Friday, February 19, 2016

The invisible hand_Cassidy reading



[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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