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The invisible hand

A new academic year entails new challenges and opportunities. In the creation of this new issue I have certainly met mine. First I would like to thank Dovile Venskutonyte, who dedicated much of her soul and heart into last years issues of Rostra, and continues to dedicate some of her time in helping me. Together with all of the lovely new editors that have joined the comity this year I look forward to be affected positively by the opportunities presented to us and meet our challenges head on.

One of my favourite courses during the second year of my Bachelors in Economics has been International Trade. I was struck by one of the stories in the book and it has been in the back of my mind ever since. The book by Krugman and Obstfeld illustrates a setting in the US where a local content requirement had been imposed. This requirement basically states that a certain part of a good had to be manufactured domestically. One of the industries this requirement had effected was that of the manufacturing of buses. At first this caused the buses to be poorly designed and badly made, thus few people thought that they could be exported to western countries any time soon. This changed when a group of Hungarian investors found a loophole in the local content requirement laws. The laws required 51 percent of the buses to be to be built domestically. The group of Hungarians realised that the buses could be better and cheaper if only 51 percent was made in the U.S. and 49 percent was created in eastern european countries. They set up two locations, one in Hungary producing the shells of the buses and an assembly operation in Georgia. American axles and tires were shipped to Hungary where they were put onto the bus shells; these were then shipped back to the U.S. where American engineers completed the production. Through these steps a perfectly legal bus was made that was cheaper and more efficient than the buses that were previously made. For me this piece of history is a perfect example of “the invisible hand” illustrated by Adam Smith in his book “The wealth of nations”. When regulations are imposed the agents in the economy will always strive for the most efficient outcome. So that they can earn the profits.

The message the course conveys is that our governments should strive for free trade and lift trade sanctions. According to the theories this not only raises our welfare but also that of our partners. The events that have transpired while we were enjoying our holidays have been quite adverse to these fundaments of trade theory to say the very least. The growing unrest in Ukraine has lead the EU, the USA, Canada and Australia to impose strong trade sanctions on Russia and vice versa. Trade wars are becoming the alternative to real wars with boots on the ground, when diplomatic alternatives are no longer viable. In my eyes this development is one we should be avoided at all cost as it has never been proven to truly resolve disputes and could lead to inefficiencies on the long term. The solution to international disputes, when military wars and trade wars are out of the question, are not easily found and that is perhaps why the current economic superpowers prefer impose sanctions than search for alternatives. Having said that the UK has found a way to put pressure on the Russian government without harming the economic efficiencies to much. They have blocked the access of the Russian elite to capital market in London, a topic nicely illustrated in this issue.

Much like the invisible hand has changed industries and companies drastically trough centuries, the time has now come for Rostra to be influenced by the invisible hand. As much as one likes to believe that printed magazines add a certain amount of authority, the time has also come for Rostra to adapt. That is, the Rostra will be transitioning to a website in early January, and the signs so far have made me feel very positive. I consider this transition to be a step forward rather than a step back and look forward to offering you, the reader, increasingly diverse and dynamic content.


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