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Midterm - Essay Example

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Name Professor Class Date News article exhibiting two economic principles: What to Do When the Invisible Hand Stops Working The article of Mark Buchanan at Bloomberg entitled “What to Do When the Invisible Hand Stops Working” best exemplified two of the most prominent economic principles which are the market’s invisible hand of Adam Smith and John Maynard Keynes’ necessity for government to intervene (usually with its fiscal and monetary policy)…
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Download file to see previous pages 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 chooses 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 free market. Perhaps even predated David Ricardo’s idea of Comparative Advantage of trading across economies in suggesting the idea of the free of trade as Adam Smith already tackled the dynamics of free trade across economies. Adam Smith posited that a poor country will naturally have a cheap labor and would be willing to work for wages lower than those their rich counterpart countries. As a result, 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 increases and will result in the higher purchasing power of those mentioned laborers. As purchasing power increase, this new consumers will create a demand that local industry will have to hire additional labor to cope with the increasing demand of 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 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. In contrast to Smith’s self-regulation nature of his invisible hand, Keynes on the other hand proposed the necessity of government intervention either to stimulate an economy or to address an economic crisis. Government can stimulate long-term growth by spending more on infrastructure and public service which has the effect of putting more money in the system. When there is more money in the system by purchase and the salaries paid to workers, these workers who are recipient of government spending will have more money to buy goods. This has a “ripple” effect to stimulate the economy because one man’s spending is another man’s income resulting to an economic growth. During economic hardships, the fiscal and monetary policies are the two most common tools available to the government to stabilize the economy during an economic crisis. This was an idea of John Maynard Keynes who posited that the extreme swings in the economy is caused by the excessive or lackluster aggregate demand for goods and services and cause the economy either towards expansion or recession. To control this aggregate demand, the ...Download file to see next pagesRead More
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