Impact of Adam Smith's the Invisible Hand in Today's Global Economy Term Paper
- Length: 7 pages
- Subject: Economics
- Type: Term Paper
- Paper: #60990147
Excerpt from Term Paper :
Adam Smith's "The Invisible Hand" in today's Global economy
The Global Economy and the Impact of Adam Smith's
Theory of "The Invisible Hand"
Adam Smith's theory of "The Invisible Hand" is not new by far, but it may have more of an application today than it had in the past, based on the fact that today's economy has become so globally oriented. This new global economy presents new and different challenges than those that were seen before and therefore some may argue that the theory created by Smith is too old to have any real value for the modern world and modern America. However, there are others that see the intrinsic value of this particular theory, and it is these individuals that have an interest in taking Smith's theory and applying it to the global economy that is seen today. This will be discussed here and looked at specifically will be the theory itself, the application and effects of the theory on the global economy as it relates to the United States, and whether the government should have any input in the global economy. These are the issues that must be presented and studied in order to determine whether Adam Smith's theory of "The Invisible Hand" is something that is valuable for today's global economy.
Smith looked at the world in a very different way from many people in his day, and in a very different way from the way that people look at it now. Understanding Smith and what he believed in is crucial to understanding the work that he did and the theory that he worked with during his life. It is not necessarily important to have information on Smith himself for this particular type of study, however, because where he was born, what his childhood was like, how old he was when he died, and other issues that relate only to his life and not to his work are not strictly relevant for discussing his "Invisible Hand" theory when it comes to the context of today's global economy.
Here is a description (in bullet form) of the way that Smith apparently imagined the universe to operate, taken verbatim from a work that looks at his "Invisible Hand" theory and what it means
There is a benevolent deity who administers the world in such a way as to maximize human happiness.
In order to do this he has created humans with a nature that leads them to act in a certain way.
The world as we know it is pretty much perfect, and everyone is about equally happy. In particular, the rich are no happier than the poor.
Although this means we should all be happy with our lot in life, our nature (which, remember, was created by God for the purpose of maximizing happiness) leads us to think that we would be happier if we were wealthier.
This is a good thing, because it leads us to struggle to become wealthier, thus increasing the sum total of human happiness via the mechanisms of exchange and division of labour.
Smith's theory of "The Invisible Hand" has its origins in his work The Wealth of Nations. It illustrates the principle of what Smith called "enlightened self-interest," and is often today associated with the concept of psychological egoism
. The quote below comes from an article in an Internet encyclopedia that has been written about Smith's theory and his work to make others understand and accept that theory
Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it... By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good
This information that Smith provides in the above quote clearly shows that he believed that individuals would help society in many more ways if they would pursue their own interests instead of pursuing things that were designed to be 'for the public good.' This ties into the issue of the global economy due to the fact that many of those that are saying that they are trying to protect the global economy and essentially save the world are actually doing things that are ultimately for themselves. By doing this, they may actually be helping the economy on a global scale more than they realize and more than they intended to. It really does not matter whether these people are doing something to help themselves or doing something to help society -- provided that whatever they are doing actually does help society. This sounds rather confusing, but it actually is not that difficult of a concept to grasp.
For example, many people do things only because they feel that they want to. However, when it comes to economics and labor markets, people tend to work for what they want (money) while producing what others want (goods). In this way, the self-interest of the people (their desire to make money) actually works for the common good (providing goods that others will want to buy). It is a simple concept when looked at this way, and also indicates that, when someone does something for his or her own benefit and gain, he or she also promotes ideas and values that are for the good of the community
Others that have studied Smith's work have taken his information and ideas and expanded upon them. One such individual, Vilfredo Pareto, used what is called an "edgeworth box" to show social optimality, which is a very similar concept to the "Invisible Hand" theory that was presented by Smith
. This edgeworth box shows a distribution of resources and also indicates all of the different ways that the resources can be distributed, since these ways can all be plotted as points in the box
. This edgeworth box is shown on the following page as figure 1. Since resources are very important to the economy, both on a global level and on smaller levels, the ideas that Pareto came up with based on Smith's theory can also have strong meaning for the global economy. However, Smith will remain the focus of the discussion here.
Figure 1: The Edgeworth Box.
When it comes to the application and effects that the "Invisible Hand" theory has on the global economy where the United States is concerned, however, the discussion can quickly become difficult. Smith generally argued against regulation by the government, since he felt that a proper society would function well and appropriately on its own -- thus eliminating the need for any kind of governmental intervention where trade, commerce, and economics were seen to be the issue
Overall, Smith's "Invisible Hand" theory is generally seen to have more to do with the allocating of capital than with anything else, but others believe that what Smith has to say is much broader than that
. Regardless of what Smith actually meant, however, what is attributed to him is a general idea that government control is bad, and that self-interest is good
. This is not because people should only care about themselves and not others, but because when people care about themselves they tend to perform actions that help out society as well. Obviously, this can have a lot of significance for many individuals in society that are struggling with poverty, ill health, and many other issues that they find very difficult to deal with.
In the global aspect, however, the self-interest issue must generally be attributed to the United States. By trying to better itself in various ways, it is actually helping the global economy, or so the theory goes. Although it sounds somewhat far-fetched, it appears to be truly the case. It would not seem that greed or self-interest on the part of a large and dominant country would help other countries, but it appears that, when the United States does something that will help it in the long-run, this usually involves an agreement or discussion with another country that is also helped by the interaction and the decision.
It may seem as though governmental input in the global economy is still dangerous, however, because the government so often wishes to control everything so strictly, instead of just overseeing what is being done
. The government should definitely have some input into…