Adams Smiths invisible hand theory has ruffled may unanticipated feathers in our Global economy. Inflation, inequality pollution, the list never ends. Not to mention the huge increase in financial failure and crises over the last 40 years. It is quite clear that the invisible hand has been handing over power a bit too much power to the unsustainable and unreliable source. The free market.
The engine of Capitalism has been steaming its way through time since the early 1900’s, where the flow of capital between firms was regulated and taxed appropriately. The need for more fair competition and lower price rates arrived and many states began to deregulate their financial institutions in order to make them more efficient. Thinkers like Hayek began to flesh out the idea of deregulation and stated that “The best the state can do with respect to money is to provide a framework of legal rules within which the people can develop the monetary institutions that suit them best.”(Hayek 1976).
Unfortunately, this did not account for the negative externalities which deregulation caused. The Debt crisis of 1980 where latin America was forced to default on its debts. The Mexican crisis in 1994, the Asian crisis in 1997, the Russian crisis in 1998, the Brazilian crisis in 1999, the Argentine crisis in 2002, etc. [In addition, we had big EMS currency crises in Europe in 1992 and 1993 but their characteristics were different.] Banks, nonbanks and corporations over borrowed, and foreign banks and private investors overlent'(Grips 2014). This was the result of the free market fighting its grip on he world markets.
Similarly, deregulation caused inequality to increase as it became easier for the middle class to manipulate the market for their benefit. As shown in Figure 4 (Oxfam 2011) the more regulation occurred the more unequal America became.
This became the common occurrence of non-regulation by governments and has caused more crisis in the last 10 years than it has in the last 2 centuries. This is due to deregulation of financial markets which made the markets much more lucrative and risk much more worthwhile by banks and investors. Burnham suggests that this is perpetuated by deregulated and globally integrated financial markets replete with new ‘financial instruments’ such as ‘derivatives’ swaps, options, futures not based on the trade in physical products'( Burnham,2010).These have been the reason for the ever increasing risk in our capitalist society.
Although deregulation sought out to make the system more competitive it instead caused local business’s and local company’s to dwindle. This is because of the high barriers to entry the Global market has presented with globalisation. This has therefore created the same problem governments want to fix.
What we need to do is regulate. Before the banks relegate us.
Hayek, F.A. (1976). Choice In Currency: A Way To Stop Inflation. Institute Of Economic Affairs pg22
Burnham, P. (2010). Class, Capital and Crisis: A Returnto Fundamentals. Political Studies review. 8 (1), 27-29.
Hepp, R. (2013). Debt Crisis of the 1980s. Grips. 9 (12), pg 12.
Kuttner, R. (2007). The Bubble Economy. Available: http://prospect.org/article/bubble-economy. Last accessed 18 Nov 2015.