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Term paper on Economic Hypotheses

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Term paper on Economic Hypotheses

Post  PapersQueen on Sat Jan 23, 2010 7:42 am

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.

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.

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)

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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