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19. Free competition and the "invisible hand of the market" in the theory of A. Smith
"Invisible hand" A. Smith called those economic forces that we call supply and demand. The laws of the market will force the entrepreneur to produce not any products, but only those that are needed by buyers, and sell them at the lowest possible price. Only in this case, he will be able to defeat his competitors and get the maximum profit. The entrepreneur does not think at all about the welfare of society, nevertheless, his selfishness benefits everyone, provides goods and services of better quality and at lower prices. That is why Smith demands that man be free to pursue his own profit in economic activity, and this will best promote the public good by means of increasing the wealth of everyone.
"Invisible Hand" can only operate successfully in a highly competitive environment. It helps bring prices down. At the same time, competition regulates the quantity of goods produced and the flow of capital and labor from one industry to another. The mechanism of competition forces the entrepreneur to constantly look for ways to reduce production costs and increase profits by increasing sales.
"Invisible hand" by A. Smith (magic 6-gon) includes:
1. Fluctuating mass and profit rates - those areas of business that are currently produced in a given profit and are achieved by a higher rate of profit and economic resources are poured into it.
2. Market prices for goods, but freely formed under the influence of fluctuations in supply and demand for them.
3. Competition forces all subjects of a market economy to produce only what the market needs.
4. Demand - the most powerful engine. The market economy is such that if there is a demand for its products, it will mobilize all its resources to satisfy this demand.
5. Offer of goods, services. The supply of goods must be sufficient to fully cover demand.
6. Interest rate for loans, which the Central Bank provides to commercial banks, and commercial banks to firms and households. The interest rate for loans is a powerful regulator in the development of a market economy.
As for free competition, then in modern conditions of large-scale and high-tech production, which requires huge costs, it is not profitable and harmful to society. For the emergence of competition, a significant redundancy of both fixed assets and production is necessary, which leads to an increase in costs and the loss of resources spent on unclaimed excess products, and gives rise to crises of overproduction.
Author: Ilyina V.N.
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