Economic essay


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Economic essay

  1. 1. Economic Essay<br />The study of economics is based upon needs and wants of an individual and three factors determine how an economy functions; consuming, producing and the sale of goods and services. The source states that the government is unable to heal the wounds of the economic body. The method to solving any economic issue is in the hands of the producers and consumers. Adam Smith – the father of capitalism whom sits on the right side of the spectrum would support the idea that the producer and consumer control the stability of the economy. However, John Maynard Keynes, an opponent of Adam Smith whom is placed on the left side of the spectrum would not embrace the ideas that the source suggests. He would argue that government intervention is necessary for an economy to recover from a depression. Individuals should embrace this source and ideas of capitalism to a degree because it is possible for government intervention to resolve issues and allow the economy a chance for a full recovery.<br />An ideology that does not involve government intervention and is based on laissez-faire is known as Capitalism. It was created by Adam Smith – the father of Capitalism as a result of this ideology, a metaphor known as the Invisible Hand Theory was developed. He felt that in a society, producers and consumers as individuals should control the economy in which the Invisible Hand Theory states that an individual will pursue their own self-interest, in doing so it will indirectly benefit the community. A common example of this would be a shoemaker would make shoes for a baker (who was good at making bread, but not at shoes). This would be much more productive for an economy opposed to each individual making his/her own bread and shoes. If consumers didn't want shoes, they would demand fewer shoes, and the shoemaker may have to redirect his efforts to pursue self-interest. This theory has proven itself to be successful in an economy; however, it has also been proven there are downfalls to it. October 29th, 1929 is an example of how this theory may be unsuccessful when the Great Crash occurred. The price of stock was artificially high because individuals were using borrowed money from the bank before the recession but as a result the value of stock inflated. The products became expensive and people lost confidence about investing in the economy. No one invested in goods and services or private businesses which led to unemployment for many and businesses were closed down due to the loss of confidence in the economy. This is an example as to why the Invisible Hand Theory may not be the most successful in any economy, the impact of this recession could have been lessened if the government was involved. This source states that in order to have a working economy, it must depend on the producers and consumers however, the Great Depression was a result of the Invisible Hand Theory at work and the recession lasted for years, therefore, the idea of Capitalism should not be completely embraced.<br />John Maynard Keynes suggests another idea that may be able to help the economy. He would reject the idea presented in the source because he felt that laissez-fair would be unsuccessful. Keynes felt that an economy should have government intervention to assist a society become stronger. The idea of Keynesian economics felt that during a depression, the government should spend more money towards social projects and lower taxes so people would have more money to invest in the economy. During economic inflationary times, the government should spend less money, higher taxes, and spend the people’s money towards social projects to lessen the effects of an economic boom. The government would spend more money during inflationary times even if it would result in a temporary deficit. Deficit spending according to Keynes’s theory was essential and radical and eventually, these actions would pump money back into the economy resulting it to become prosperous. Although the idea of the government injecting money into the economy seems like a good idea, the reality of it comes with negative consequences. For example, governments applied Keynesian economics in hopes to encourage consumers to stimulate the economy; however, when citizens received or possessed large amounts of money, they were likely to invest it in a bank instead of the economy. When President Obama took office during the depths of the recession, unemployment was 7.6%. Now, after trillions of dollars of Keynesian-style government spending to stimulate the economy, unemployment stands at 9.7%. Millions of jobs were lost as we simultaneously accumulated trillions of dollars in new debt. If government spends excessive amounts of money using Keynesian Economics, it is possible for a country to go into debt. Keynesian Economics has had both successful and unsuccessful moments but due to previous experiences, it should not be fully embraced due to the difficulty trying to restore the economy.<br />Although, many countries follow various economic systems such as communism or a free market, Canada has a mixed economy which consists of both capitalist and socialist ideologies. A supporter of a mixed economy may only partially accept the ideas presented by the source because of private business and if the economy is suffering, producers and consumers and/or the government are able to make an effort to fix it. The government uses social safety nets which supports individuals who fall on hard times to prevent any recessions from occurring. In a mixed economy an individual may run a private business, pursuing their own self-interest under a small amount of government control such as wage or price controls, taxes, and tariffs. Taxes still apply to every individual in a mixed economy to benefit the public and its services such as public transportation, education and health care. For example, public transportation is beneficial to a society to reduce the amount of pollution, or public education builds up a student’s knowledge about politics and economy allowing them to make decisions about what is right in society. Adam Smith`s theory of the Invisible Hand may be applied in a mixed economy but it allows for government intervention in case an economy starts to downfall. Although, both ideologies contain ideas that may be successful in a society, it has been proven that when using a single theory to run an economy, it may be unsuccessful. However, when both ideologies are combined it creates stability within an economy therefore; the idea of a mixed economy should be embraced.<br />The ideas presented in this source suggest that no government intervention is needed during a time of depression rather; the answer to the problem is the producers and consumers and the course of action they take. However, if the source is not fully embraced the government will control the economy and any mistake that is made within the economy will affect each individual. In order to have a successful economy, a society must embrace this source to an extent and allow an individual to control the outcome. If the economy is on a downfall, it is acceptable for the government to intervene to restore the economy.<br />