invisible hand-Greece

Economies around world grow, decay and stagnate throughout the time like eco systems. Macro economic theorists and practitioners study why certain economies grow and some ruin. Adam Smith developed his theories on capitalism, Karl Marx devoted his life in explaining destructive forces inbuilt in capitalism, modern day economists like Keynes supported fiscal activism, and Freidman popularized monetarism. Despite these theories standing as shield against severe crisis, we are seeing economic crisis happening repeatedly. Each crisis is succeeded by a new explanation from new wave of economists. My question is can we indentify the factors that are underlying the crisis. My answer is yes. So how can we achieve this? An economy whose growth accompanies with minimum stress prevails and anything else is bound to fail.


In this article, I would like to think about some economies that have risen into stronger economies like US, UK, Japan, Germany, some economies that have fallen from top like soviet bloc, some Latin American countries and some struggle to survive like Pakistan, Zimbabwe and some African nations.

Civilizations have thrived and destroyed in last two millenniums. We have horde of historians describing rise and fall of Roman Empire, Persian Empire, Chinese civilization, Hindu kingdoms, British Empire, Spanish Empire and so on. As Tolstoy mentioned, “all happy families are alike and each unhappy family is unlike in its own way” the story of rise of all empires is same but fall is different in its own way. Every civilization starts small. Depending on the strength of the people from the civilization, it will start growing. This growth is constantly under check from opposing forces. These forces can be like Barbarians for Roman civilization, Muslim invasions in India, Mongols invasion in China etc. In Modern days, we do not see Empires but Countries, no monarchs but elected or self-appointed leaders to govern. These leaders can safely govern their kingdoms without any fear from barbarian invasions. Therefore, some countries in Europe and Japan have preferred to outsource their defense needs. If so what is the balancing force that ensures each country allocate capital and resources efficiently lest it will ensure its ruin. This force I call as Adam Smith’s invisible hand. This invisible hand takes many forms, activist investor who will punish financially mismanaged countries by limiting its access to capital markets, active public activist who will purge system of mismanagement and so on. Invisible hand is absent most of the time, will manifest itself when system attains deep disequilibrium. So how do we know when system has attained disequilibrium? How long system can remain in disequilibrium. Markets can remain in disequilibrium for longer time than we can ever imagine.



Greece: Greece is a Mediterranean country with great history. This country produced historians like Aristotle and leaders like Alexander. In modern days it has joined European union as a member country by subordinating its currency Drachma to Euro. In return, it enjoyed superior access to global capital markets. This wonderful gift made its politicians to become lax towards fiscal policy. Consequently, country became deeply indebted. As world, growth is increasing so Greece fiscal expenditure is increasing. This expenditure did not help towards developing growth rate of the nation. Therefore, invisible hand turned up in the form of active investors and brought the nation to its waking state.