The Invisible Backhand

In his masterpiece The Wealth of Nations, Adam Smith explains and describes many different economic theories. One theory, and arguably his most famous, is known as the Invisible Hand Theory. This is the idea that in a free market society, everything will balance out on its own. For instance a producer will produce only the amount of goods consumers are willing to consume. The alternative idea is that the government will set a number of how much a producer must/can produce. This idea will cause either a shortage or an excess of the good.

The Invisible Hand can be applied to many situations. The stock market is another, more raw, and easily track-able example of where the invisible hand can be applied. According to performance of the industry / company / country / sales / accounting / etc, stock prices vary. For many years, the stock market was being artificially inflated, causing the market to seem to be striving. The Invisible Hand, as Smith described it, is constantly trying to keep things at “equilibrium point”. An inflated market obliviously means that the numbers are above the equilibrium point.

So, all of this introduction for what?

All of this present stock market fluctuation is due to the markets trying to find the balance. It is nearly impossible for any market to be at a balance point because of the many calculations that have to be considered. Nearly everyone has noticed that the Dow Jones has lost over 50% of its points from its all time high of about 14,000. When the market began to fall, a snowball effect took place.

I believe the snowball effect brought the market below the equilibrium point. Many economists believe that the markets will keep tumbling through 2009, but I believe this summer we will begin to see a slight recovery. With this recovery there will be an incline in gas prices as well. But as of right now, we are in a deflated stage. We are being kept artificially below the balance from things such as bailouts and other governmental decisions. This snowball effect will cause a huge loss on money for many corporations, it will slow down growth and development, and it will ruin many retirement portfolios. There will be a recovery as long as free markets will be able to take place.