Economic System: Invisible Hand
These are the questions :
1. The so-called “Invisible Hand” of the market is viewed by some as a basis for an optimal
economic system. Explain why this view is controversial or contested by using material from this
course, including two or more of the readings by Heilbroner & Thurow, Heath, Aldred, Stanford and
Sagoff.
2. Researchers who have studied the rise of large corporations and their role in our society and
economy have tried to address a number of key questions such as:
· Why do business firms grow?
· Do they have too much power in society, especially when they become large?
· Should their power be directed or limited, and if so, how and by whom?
Discuss one or more of these questions by referring to relevant course materials
General instructions:
Please write a three page (800-950 word) original essay on two of the three
topics listed below. You will be evaluated on your ability to bring together facts, concepts and
arguments into a coherent answer. It is expected that you will use material from the lectures and
readings in this course rather than outside research.
When citing readings either directly or indirectly please use the following APA-style format for intext citations: (Sagoff, 2014) or (Stanford, 2015a). For your convenience, a bibliography of course
readings covered in the first section of the course is provided on the next page. You do not need to
add your own bibliography as you would normally do for a regular essay assignment in this course.
Please avoid using excessive direct quotation of readings.
Readings to use :
Aldred, J. (2020, July 5). This Pandemic has Exposed the Uselessness of Orthodox Economics. The
Guardian. Retrieved from https://www(dot)theguardian(dot)com/commentisfree/2020/jul/05/pandemicorthodox-economics-covid-19?CMP=Share_AndroidApp_Gmail
Belshaw, J. D. (2016). Canadian History: Post-Confederation. Victoria, B.C.: BC Campus. Retrieved from
https://openlibrary-repo(dot)ecampusontario(dot)ca/xmlui/handle/123456789/234
The Economist, (2017). Coase call: The theory of the firm. The Economist, 424(9051), 59.
Heath, J. (2001). The Efficient Society (selections). Toronto: Penguin Canada.
Heilbroner, R., & Thurow, L. (1998). Three great economists. In Economics Explained (pp. 26–43). New
York: Touchstone.
McGraw, T. (1997). American Capitalism. In T. McGraw (Ed.), Creating Modern Capitalism (pp. 303–348).
Cambridge, MA: Harvard University Press.
Nicholson, P. (2016). Canada’s low-innovation equilibrium: Why it has been sustained and how it will be
disrupted. Canadian Public Policy, 42(1), S39–S45. https://doi(dot)org/10.3138/cpp.2015-019
Sagoff, M. (2014). Schumpeter’s Revolution. Breakthrough Journal, (4), 8–10. Retrieved from
https://thebreakthrough(dot)org/journal/issue-4/schumpeters-revolution
Stanford, J. (2015a). Competition. In Economics for Everyone: A short guide to the Economics of
Capitaliism (2nd ed., pp. 137–147). Ottawa: Pluto Press.
Stanford, J. (2015b). The politics of economics. In Economics for Everyone: A short guide to the
Economics of Capitaliism (2nd ed., pp. 52–60). Ottawa: PlutoPress.
Stanford, J. (2019). Staples Dependence Renewed and Betrayed : Canada ’ s Twenty-First Century Boom
and Bust. In M. P. Thomas, L. Vosko, C. Fanelli, & O. Lyubchenko (Eds.), Change and continuity :
Canadian political economy in the new millennium (pp. 79–105). Montreal: McGill-Queen’s
University Press.
Stanford, J. (2020). Why Linkages Matter. In J. Stanford (Ed.), The Staple Theory @ 50 (pp. 65–71).
Ottawa: Canadian Centre for Policy Alternatives. Retrieved from
https://www(dot)policyalternatives(dot)ca/sites/default/files/uploads/publications/National
Office/2020/04/Staple Theory at 50 - 2020 version.pdf
Weinstein, O. (2019). Understanding the Roots of Shareholder Primacy. The Oxford Handbook of the
Corporation, 138–167. https://doi(dot)org/10.1093/oxfordhb/9780198737063.013.8
Invisible Hand
Students Name
Institutional Affiliation
Course Code and Name
Instructors Name
Date
Question One
The existence of almost perfect competition and free markets is based on the principle of the invisible hand. The concept of the invisible hand was introduced by Adam Smith in his theory of moral sentiments. According to the economist, the invisible hand is a description of the unseen forces that keeps the free market running. However, the concept is considered to be controversial and has been contested by various scholars.
The main controversy regarding the invisible hand is that many assumptions have to be made for the free market to produce optimal results. Among the assumptions is the transparent access to information such as product prices. Smith points out that self-interest motivates the participants of the free market to make a decision. However, this is not the case since it indicates that greed is better than doing good (Heilbroner, R & Thurow, 1998). Free markets aim to promote the social welfare of every participant. Therefore, if people buy or sell goods based on their interests, the market will no longer be fair. Such a market would only result in a high number of extremely wealthy people and extremely poor people. In the case where participants act regarding their self-interest, they would take advantage of market information and prices without minding the welfare of the people that might not easily access such information ( Stanford, 2020). Such acts would not result in an optimal outcome. The optimal outcome of a free market is promoting every participant's welfare, something which cannot be achieved if people act regarding their interests.
Smith pointed out that free markets work well in promoting every participant's welfare and leading to an optimal outcome. However, there are various barriers to a free market, achieving an optimal outcome. Such barriers disproof the existence of the invisible hand. The issues of conspicuous consumption, asymmetric information, and other externalities make it challenging for consumers to choose the best option in the market ((Heilbroner, R & Thurow, 1998). The market conditions keep on changing, and so are the needs of people. Whenever a person's needs change, they have to adjust their spending techniques to satisfy such needs. The free market will not adjust itself to cater to such needs. Given that the barriers are unavoidable in the economic system, the invisible hand concept is not applicable in promoting the welfare of everyone.
Decentralized markets disproof the concept of the invisible hand. The invisible hand is not the force that drives free markets into achieving optimal. Given the current technological advancements, manufacturers are now able to manufacture goods that they could not make. Therefore, technology is an essential impulse that sets the capitalist economy in motion (McGraw, 1997). Achieving an optimal outcome in a free market is enhanced by modern production methods, new consumers for the new goods, transportation, and the industrial organization created by capitalists. In the Wealth of Nations, Smith pointed out that technological changes resulted from market changes instead of driving the changes. Schumpeter disregards this argument by pointing out that economic growth is innovation-driven (Sagof, 2014).
The ideology of the invisible hand is based on the fact making profits motivate people into being inventive. Schumpeter argues against this claim by pointing out that entrepreneurs are innovators and creators rather than profit-seekers (Sagoff, 2014). Through such innovation and creativeness, participants of the free market can produce new products and create new markets and consumers. If the entrepreneurs were only a profit seeker, they would not be motivated to innovate new products to satisfy consumers' changing needs. It is the innovation that keeps the market moving (Nicholson, 2016). Hence, Smith's idea of an invisible hand remains controversial since profit-seeking is not reason enough to keep the economy moving. Entrepreneurs make profits by being innovative in creating new or better products. If the entrepreneurs focus on making profits, they might not come up with new ways of doing so. Their focus will be keeping the economy in motion using the existing goods (Stanford, 2019). Therefore, the possibility of the invisible hand leading to an optimal outcome in a free market is questionable.
Another limitation of the invisible hand is the economies of scale. Economic conditions have a great influence on economic ideas. as well, the ideas also influence the economic conditions. the concept of the invisible hand does both good and harm to the economy. However, it is not a complete model of business that can be applied to enhance economic growth. Its assumption that people's preferences are static and are rational decision-makers does not apply in economies of scale. In the case where people's preferences do not change, a change in output would not result in a reduction in overall costs (Stanford, 2015a). As a result, the manufacture would make losses. As well, people are not always rational decision-makers. For instance, if a person has a lot of money to spend on an item, they might not make a rational decision of bargaining for the same item. If organizations intend to apply economies of scale, they have to operate in a market characterized by open-minded individuals (Heilbroner, R & Thurow, 1998). If all consumers are rational decision-makers, a free market will not achieve an optimal outcome since the poor would be disadvantaged.
The invisible hand cannot be the only concept enhancing economic growth. Other economic factors play a major role in the growth of economies, regardless of the market type in which the economy is being operated. Therefore, the controversies and contests of the invisible hand can be justified in a real economy (Stanford, 2015b). The concept might play a role in economic growth, but it is a combination of other factors that result in an optimal outcome in a free market. Relying solely on the invisible hand might make it challenging for the free market to thrive in modern economic conditions. in most cases, limited government intervention is necessary.
Question two
The profit motive is one of the main reasons why businesses grow. It is the profit-making goal that motivates organizations into laying strategies that would enhance their performance. The firm sets both long-term and short-term strategies, depending on the objectives that they intend to meet. Once an organization has set goals to i...