The Invisible Hand Theory Essay
The Invisible Hand Theory
“The Enquiry to the Nature and Cause of wealth and Nation” by Adam Smith is one of the well-known influenced books in the economy. As express on the title of the book, it shows Adam great interest on wealth condition of a nation. He doesn’t locate the wealth on natural resources and climates but in division of labor and the “Invisible Hand” within competition of free-market. In Vietnam, healthcare, education and retirement services are opaque and inefficiency due to State monopolization.
So by applying the “Invisible Hand” theory to Vietnamese market, it would be a shift of local economy. The theory “Invisible Hand” In the book “The Enquiry to the Nature and Cause of the Wealth of Nation” by Adam Smith, he expresses three arguments: the Economizer Argument, the Local Knowledge Argument and the Invisible Hand Argument. (Otteson and Meadowcroft, 2011:99)  “Invisible Hand” is the term which is rarely mentioned in Adam’s work but has great influence in modern economy.
In details, he wrote: “…Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…” (Smith, 1950: 9) , that simply means the entrepreneur is motivated by self-interest to satisfy their need but unintentionally by doing so, at the end it not only benefits himself but also to other people. People act unintentionally with local purpose in mind but it does not only to them.
In contrast, Smith believes that it also includes concern about family and friends as well. Smith describe people as economizers and who want to save their time and energy while try to get enormous return of investment (Otteson and Meadowcroft, 2011:99). People use energy more efficiently benefits not only themselves but others. Since people are allowed to focus on narrow range of activities, it creates surplus in goods which they can sell or trade on the market. Furthermore, other locals may interest and imitate that so it saves time and energy for them as well.
Another point is that when division of labor is accepted and people allow specializing or concentrating on their task, it will unleash hidden human ingenuity as mentioned on Prof. James Otteson’s interview Adam Smith: The Invisible Hand, 2011 . For instance, entrepreneurs will figure out better ways to do things to satisfy their interest. In order to create opportunity for specialization, free up of market is essential. The competition between buyers and seller is motivated by profit for individuals, as the result both sides have to improve their products and reduce selling prices.
This process of attracting customers is leading by the “Invisible Hand”. Generally, external forces such as Government interventionism is unnecessary because economy can be sustain under guidance of “Invisible Hand”. Overall, Smith saws creation of the free market as resources of higher standard of livings. (Morgan, 2010:23) To sum up, the “Invisible Hand” shows that innovation and free market can generate specialization and productivity therefore improves living standards. Positive & negative attributes
One benefit of the Invisible hand is that it can guide free market through competition for scarce resources therefore benefits everyone since not only it makes the firms produce more quality resources but also enhances variety of products in the market with cheaper prices. (Otteson and Meadowcroft, 2011:89). As this process is repeated in other industry, people will enjoy buying as well as increase their living standards. Even though it is possible that the Invisible Hand can improve living standards but Adam Smith’s ideas only suitable for capitalism for free-market period.
Later, when the economic crisis happens, people need visible hand of government intervention to balance the economy. Another disadvantage shows in total free market dominant the market by State-owned enterprises. Petrol in Vietnam for instance, Petrolimex holds nearly half of the market shares and it betrays the principle of free market. Lastly, division in people values will be deeper. (Vietnamnews, 2013) Summary newspaper article Title: Public expects better quality service The author suggests that Government should “play as regulatory and supervisory role” in management of healthcare, education and retirement.
In Vietnam, Government is still a major public service provider so that service users have very few options to choose. In addition, according to a survey made by Central Institute for Economic and Management, public services are facing low efficiency in allocating the funds as well as little engagement with non-State sector. As the result, quality provided remains low. In order to solve the problem, Nhung, a supervisor from Institution, suggests that “public sector should only do what private sector is unable to do” which also means open up the market for private sector to provide public service.
Relevance Opaque, corruption and inefficiency Low efficient services provided by the public sectors is the fact that local people facing every day. Not only healthcare, education and retirement are State monopolized but also petrol market such as Petrolimex. Since the mid 1980s reform period, Vietnam has change from planned economy to a Socialist-oriented market economy but state sector still accounts about 70 percent of total economic activities in Vietnam. Moreover, the sector hasn’t been seen in good health in recent years.
For instance, economic scandal, giant Vinashin which announced $4. 4 billion losses which is the biggest lost to the national budget (France24, 2013) . Return to the healthcare system, most Vietnamese have to pay health services out of their own pocket even though it’s public service. There is another fact that patients have to bribe the doctors or they will put him in waiting list for treatment. Opaque, corruption and inefficiency exist in public sector due to lack of competition in the market.
“Public sector should only do what private sector can’t do” Private healthcare or private operators may be more innovative in telemedicine which is use telecommunications to provide patients with clinical healthcare at a distance. Due to profit motive, they can be very productive while public sector meets limitation in funds so leads to low quality services and number of researches. In that case, instead of monopolizing the market, public sector should play as supervisory role as Ms Nhung said (Vietnamnews, 2013).
But there is negative affect if market is open for private sector; quality of services in Vietnam highly depends on remuneration for doctors and staffs. Consequently rich people will get better services than others and that creates division in people values. Recommendations If free market is apply, private healthcare has to be more carefully regulated to ensure that it achieves national standards as well as safety, value, and efficiency. Similarity, State should have taxes, standards and a legal system to encourage the free market to operate quickly. New technology can be used in administration of hospitals.
Conclusion Even though Vietnam did change to Socialist-oriented market economy which is partly open-market, the public sector still suffers from “long illness”. It let a web of state own firms control the economic and stubbornly resistance to change. Note that free market mention by Adam Smith is base of capitalism so it can create also a political issue when trying fully applying it to Vietnam despite the fact that competition does enhance quality of services. On the whole, I would call Vietnamese market is a partly free-market since it encourages private sector in some industry but monopolizes in a few like petrol or electricity.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 13 December 2016
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