The so called ‘laws of the market‘, & its ‘self-regulating’ phenomenon.

Many economists have tried explaining the laws of market. Say’s argues that supply creates its own demand i.e. the expenditure on production, on an average would be spent on purchasing that product. If it were true than producing millions of products would have lead people out of the Great Depression. Keynes encouraged to leave the markets alone and let them function independently. However, if this was the case to be then Monopoly firms would explot the markets. Adam smith advocated the free market economy, ‘the invisible hand’ influenced by law of self-interest, competition and demand & supply governs the market behavior. Adam Smith argues that when a person works towards maximizing his own interest, he in turn maximizes the utility of the society’s resources. Thus this invisible phenomenon guides the free markets through maximizing the utility of the limited resources and enhanced healthy competition. Moreover, this invisible hand makes the society’s outcome better off, as each trader maximizes profit on his or her goods and get richer. This self-centered attitude leads to self-governance of markets and he also argues that this negates the need for any form of intervention may it be government or other agencies.

However, the law of self-interest, competition and demand & supply could work in many cases in perfect market competition. However, an oligopolistic or monopolistic firm could collude to exploit the markets or may not be able to maximize the economies of scale. Therefore, these laws of market could be considered as a stepping-stone towards describing or analysing the market’s behavior.

“Economic world described by Smith differ from the economic world of today” 

The distinction between Adam Smith’s economic world and today’s world can be well seen in US capitalist economy. In today’s economic scenario, monopolies avoid competition and earn abnormal profits by manipulating the markets, which is a contradiction to Adam smith’s theory where he argues that competition leads to market efficiency. Moreover, the government intervention in today’s world in many sectors, due to the lobbying would be another differentiating factor as in his economy government would have limited role. This form of influence leads to distortion of natural law of self-governance and is less efficient resource dissemination. Moreover, he advocated that the cross-country trade should be tax-tariff free, which can’t be said for today’s world.