Market Intervention: To Do or Not to Do - Essay Example

? Market Intervention: To Do or Not to Do? A Discussion on the Contradicting Treatise of Adam Smith and John Maynard Keynes between the Self-Regulating Nature of the Market and the Necessity of Government Intervention Perhaps if there are any two individuals who had a tremendous influence on how economies should work, they would be Adam Smith and John Maynard Keynes. Yet, even if both of their explanations and suggestions on the dynamics of the economy and the market are generally accepted, their premise and idea basically collide with each other. The concept of “market forces” which modern economist today infers as the self-regulating dynamic of the market was an idea of Adam Smith. For Smith, the market will regulate itself through its “invisible hand” which the government and its regulatory power play no part. In his monumental work “An Inquiry into the Nature and Causes of the Wealth of Nations” or “Wealth of Nations” (1776), he argued that individuals pursuing their self-interest are actually good for the larger society. To paraphrase Smith, he contended that “by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (1776, 364). This idea of Adam Smith’s individual’s pursuit of self-interest to be good for society in general became the driving force of classical capitalist economies. This was however contradicted by John Maynard Keynes. He argued that in his magnum opus work “The General Theory of Employment, Interest, and Money” that “the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience” (1936, 3). In his postulates, he exhorted that capitalist economies does not usually work at top efficiency when left on its own as suggested by Smith, but suggested that such efficiency will become possible through the influence and intervention of the government. These two economists contradicted in a manner that Smith negated the role of government intervention in the economy by solely relying on the market’s “invisible hand” while Keynes believed that the economy will work at its optimum with the influence and intervention of the government. Analysis While these two economists made two contradicting explanation and suggestion on how economies should work, they are however both correct. For Smith, while it may sound as an oversimplified generalization that the economy is ruled by “market forces’ invisible hand”, this truth however cannot be denied. We just cannot break the law of market forces that rules the economy. Our own pursuit for our individual success has also been generally good for society for we can contribute more when we are individually productive. For Keynes, his economic precepts has never been truer today with governments intervening in the recent 2009 Financial Crisis to bail out companies to save jobs and the economy in general from depression. Contradictory ideas but both are true and only different on its implication on the market and the economy in general. Smith may have explained the harsh reality about the dynamics of the capitalist economy and accepted the fact if individual’s are left on their own, we will be always be driven by our selfish motive. According to Smith, self-interest is not necessarily evil as he contends that our pursuit for self-interest will actually make the economy work efficiently and will be good in the long run. Keynes however made an assertion that this is in fact “disastrous if we attempt to apply it to the facts of experience” and attempted to temper the selfish and disastrous nature of the capitalist economy by government intervention. I am personally inclined to be partial with Keynes idea not only for his humane perspective about the market but also for his accurate assessment on how disastrous it can be if the market will be left on its own. Our recent experience with the 2009 Financial Crisis showed and validated this. The 2009 Financial Crisis was spawned by Smith’s idea of capitalist individualism where financing companies overextended credit as they pursue their own self interest that created a bubble which brought our economy to a near collapse. While many of the population are losing their jobs and homes, these executives of financial companies continue to enjoy huge financial perks. The result was a financial disaster and it is Keynes economic theorem that saved us from economic depression with the government intervening to save the economy from near collapse. Conclusion There is a parallelism that can be drawn with the idea of these two great economic philosophers; that is how things are and how it can be if we will only exert some effort. The cliche that anything taken to its extreme cannot be good is also applicable to the idea of these economists. Adam Smith stated how things are with his individualistic perspective of the market while John Maynard Keynes argued that while it is so, it can be disastrous if it is left on its own. It will become prone to excessiveness and we should guard ourselves from it through government intervention. To put it simply, I find the basic contradiction of the two as Smith being the realist, while Keynes as the idealist. Their seeming connection was that Adam Smith stated the fact of a modern capitalist economy while Keynes provided the remedy should the economy will succumb to excessiveness and harm itself. True enough it did with our recent experience with the Financial Crisis and Keynes provided the solution. These two ideas may be contradictory but this contradiction goes together. Keynes may be Smith’s antithesis but he is the antithesis that complements the thesis. REFERENCES: Smith, Adam (1776), The Wealth of Nations. Viewed on July 18, 2011. Retrieved from [http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-Nations.pdf] Keynes, John Maynard (1936), The General Theory of Employment, Interest and Money. Viewed on July 18, 2011. Retrieved from [http://innovbfa.viabloga.com/files//JM_Keynes___Livre___The_general_theory_of_employment_interest_and_money___1936.pdf] Read More