Thesis Statement
In this paper we propose to deliberate on economic
hypotheses. We shall briefly touch upon the history
and development of individual hypothesis. Also
we shall dilate on interpretation and current
applicability of these. We hope to enlighten the
reader on this subject/topic.
Analysis
There are various economic hypotheses developed
over time. Some have been rejected because of
lack of beneficial results accruing by following
these. Others have stood the test of time and
have been widely adopted.
Privatization.
One such hypothesis is privatization. It is the
current buzzword and catchphrase. Ailing, ageing
railways? No problem, just privatize. Investment
needed for the telecom industry? No problem, just
privatize. NASA’s escalating costs? No problem,
just privatize. And in future, war on terror?
No problem, just privatize. It is said to be ‘one
cure treats all’ situation. It is touted
as the panacea for all ills. The arguments cited
in support and as justification for this are better
management and greater efficiency. It is also
argued that competition that results in the wake
of privatization also contributes to the improvements.
Yet another factor is the initiative and enterprise
which is given full opportunity rather than being
stifled in state owned or ’crown’
corporations.
There is no doubt that, everything remaining the
same (which they seldom do in teal life situations),
and even otherwise, privatization has more safeguards
and ability to focus on the achievement of economic
goals. This however is not to be taken as a license
for over indulgence in any and every situation.
In third word countries particularly, smooth and
efficiently run businesses are sold off to private
hands for a song for a ‘consideration’.
Nothing is kosher about such deals. Everyone makes
money to the detriment of the consumer and ultimately
the nation suffers economic losses. All this is
done in the name of privatization.
In the case of united states, which is the epitome
of privatization the individual spirit of ambition,
adventure and pursuit (often blind) of wealth
has worked very well indeed. To a lesser extent
this is true for Western Europe as well. It has,
at best, been a mixed blessing for countries of
the third world for reasons mentioned above. Family
silver is old for a pittance there through underhand
deals. It follows from the above that what is
good for the goose is not necessarily good for
the gander. If a lesson can be drawn it is that
crown corporations need not be privatized if they
are being run efficiently. Such corporations are
not necessarily a safe heaven for inefficient
workers or over employed or mismanaged. Judicious
assessment be carried out in individual cases/proposals
of privatization.
Free Market Mechanism.
This hypothesis assumes that the market knows
best. Privatization in fact is an offshoot of
the free market economic theory. The word capitalism
seems to have given way to the phrase ‘free
market economic system’. It is the opposite
of centrally planned economies the best example
of which was, and still is, the former Soviet
Union and the present day Russia. After the break
up of soviet Union the socialist economies of
the East European states, which lent political
support and in turn were recipient of economic
and military aid from the Soviet Union, also collapsed.
For the present the free market system is the
only success story and model. It is assumed that
under this system all resources are allocated
by the market. Only those goods would be produced
which the market wants, irrespective of whether
these goods are for the greater good of the society.
The assumption here is that food and education
would get automatic preference over the pursuit
of sinful activities and the resources would be
diverted to the noble causes. It is further assumed
that the market mechanism would weed out the inefficient
and only the best or the fittest would survive.
The rest have to watch out for themselves. If
they get crushed under the demands of the system
so be it. Safeguards have been built into this
pure theory. For instance the United States protects
its textile and steel industries by imposing quotas
on textile imports and applying dumping laws on
the steel imports. So much for the free market
theory! By and large this system has withered
the Great Depression, several stock exchange crashes
and the recent corporate scandals. It definitely
has very strong arguments and historical evidence
to support it.
Global Warming.
One hypothesis which has recent origins is global
warming. According to this hypothesis the rich
nations, United States, Western Europe and Japan
are causing environmental pollution but do not
own it. They point to Kyoto to prove their point.
This phenomenon is normally thought of as an environmental
problem with social and political connotations.
However it has an economic perspective as well.
Western countries are the perpetrators of this
growing catastrophe. (Global warming 2001)
Bangladesh is on the receiving end of the extreme
weather which ruins its economy. In pure economic
terms are the factor of production and consumption
that have wrecked this havoc greater in value
than the factors of production and consumption
that have been destroyed. And is so can a case
be made out for economic compensation. And what
about the aggregate economic loss of the world.
Which economic forum will allocate the share of
loss to those responsible and by what formula?
Such economic dilemmas will assume greater significance
in years to come.
Selfish Hypothesis.
This hypothesis is rooted I the belief that self-interest
is the motive of human action. Adam Smith made
generalization about wealth from the point of
view of selfishness and not from the point of
view of wealth. He regards men as being naturally
selfish and as pursuing wealth for sordid objects,
and for the narrowest
personal pleasures.
Though this hypothesis may sound to be harsh on
men it nevertheless comes quite close to truth
proving the adage that truth is always bitter.
Though it must be said that his views were conditioned
by contemporary thinking and the environment in
which he was brought up and educated. Some say
this view attributed to Adam smith is based on
misconception. (Self-Interest before Adam Smith)
Outsourcing.
Rapid and widespread resorting to outsourcing
is a recent phenomenon. This hypothesis is based
on the concept of specialization and of diversion
and deflection of economic activity to where wages
are competitive. This truism is borne by the massive
outsourcing of software development and data processing
from the United States and Western Europe to India.
Stock market is the barometer of a country’s
economic well being. This hypothesis is largely
true with certain exceptions. The economy o the
country may not warrant a collapse but the unstable
political climate within and without a particular
country may see the stock market crash inspite
of the overall economy doing well.
Supply and Demand.
This is the most elementary and classic hypothesis
of economics. This hypothesis is summarized in
the following three conditions:
I. 1.When, at the price ruling, demand exceeds
supply, the price tends to rise. Conversely when
supply exceeds demand the price tends to fall.
II. 2.A rise in price tends, sooner or later,
to decrease demand and to increase supply. Conversely
a fall in price tends, sooner or later, to increase
demand and to decrease supply.
I3.II 3. Price tends to the level at which demand
is equal to supply.
Division of labor.
This hypothesis argues that the whole task if
broken in component parts with each part to be
made repetitive (i.e. to be performed by one individual)
will yield higher production. This is largely
true albeit it introduces monotony and reduces
man to the status of a robot thereby losing his
identity, individuality and ultimately his interest.
Indifference Curve. According to this hypothesisan
in indifference curve is a graph showing combinations
of two goods to which a consumer or a firm is
indifferent. There is no preference for one combination
over the other. They are used to analyse the choices
of economic agents. If a consumer is equally satisfied
with say one loaf of bread and two pieces of meat
balls or conversely with twoof bread and one meat
ball then that person would lie on the same indifference
curve. The purpose of the theory was to analyze
economic choices based upon preferences, which
can be observed, rather than the older concept
of utility which suffers from the disadvantage
that it cannot be objectively measured.
Diminishing returns.
According to this theory, developed by the economist
Malthus, population growth would force incomes
down to subsistence levels. When a fixed input(land)
was combined in production with a variable input
(labor), using a given technology, increasing
the quantity of variable input would eventually
diminish the variable input. After two centuries
his forecast has not come true because the population
has multiplied many times but the incomes have
not diminished. Better technology has saved the
day, it seems.
Diminishing utility.
This concept explains that utility of a product
or service diminishes with each additional unit
consumed until no further benefit is perceived,
within a given time frame. After the last unit
of consumption, the utility can turn negative.
This has been proved to be a true hypothesis.
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