On the other hand suppliers will be willing to invest and offer goods at the
highest profit possible. As the consumers seek lower prices and suppliers
higher profits, the prices stabilize at market equilibrium where the demand
equals the supply (Cassidy, 2013). Therefore, the forces of demand and supply
in the market regulate the order that follows pricing in the economy. Moreover,
free entry and perfect competition sets an orderly process as rival suppliers,
merchants and manufacturers are forced to cut on their huge profit margins and
set up other production methods.
According
to Adam Smith banking needed to be regulated. It was a necessary measure for
the government to protect its public from speculative panics and financial
swindles that were common in Britain in the 18th and 19th
centuries. Adam Smith was concerned about the issuance of promissory notes by
small or provincial banks that could offer the paper to unworthy borrowers
(Cassidy, 2013). This issuance would
expose the borrowers to financial panic once depositors decide to withdraw
their money. Smith postulates that unregulated credit facilities would only put
borrowers into deeper debt. For instance, the Scottish bank provided loans to
individual entrepreneurs at relatively favorable terms as compared to other
lenders. Ultimately, the bank ended up with heavily indebted clients once
ruined. Thus regulating banking system would inhibit the recurrence of further
credit bursts.
In
regard to general equilibrium theory, forces of demand and supply constitute
the invisible hand process. Markets would regulate themselves as buyers seek
goods at the lowest prices possible while suppliers offer their goods at the
highest prices (Cassidy, 2013). As such, prices variation would push the market
to a general equilibrium whereby the buyers would be willing to pay for goods
while suppliers would be willing to offer their goods at the same prices. In
general equilibrium, government intervention is unwarranted as the market is
self-regulating. The invisible hand directs the economy to equilibrium.
Later
in the years, economic researchers developed a different view on general
equilibrium. In 1970s, the researchers hold the opinion that, general
equilibrium could not hold at laissez faire economy but government intervention
was needed. Arguably, the centralized control would ensure resources are
directed to socially needful areas and avoid the flaws of capitalism (Cassidy,
2013). The economists advocated for a mid-point between communism and laissez faire
that would ensure general equilibrium in the market. Apparently, they initiated
a combination of adjusted price system and a state ownership of major
production systems in the economy. To establish an equilibrium in the market,
the free market would set some prices while central planner others.
Although
Arrow-Dobreu model covers time and uncertainty in general equilibrium theory,
it make unrealistic assumption that trading occurs at a single initial moment.
In regard to the Arrow-Dobreu, time and uncertainty in the future are collapsed
to the present that is fictitious. Realistically, not all trade can be arranged
as a forward contingent trade (Cassidy, 2013). Reasonably, complete markets
never occur and people cannot trade in enormous markets at a one time.
Milton
Friedman became so famous and his view so popular because he delved on key
issues that affected the core economy of nations. Majorly, Friedman explored on
the impact of investor speculation on the economy especially its effect to
recession and depression. In 1976, he won a Economics Nobel Prize on his paper
on “A Monetary History of the United States”. Apparently, resonating with the
public, Friedman suggested that the Great Depression was as a result of poor
policies by the Federal Reserve in 1920s that become worse in 1930s. This
explanation catapulted him to popularity. He used media attention to explain
economic issues to the common people. Notably, he served as a great debater
offering appropriate counter arguments to liberal views of dominant economists.
Using the TASTaaFL (there ain’t no such thing as free lunch)a core libertarian
theme for his book in 1975 increased his popularity. Essentially, Friedman used
idea of nothing was offered for free to explain real economic situations that
people had to deal with opportunity costs (Cassidy, 2013).
According
to Hayek telecommunications industry is highly susceptible to business cycles.
He notes that, price slumps in the telecoms were inevitable occurrence that
responded to prior price booms. Remarkably, during the booms, market growth in
the telecommunications was usually unbalanced with the investment in regard to
the industrial capacity (Cassidy, 2013). Consequently, savings supply in the
economy dwindles considerably as compared to overall investments. To ensure
continued balance, Hayek suggested the use of government intervention to
spearhead central planning. As such, supply of resources would be directed
where most needed to stabilize prices. Moreover, organizing production in the
telecommunication ensured prices dictated upon what people needed to
manufacture in response to market needs. The system of telecommunications
advocated for transfer of price signals. Hayek points out that knowledge is
important in the economy and as such it helps ion the understanding of the
inevitable price signals. Individuals in the economy need to have adequate
knowledge to be able to take appropriate actions. He noted that, only important
information is passed and to only those who deserve it. Arguably, system of
telecommunications seeks to correct the flaws of central planning that could
not deal with consumer driven society (Cassidy, 2013). Arguably, centralized
economy lacked innovation and information on consumer preferences leading to
shortages of important goods and surpluses of less needed goods.
Hayek
considered recession as a way of restoring the lost balance between investment
and savings. Notably, government spending would stimulate more investments to
restore economic prosperity. According to Hayek, poor demand for goods could be
a source of the imbalance in economy resulting to recession (Cassidy, 2013).
Reasonably, low demand led to excessive savings that deprived the economy of
the aspect of investment.
References
Cassidy J.
(2013) How Markets Fail: The Logic of Economic Calamities. NewYork, Farrar,
Straus and Giroux
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