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The Invisible Hand (Laissez Faire Economics)

JayLewis
Posts: 41
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11/25/2013 4:53:03 PM
Posted: 3 years ago
What are your opinions on Laissez Faire economics?
This view was popular in the early twentieth century (before the Great Depression) especially in regards to Calvin Coolidge's presidency. At this point in history the U.S. economy was in a boom cycle and was achieving unprecedented economic growth. The prevailing economic theory was that of the 'invisible hand', which stated that the economy would have natural ebbs and flows as supply and demand increased or decreased. These fluctuations of the economy were natural and should not be interfered with by an outside source (federal government). This was a popular theory for many years, especially with the growth of Wall Street. However, the crash of 1929 changed the course of economic theory. It was a combination of multiple things, but put simply it was the cause of overproduction and not enough demand. This exponential growth had caused an equally severe economic bust.
Hoover introduced the idea of the 'beneficent hand', one of the first presidents to propose some government intervention in the goings-on of Wall Street. However, he was hindered by high unemployment, high tariff rates, and a lofty idea that he could save the economy himself. Roosevelt, who followed Hoover, introduced unprecedented government intervention in the economy. He went far past the 'beneficent hand' which was designed to stimulate the economy in times of crisis. Roosevelt wanted government intervention at all times in order to minimize the boom and bust cycle of the stock market. This raised concern amongst conservative economic theorists who believed that removing the "free" out of "free market" could have disastrous effects. Thoughts?
Tophatdoc
Posts: 534
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11/25/2013 9:07:37 PM
Posted: 3 years ago
At 11/25/2013 4:53:03 PM, JayLewis wrote:
What are your opinions on Laissez Faire economics?
This view was popular in the early twentieth century (before the Great Depression) especially in regards to Calvin Coolidge's presidency. At this point in history the U.S. economy was in a boom cycle and was achieving unprecedented economic growth. The prevailing economic theory was that of the 'invisible hand', which stated that the economy would have natural ebbs and flows as supply and demand increased or decreased. These fluctuations of the economy were natural and should not be interfered with by an outside source (federal government). This was a popular theory for many years, especially with the growth of Wall Street. However, the crash of 1929 changed the course of economic theory. It was a combination of multiple things, but put simply it was the cause of overproduction and not enough demand. This exponential growth had caused an equally severe economic bust.
Hoover introduced the idea of the 'beneficent hand', one of the first presidents to propose some government intervention in the goings-on of Wall Street. However, he was hindered by high unemployment, high tariff rates, and a lofty idea that he could save the economy himself. Roosevelt, who followed Hoover, introduced unprecedented government intervention in the economy. He went far past the 'beneficent hand' which was designed to stimulate the economy in times of crisis. Roosevelt wanted government intervention at all times in order to minimize the boom and bust cycle of the stock market. This raised concern amongst conservative economic theorists who believed that removing the "free" out of "free market" could have disastrous effects. Thoughts?

For the record, I am no libertarian. I have libertarian sympathies though. But Laissez Faire economics is ideal but it is not considered practical due to the actual functions of government. Laissez Faire economics has not been applied in adequately in any country of significance. To suggest Laissez Faire economics has existed is to suggest the government hasn't picked winners and losers previously. In the United States, even the earliest banks and corporations were chartered by the state legislatures such as the Manhattan Bank in New York. The question is how much should the government intervene in the economy.

President Franklin D. Roosevelt imposed too much on the economy. The National Recovery Act was the closest thing the United States has ever been to a command economy, or some may say a form of Fascism. Nevertheless, government intervention can and has lead to mistakes. At the national level, look at the failure of the auto manufacturing bailout. GM, has made it clear they are intending to invest in plants in Mexico. Chrysler was bought by an Italian. Many would argue the auto manufacturing bailout was a waste. Versus the bank bailout which has been repaid by many of the banks who received the loans. The more the government picks winners and losers, the less free the market is.
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slo1
Posts: 4,353
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11/26/2013 8:30:13 AM
Posted: 3 years ago
At 11/25/2013 4:53:03 PM, JayLewis wrote:
What are your opinions on Laissez Faire economics?
This view was popular in the early twentieth century (before the Great Depression) especially in regards to Calvin Coolidge's presidency. At this point in history the U.S. economy was in a boom cycle and was achieving unprecedented economic growth. The prevailing economic theory was that of the 'invisible hand', which stated that the economy would have natural ebbs and flows as supply and demand increased or decreased. These fluctuations of the economy were natural and should not be interfered with by an outside source (federal government). This was a popular theory for many years, especially with the growth of Wall Street. However, the crash of 1929 changed the course of economic theory. It was a combination of multiple things, but put simply it was the cause of overproduction and not enough demand. This exponential growth had caused an equally severe economic bust.
Hoover introduced the idea of the 'beneficent hand', one of the first presidents to propose some government intervention in the goings-on of Wall Street. However, he was hindered by high unemployment, high tariff rates, and a lofty idea that he could save the economy himself. Roosevelt, who followed Hoover, introduced unprecedented government intervention in the economy. He went far past the 'beneficent hand' which was designed to stimulate the economy in times of crisis. Roosevelt wanted government intervention at all times in order to minimize the boom and bust cycle of the stock market. This raised concern amongst conservative economic theorists who believed that removing the "free" out of "free market" could have disastrous effects. Thoughts?

The overall guiding principles are good for Lassez Faire Economics and should try to be emulated where ever it can. With that said, markets are highly irrational. Lassez Faire Economics fails on that part. Using an analogy, when one sees a train headed for a car stuck on the tracks, lassez faire dictates that we should do nothing about it.

A perfect example is in mid 2000's when pricing on default credit swaps was highly irrational. When the entire scheme came crashing down, gov had to step in to save the financial industry, so it would not impact all the down stream industry that relies on the financial industry. It got so bad that banks were not even loaning overnight with each other.

Humans are irrational, markets are irrational, and lassez faire does not care even when the proverbial train is ready to crash on the tracks. Gov regulation should be minimal because that can create its own crashes, but it is needed to deal with the irrationalism of the markets.

To continue with the example, there is absolutely no argument that letting the world financial collapse continue would have been better than stepping in to minimize damage.

One can also argue that fannie mae and other gov intervention queued up the crisis to start with, but ultimately it was the pricing and crash of the unregulated credit default swaps market that caused it. If the mortgage risk would have been priced accurately to start with then there is no crisis because there is less profit to be made originating and bundling mortgages.

Laissez Faire is dead, however it would behove us to look at it as a guiding principle and gov intervention should only happen with great consideration to mitigate the risk lassez faire brings.

This mean eliminating the things people love from their gov like the mortgage interest tax deduction and other tax credits/deductions geared towards spurring various markets, but keeping the SEC, FDA, and other agencies who's goal is to keep private enterprise trustworthy and accountible.