Archive for January, 2010

The many hands of capitalism

The beauty of capitalism, argues Adam Smith and my textbook, is that resources are magically guided by the invisible hand of the market to their most efficient uses. No central planning body is needed, as it is in communism, to decide how much of each product should be produced and who should receive it.

On the micro-scale, this is true in many ways. The individual decisions of millions of businesses, communicating through prices, add up to a system that satisfies most people’s wants with a dizzying array of constantly-improving products. We don’t need a giant bureaucracy to set the price of raisin bagels or determine how many electric lawnmowers should be built.

However, what I’m now discovering is that there is no “invisible hand” analogy on the macro-scale. The “natural” macroeconomic outcome of an entirely free market is abhorrent. Devastating cycles of boom, bubble, and recession; ever-more concentrated wealth; terrible working conditions for the poor; and, perhaps, resource depletion and collapse. It’s entirely up to the government (and, in some cases, labor unions), to guide the market with fiscal policy (government spending), monetary policy (mainly the interest rate), and human rights protections, and to clean up after the market with social welfare programs.

The hands are quite visible. So how much do you trust your government? They’ve been doing a bang-up job lately. Poor monetary policy (years of super-low interest rates, among other problems), contributed greatly to the housing bubble and our current Great Recession.

I just think it’s important to remember when certain pundits and Wall Street executives plead for small government and financial deregulation, that there is no reason to believe that would help in macroeconomic terms.

On the micro-level — when you are talking about things like price tariffs, subsidies, restrictions on trade, product standards — there is a justification, at least in theory, to call for “smaller government” or deregulation. Because here the market allocates resources more efficiently than the government would (again, at least in theory). But we already know what happens to the macroeconomy, left to its own devices, and that is everyone but the fabulously rich and very lucky gets smacked around by the invisible hand.

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