According to Adam Smith, when private individuals are left free to seek their own interests in free markets, the will inevitably be led to further the public welfare by an “Invisible Hand.” What is this “Invisible Hand” and why does Smith believe that it will further the public welfare?
The groundbreaking treatise authored by Adam Smith was published in the 18th century. But even after two hundred years it is still an important concept in the world of economics. Without this masterpiece it would be difficult to understand the foundation of modern economic thought (Dougherty, 2002, p.3).
This theory states that it is good to remove regulations when it comes to the selling and buying of goods. (Muller, 1993, p.7). This action will greatly benefit all that are involved. This is because of the action of the so-called “Invisible Hand” that influences the marketplace.
Adam Smith did not propose to remove the government from the equation. The government has a critical role to play, however, Smith says that a free market with fewer restrictions is the ideal setup. This principle became known as the the laissez-faire or the self-coordinating market (Psalidopoulos, 2000, p.69). In other words if the government takes a step backwards and not intervene with price controls and other control mechanisms then the the market will self-regulate.
One way to explain the laissez-faire principle is by looking at the price of goods. Using Smith’s theory it is impossible for a businessman to continuously raise the price of his goods because no one will be able to afford it, as a result demand will slow dow and finally the market will correct itself and the price will go down (Otteson, 2004, p.3).
Thus, there is no need for the government to intervene (Brown, 2006, p.270). This is a remarkable idea. Nevertheless, there are instances when the laissez-faire principle does not work. In these cases the government has to come in and save the day.
One of the best example is the significant trade imbalance between the United States and Japan in the latter part of the 20th century. The problem became so severe that Americans accused Japanse manufacturers of unfair trade practices. The U.S. Government had to come in and intervene, to force Japan to modify some of its business practices in order to show the world that they are promoting fair trade.
This is a clear example that Smith’s theory cannot be relied upon all the time. In fact it is foolish to rely on the markets to behave in such a way that everyone will benefit from it.
Another example that will illustrate the inherent weakness of Adam Smith’s “Invisible Hand” theory is seen in the recent financial crisis that stymied the U.S. economy a few years ago. It was due to the real estate crisis characterized by the sharp rise in mortgage delinquencies (Sun, Stewart & Pollard, 2010, p.116).
Yet even if the government was given the chance to create policies that would regulate the said sector it was not enough. According to analysts, “it was financial manipulators and market speculators who directly blew the bubble and then burst it in the US housing markets” (Sun, Stewart & Pollard, 2010, p116). The fundamental weakness of Smith’s theory is that it underestimated human nature.
Man is competitive but he does not compete to be the best that he could be in order to help others. He competes in order to secure for himself everything that he needs. In this regard there is the fear of lack and therefore men and women tend to hoard money, land, food etc. If this occurs then people will do everything in their power to amass more wealth than they can use and they will exploit both natural and human resources for their benefit.
In the case of the recent U.S. real estate crisis, the expected outcome of the overheated housing market was for the price to go down but because of manipulators, the American people were led to believe that the housing market wil continue to grow. Thus, many were fooled to invest and as a result the prices went even higher, until the government came in to set things right. This means that there are times when the “invisible hand” ceases to remain in the background and reveals itself to be the hand of greed.
Both the People’s Republic of China and the U.S. have “mixed” economies. What is meant by a mixed economy? How does the mix in the People’s Republic of China differ from that in the U.S.?
Going back to Adam Smith’s theory with regards to the nature and cause of the wealth of nations, it changed the way people see the role of government in the marketplace.One of the forceful consequences of Smith’s treatise is the creation of a mix economy where the government plays an active but limited role in the marketplace.
The effect of Smith’s “invisible hand” theory became more evident when China – previously a centralized economy – embraced capitalism and free enterprise. Just like the United States, China can now be considered as a mix economy.
A mix economy is an economy wherein there is private ownership of business as well as the participation of government. It can also be understood as the mixture of public and private ownership of property. the A mere two decades ago China was not a mix economy. It is an economy characterized by state-controlled prices and state-owned enterprises. Today, however, China is a mix economy like the United States.
There are similarities and differences between the two. They are similar in the sense that Chinese and Americans can own property and that private citizens can become entrepreneurs. In another aspect, the United States government and the Chinese government control large enterprises. For example the U.S federal government owns and control the post office and the electricity producing Tennessee Valley Authority (Baumol & Blinder, 2009 p.23). In America there are also state-owned mass transit facilities as well as sports stadiums.
The difference between the United States and China is in terms of the degree of privatization of all the businesses in their respecitve countries. The United States is the most “privatized” country in the world because “few industrial assests are publicly owned … even many city bus companies and almost all utilities are run as private comanies” (Baumol & Blinder, 2009, p.23).
The same thing cannot be said of China. It can be argued that the government still play a major role in the economy. This is easy to understand since not a long time ago the Chinese people and its businesses were under policies created by the socialist government.
It can also be said that the mix economy in the United States allow for a greater degree of equality while in the China there is great divide between the rich and the poor. According to one commentary, while there is concensus that a mixed economy is what is needed in China, “the story of who actually is ‘making it’ presents a picture of a deeply divided nation” (Zhang, 2001, p.11).
The commentators also added that, “As new export-oriented and consumer-oriented economic structures develop in the coast regions, and allkids of ‘Made in China’ products flood the shopping malls of American suburbia, most Chinese are either too poor or too insecure to buy such goods” (Zhang, 2001, p.11). If China is trying to emulate the ecnomic success of the United States, then there is till so much work left to do.
In Hardin’s article, Living on a Lifeboat, he argues against both foreign food aid and permissive immigration policies. Explain how is his position flawed and why you disagree with him and how could you avoid some of the “inhumane” options he suggests.
The weakness of Hardin’s argument is seen in the way he anchored his arguments on the premise that everything is limited. This is very much evident when he used the metaphor of a lifeboat (Hardin, 1974, p.1).
It is easy to understand why he used a lifeboat to illustrate the scarcity of resources such as land, food, etc. Just imagine a lifeboat full of person and everyone around them are people that are drowning because they used to be inside an overly crowded lifeboat and since it could no longer support them then some of the peole had to fall away.
There are those who decided to swim over to the other lifeboat. They decided to go intothe lifeboat of the rich people. This lifeboat is spacious and well-stocked however, there is a limit to the number of people that it can accommodate. Thus, Harid argued that it is the moral right of the owner of the said lifeboat to reject the request for help.
Hardin seemed to imply that the rich people sitting in the rich man’s lifeboat should not feel remorse or any negative feeling as they continue to watch other people sink to the bottom of the dark water and die.
Hardin thought that he was clever when he used metaphors such as boats and spaceships to depict the current situation concerning U.S. immigration policy. However, rich countries like America, Canada, Great Britain, Germany, and France are not small countries.
Thus, it is erroneous to use the metaphor of a tiny and space-starved lifeboat and use ti to describe the limitation of these countries in terms of absorbing immigrants. the relative size of these countries to a cramped life boat. In the United States one can find this huge land mass. Therefore, the problem is not the lack of space, it is the difficulty in correctly managing resources.
It has to be pointed out that the United States is a land of immigrants. The officially recognized natives of this nation are the Native Americans and the rest came from other countries all over the world who settled in the great continent to find peace, fortune, and build a legacy for the future.
Now, Hardin is a Professor of Human Ecology at the University of California. This means that he is not ignorant of how the United States was established – and it is through the blood and sweat of immigrants. It is a moral right for people to immigrate; especially so if their lives are threatened by war, famine, and the lunacy of a tyrannical ruler. But Harding seems to have forgotten this crucial aspect of American history.
Maybe he chose to forget because the influx of migrants made him uncomfortable. If U.S. Immigration laws will be modified to accommodate Hardin’s views that it can be said that it contradicts the ideals of its founding fathers. If the American people will agree with Hardin’s position then it can also be said that it is a hypocrital stance knowing fully well that they too are descendants of immigrants.
The life-blood of America is the unbroken and continuous stream of foreign born men and women who chose to make the U.S. their second home. It would be fool hardy to shut the doors and force the long-staying yet productive illegal immigrants who are currently numbering in the millions. It is time to change the laws. It is time to legalize immigration, favoring those who are here to contribute.
Another problematic statement made by Hardin is his displeasure with the idea of providing food for the poor. This is not a good idea because in the a time of globalization the problem of one country can no longer be contained in within their boundaries.
It will spill over. Poverty-stricken populations are prone to the persuasions of extremists and radicals. If the United States will not ship its surplus food to countries that needed it most and send it as a form of aid then they will come to this country angry and frustrated. This may be an exaggeration but preachers of hate can easily exploit this problem.
References
Baumol, W. & Blinder, S. (2009). Economics: Principles and Policy. OH: Southwestern Cengage-Learning.
Brown, V. (2006). Adam Smith Review. New York: Routledge.
Dougherty, P.J. (2002). Who’s Afraid of Adam Smith?: How the Market Got Its Soul. New Jersey: John Wiley & Sons, Inc.
Hardin, G. (1974). Living on a lifeboat. The Garrett Hardin Society. Web.
Muller, J. (1993). Adam Smith in His Time and Ours: Designing the Decent Society. New Jersey: Princeton University Press.
Otteson, J. (2004). Adam Smith: Selected Philosophical Writings. UK: Imprint Academic.
Psalidopoulos, M. (2000). The Canon in the History of Economics: Critical Essays. New York: Routledge.
Sun, W., Stewart, J. & Pollard, D. (2010). Reframing Corporate Social Responsibility. UK: Emerald Group Publishing, Ltd.
Zhang, Z. (2001). Wither China? NC: Duke University Press.