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What to Do When the Invisible Hand Stops Working - Essay Example

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The essay “What to Do When the Invisible Hand Stops Working?” discusses Smith and Keynes’ principles resorted by governments and central banks to address issues in their economics: self-regulating economy against government intervention to stimulate the economy or to overcome the economic crisis. …
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What to Do When the Invisible Hand Stops Working
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Download file to see previous pages At a glance, Smith’s invisible hand is known for the market’s regulation of the market (and self-healing too according to Buchanan) and the government’s necessity to intervene in the market.  This was mentioned in passing but was not explained in detail leaving the reading without much clue that compels this paper to elaborate.
With regard to the invisible hand of the market, Adam Smith originally meant that the mechanism of the invisible hand is a result of the market settling the distribution of goods and the prices between what the producers want to produce and what the consumers choose freely what to consume.  As a result, producers will have to create goods that are cheaper to produce undermining competition and gain market share.  This competition will ultimately benefit the individual consumer and hence, the greater community as a whole. 
On a bigger picture, Adam Smith’s invisible hand may have been the precursor of globalization or the free market.  Perhaps even predated David Ricardo’s idea of Comparative Advantage of trading across economies in suggesting the idea of the freedom of trade as Adam Smith already tackled the dynamics of free trade across economies.  Adam Smith posited that a poor country will naturally have cheap labor and would be willing to work for wages lower than those of their rich counterpart countries.  As a result, the industry will naturally move to these countries as they make more profits by discounting on the labor cost as afforded by the poor country.  As the demand for labor increases, wages will also increase and will result in the higher purchasing power of those mentioned laborers.  As purchasing power increase, these new consumers will create a demand that local industry will have to hire additional labor to cope with the increasing demand for goods.  As this continues, the labor cost of the once poor country will eventually equal those of the host rich country to the point that the advantage of the poor country to provide cheap labor will be lost that it will no longer be advantageous for the rich country to move their factory or industry to the poor country.  In effect, Adam Smith was presupposing that the invisible hand will “guide” and regulate the market in the most beneficial manner. ...Download file to see next pagesRead More
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