The Invisible Hand

ryanEconomics(ML), Mini Lessons

The Invisible Hand



Read from Common Sense Economics: What Everyone Should Know about Wealth and Prosperity (St. Martin’s Press, 2016):

Economic progress comes primarily through trade, investment, better ways of doing things and sound economic institutions.

Investment and improvements in technology do not just happen. They reflect the actions of entrepreneurs, people who take risks in the hope of profit. No one knows what the next innovative breakthrough will be or just which production techniques will reduce costs. Furthermore, entrepreneurs are often found in unexpected places. Thus, economic progress depends on a system that allows a very diverse set of people to test their ideas to see if they are profitable and, simultaneously, discourages them from squandering resources on unproductive projects.

For this progress to occur, markets must be open so that individuals are free to try their innovative ideas. An entrepreneur with a new product or technology needs to win the support of only enough investors to finance the project. But competition must be present to hold entrepreneurs and their investors accountable for the efficient allocation of their resources. Their ideas must face the “reality check” of consumers who will decide whether or not to purchase a product or service at a price above the production cost. In this environment, consumers are the ultimate judge and jury. If they do not value an innovative product or service enough to cover its cost, it will not survive in the marketplace.

Questions:

1. Is it “fair” that there are winners and losers in the marketplace for lemonade (or anything else)?

2. When a company fails to produce goods that consumers want, or produces them at too high a price, it eventually goes bankrupt. There are a number of obvious costs to this: employees lose their jobs; localities lose tax revenue, etc. But there are also benefits. Describe how society as a whole might benefit from companies going bankrupt. Can you imagine ways in which even workers who lose their jobs might see long-term benefits, even if the short-term costs are high and painful?