“I always assumed …that the writers we were studying were always much smarter than I was. If they were not, why was I wasting my time…studying them? If I saw a mistake in their arguments, I supposed they [the philosophers] saw it too and must have dealt with it, but where? So I looked for their way out, not mine. Sometimes their way out was historical: in their day the question need not be raised; or wouldn’t arise or be fruitfully discussed. Or there was a part of the text I had overlooked, or hadn’t read.”

– John Rawls, “Some Remarks About My Teaching”

What does the great Sergio Leone’s brilliant “Dollars Trilogy” have in common with our idea of the so-called Free Market? Well, for a start the titles are enough to give most Capitalists a run for their money: A Fistful of Dollars, For a Few Dollars More and The Good, the Bad, and the Ugly. A careful look at these wildly entertaining films also reveal what most would agree the common idea of the Free Market brings – a great deal of competition to see who is the last man standing after as many Mexican standoffs as possible; who gets the cash at the end; how many bodies you must climb over to get to your cash heap; how much manipulation, lies and betrayal are necessary to make and keep you top dog; how to make as many enemies as possible; how to achieve a life of constant neurosis and paranoia, and a good deal of other niceties.

But there seems to be some whose idea of the Free Market may sheepishly try to avoid all that is described above. Unless you tell them they get to play Clint Eastwood, as that might change the equation somewhat.

This post will look at the common usages of the term the ‘Free Market’ to show that there is no consistent idea (in fact, no sensible one either) as to what this term means, as it is a free for all catch phrase to sum up an amorphous idea of a genuine misconception.

We will also take a look at the much maligned Scotsman Adam Smith and the crazily abused idea of the ‘Invisible Hand’. It will become apparent that Smith has little to do with what Capitalism and the ‘Free Market’ mean. That Smith was onto something else more subtle, accurate, and profound than the mumbo jumbo churned out through the ideological hijacking he has been sadly subjected to.

As the epigraph from Rawls suggests, this post will try to show in its own way that Smith was a far greater and consistent thinker than many have made him out to be.

To Market, to Market, to Buy a Fat Lie

So what does the hagiographical term ‘Free Market’ (FM) mean. The misuse and abuse of this term has led to so much of the world’s problems today. There are numerous definitions for FM but we will look at a rather all encompassing one.

According to the Wikipedia, the definition of FM includes:

A…market without economic intervention and regulation by government except to regulate against force or fraud. The terminology is used by economists and in popular culture. A free market requires protection of property rights, but no regulation, no subsidization, no single monetary system, and no governmental monopolies. It is the opposite of a controlled market, where the government regulates prices or how property is used

The theory holds that within the ideal free market, property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other's property rights without the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party (such as by government via transfer payments) and they engage in trade simply because they both consent and believe that what they are getting is worth more than or as much as what they give up. Price is the result of buying and selling decisions en masse as described by the law of supply and demand.

Free markets contrast sharply with controlled markets or regulated markets, in which governments directly or indirectly regulate prices or supplies, which according to free market theory causes markets to be less efficient. Where government intervention exists, the market is a mixed economy.

In the marketplace the price of a good or service helps communicate consumer demand to producers and thus directs the allocation of resources toward consumer, as well as investor, satisfaction. In a free market, price is a result of a plethora of voluntary transactions, rather than political decree as in a controlled market. Through free competition between vendors for the provision of products and services, prices tend to decrease, and quality tends to increase. A free market is not to be confused with a perfect market where individuals have perfect information and there is perfect competition.

Free market economics is closely associated with laissez-faire economic philosophy, which advocates approximating this condition in the real world by mostly confining government intervention in economic matters to regulating against force and fraud among market participants. Some free market advocates oppose taxation as well, claiming that the market is more efficient at providing all valuable services of which defense and law are no exception, that such services can be provided without direct taxation and that consent would be the basis of political legitimacy making it a morally consistent system. Anarcho-capitalists, for example, would substitute arbitration agencies and private defense agencies.

In social philosophy, a free market economy is a system for allocating goods within a society: purchasing power mediated by supply and demand within the market determines who gets what and what is produced, rather than the state. Early proponents of a free-market economy in 18th century Europe contrasted it with the medieval, early modern, and mercantilist economies which preceded it.”

This sounds just about right. So what would be a summary of the key ideas here:

1. A FM is one in which there is no governmental intervention “except to regulate against force or fraud”. So no control by governments of any form of economic activity
2. A FM sees to it that the price mechanism operates within the law of demand and supply to ensure people get what they want. Trade is engaged in through consent and gain for everyone results from this
3. Any government intervention means lack of efficiency as opposed to the efficiency provided by the FM
4. The FM ensures the allocation of resources according to consumer satisfaction which is something political interference cannot do. The FM also makes certain that due to competition “between vendors for the provision of products and services, prices tend to decrease, and quality tends to increase”
5. The FM promotes the removal or minimization of taxation. It is also so efficient and brings about so much good that all sectors of a country can be left under the tutelage of FM forces including defence and the law
6. What is not mentioned in the above definition clearly is that many proponents of the FM believe that it is the subset of, if not the main cause for, personal freedom and liberty

Think about these ideas and see how they resonate with you.

And now take a look at what they mean under the scrutiny of common sense:

a. Take a look at (1). If the government is so useless and such a bore to the operation of the FM, why is it needed to “regulate against force or fraud”? If the FM is so effective and useful and powerful, how come it needs government help? For an entity to be able to ensure that the all powerful FM is protected against “force or fraud”, it must be more powerful than the FM in order to be able to so do.

But this is exactly what the FM is trying to avoid, but it needs its nemesis to ensure its survival because a genuine free for all system (which the FM implicitly seems to strive for) would ensure chaos and a cowboy town mentality that is not always conducive to consistent growth and wealth.

So an effective FM it seems always requires a powerful government. It is most unlikely that a powerful government would then sit by quietly and allow the FM to run things without ample kickbacks over and/or under the counter for itself. So (1) is patently absurd.

b. Take a look at (2). Price mechanisms work within the law of demand and supply. There is such a thing as pricing but ‘price mechanism’ is the infantile idea of neo-classical economists who have no idea what the world is about. And what on earth is the ‘law’ of demand and supply (DS)? There is a law of gravity to all intents and purposes, but demand and supply are completely arbitrary.

If demand and supply are a law then why is there always a mismatch between them because of either shortages or excess. The one thing you can be assured of is complete lack of consistency/regularity to this trumped up ‘law’. Pricing is also arbitrary depending on whether these are normal consumer items or luxury brands and goods. But unilateral price adjustments by suppliers and factors that influence them are regarded as interference in perfect market models of the neo-classical economists who claim that if it was not for branding, advertising, marketing, businessmen ascertaining prices, profiteering, people having irregular income flows, why, then you would see a ‘law’ for DS and this strange animal called ‘price mechanism’.

But, the proponents of the FM insist that their idea is different from the silly notion of a ‘perfect market’. But it is just as clear that the FM is based on some weak version of a ‘perfect market’ where apparently you can have the ridiculous situation of an all powerful government who decides to sit on its hands and protect the FM without daring to interfere in it (without considerable gain for itself from the situation).

People never get what they want from the FM because it constantly uses consumerism and all the unpleasantries supposedly avoided by a ‘perfect market’ like human egomania and delusionally driven advertising, marketing, media and banking hype to ensure that you are always dissatisfied with life and what you have. If, heaven forbid, you would actually find satisfaction and peace in life would you really want to be indebted and work for unreasonable bosses to get that X-box or I-pod?

Trade is not engaged for the benefit of everyone. What do these people claiming this know about colonialism and gunboat diplomacy or the so-called ‘free trade’ agreements of today which leave countries, governments and peoples indebted to corporatism and profit mongering?

If there is one New Year resolution for 2010, please recycle all your economic textbooks as they are written by the deluded using a lot of sound and fury signifying nothing.

c. Take a look at (3) and remember that if government interference causes inefficiency then why have the government try to protect the FM. Why not have the FM privatise government and then ensure the framework for the success of the FM. But does that make much sense? Why call it a Government if it has been privatised. In fact, why have any political entities at all, why not just have warring factions of corporations killing and robbing on another to see who survives the competition. (Yes, Leone has a visionary subtext in his “Dollars” films).

But would that really suit the FM? Best to have Government (under its influence and control as far as possible) to ensure that the killing and robbing is done within some form of stability and legitimacy thereby accentuating the ‘Free’ in FM, that is, allowing corporations and Capitalists to do whatever the hell it is they want. What kind of freedom is it if you’re not free to do harm to people around you and not have it legitimized thereby having the best of both worlds.

And how come the FM is more efficient than government? The FM as extolled by Capitalism and driven by the lust for profit has only resulted in massive waste of resources due to destructive competition, devastation to the environment and incalculable human misery. Look at the wastage of money, natural resources and human life that is needed to feed the Capitalistic drive for profits (whether it be the internationally renowned sweated labour of globalization, media hype promotion, inculcation of amorality and immorality, and dumping/destruction of excess goods to create high demand through artificial shortage so that high prices can be extorted).

In short, just look at the current economic and social mess the world is in and ask the proponents of the FM how much more Free Market-ness do they need?

The most remarkable thing is that they even give out a Nobel economics prize to ensure the further spread of economic instability.

d. Take a look at (4). Allocation of resources according to customer satisfaction is not always a good thing. Just think of all the negative products and issues societies have to deal with to realise that pleasing the customer in everything or giving in to unbridled human desire is not what we all need. That’s the kind of thing when advocated ensures the continued existence of laws, prisons, and the security services, not to mention Government -- which FM enthusiasts are supposedly wary of. In fact, it is this attempt to give in to as much as possible to untrammeled human wants that have led to so much of our problems and constant need for media and consumer watchdog agencies, that is, even more forms of monitoring and control (apparently to enhance freedom).

Common sense will show that competition may lead to some form of price decrease (at the expense of the welfare of people and the environment as wage cutting and environment bashing gets top billing), but that hardly correlates to an increase in quality of things. Often it is the case that quality runs short just as prices decrease. Bootleg/’pirated’ editions of things are a good example.

e. As for (5) what results are the unending attempts to avoid and minimize taxation so as to increase profits and satiate the greed of Capitalists/FM proponents. The consumer and the public are then left to carry all tax burdens through goods and services taxes/VATs, higher income taxes, higher interest rates, and/or the tax that comes in the form of inflation which erodes your earnings: just as Capitalists continue to fine tune every form of tax evasion. This has turned out more as an incentive for dishonesty and robbery of the populace than efficiency or effectiveness.

Part of (5) has also been responded to under (c). If defence and the law should be run by private interests then why bother with any government; however, that would result in a situation where no fixed entity with public backing can produce conditions which will allow the private enterprises to make their killings in the market.

f. Then we have (6), an important component of the FM myth. Let’s take a look again as to why this is an illusion. In some cases the only way to ensure the functioning of the FM as Capitalist fantasists have it is to have a powerful government in place. This is precisely why most FM fantasists and hard core Capitalists tend to support fascist regimes. A look at Nazi Germany and fascist Italy confirms the not so subtle role of Capitalists behind these regimes (not to forget global banking cartels owned by gangster bankers/banking mob, a.k.a. banksters).

One glance at the United Corporations of America (UCA) – formerly known as the USA or United States of America – shows how far gone the country is in the hands of Capitalist cabals and banksters (the UC/US Fed being a branch), and how much of the country has been subjected to near fascist control and fear mongering.

And at the end of the day all this so-called freedom of the FM creates a situation that is conducive to the creation of monopolies. These monopolies then grow larger and more powerful and then do their best to shut out all other competitors or gather together to form an oligopoly. All this is at the expense of the rest of society, but that’s the freedom of the FM to do whatever it wants at the expense of anyone whom it perceives stands in the way of profit.

We also need to look at this beast known as the Corporation as the key entity of the FM. If anything, the corporation exists because there is a legal and political framework that emanates from the government. This goes back to the points raised above that ironically the corporations under the auspices of the FM would be non-existent as such without a government to back it up, and a pretty strong one at that in order to protect corporate agendas and profit obsessions.

All this creates a perfect reductio ad absurdum where the FM and their beloved corporations cannot exist unless they put in place what they fear will interfere with their plans most. But as we know, one traditional way round this is for the FM and corporations to have fascist governments (or some form thereof) arise so that they can then have what they think is the best of both worlds: a guarantor of their interests as well as owning the governments it puts into place.

The only loser in all this is the people of a country and the rest of the planet from the shenanigans that arise from such a situation. It’s worth repeating: freedom to the FM and corporations means everything goes to hell except the satisfaction of their profit motive thereby removing the very stability and balance on the planet needed to allow the bad behaviour of the FM and corporations to take place in the first place.

Given the above situation created by the drive for have an apparent FM it is manifest that there is simply no such thing as a Free Market.

QED

It’s in the Way that You Use it

Dear Readers, contrary to popular mythology there is such a thing as a free lunch. It comes from people just being decent and charitable, or altruistic. But there are many who insist that they believe in a FM that is not typical of Capitalism and the negativity that goes with it. The term FM here is used in the most typical and common usage of the term.

Broadly, the main categories of the FM would include:

• The Generic Meaning

• The Capitalist Meaning

• The Right Wing Ideologue Meaning

• The Libertarian Meaning

• The Accurate Meaning

A. The Generic Meaning

This has been covered by the Wikipedia definition delineated above. Essentially it means the unfettered operation of the market through the presumed law of DS and minimal government interference. The absurdity of this definition has been made obvious.

B. The Capitalist Meaning

This would take off from the Generic Meaning but emphasise the right of corporations and businesses (one paragon of how this works is the UC of A) to do what they want, how they want, whenever they want without interference from any form of government, citizenry, non-corporate entities or interest groups, any sense of morality, fairness or human decency. What is right is what greed, selfishness, violence and the profit motive dictates. The exception is a government that is in its corporate controlled form interfering to help corporations/capitalists at the expense of all others.

C. The Right Wing Ideologue Meaning

Using elements from the above, this definition would include that while any form of government interference may be unpleasant, the government ought to somehow ensure its non-interference and allow for the ascendancy of Capitalism, the profit motive and maximum consumer satisfaction. Anything that vaguely opposes this is anathema or smacks of Socialism/Communism or (anything that could possibly be) worse. And state sponsored violence or any form of force instituted by private enterprise is justified if it allows this ‘way of life’ to carry on. Any form of corporate sponsored state violence to support corporate and corporate linked interests, is perfectly normal and should even be extolled. This tends to be consonant with extreme religious and/or racial prejudice. At times certain fanatical religious elements seem to align themselves to this belief or claim that it in turn allows for their zealotry to exist.

D. The Libertarian Meaning

This is usually consistent with the belief in a form of individualism and independence from authority structures that allow for people to do as they please while respecting the rights of others to lead their own way of life. Hence, business models as in certain small business types tend to gravitate towards this interpretation of being economically successful without being driven by monopolists and big businesses that are solely profit driven and which tend to be destructive to communities. There is the belief that the FM offers self regulation as opposed to interference from anyone and that the law of DS takes care of itself.

E. The Accurate Meaning

All of the meanings cited have some form of ideological viewpoint that is projected on the term FM and it always comes out in a way that is skewered and, when pushed to its logical conclusion, inconsistent and contradictory to say the least or has elements that tend to its own undermining and that of the society it operates in. An accurate way of looking at this with minimal distortion in the lens is to realize that the whole of notion of the FM is a fantasy as it is held by most.

All forces of DS are arbitrary. There is no law in economics similar to that of gravity (or as in physics). The idea of imposing man made laws as explanations for human behaviour and motivation is part of the misguided sense of all attempts to mechanistically control human beings who are wholly organic entities.

The space in which commodities are exchanged or are bought and sold can be called ‘the market’. But DS are quite arbitrary. Due to constant mismatching of DS and consumerism and the use of the media to create lust for things there is a constant state of disequilibrium and misallocation of resources. The deluded neo-classicists, of course, then claim that this is due to distortions to the idea of a prefect market (which would allow DS to operate the way it’s meant to!). But it is the silly idea of a ‘perfect market’ that is the distortion of reality or the world as it is.

The realities of the world when open to the arbitrary forces of DS and the profit motive cause the out of sync boom and bust nature of 'economic forces'. There is no FM but arbitrary forces trying to control things to their advantage. This selfishness and greed and amorality which are not only the key to Capitalism but are the empty core of all neo-classical utilitarian principled ideas that revolve around sense satisfaction alone. This is what the market and DS mean.

Left by itself, the FM simply degenerates into monopolies and the quest for dominance, violence and that which is empty of any human value. Greed and profit obsession is expressed through monetary units and status, it has nothing to do with human value which is immeasurable.

Market ‘corrections’ merely mean the unforgiving ruthless forces of selfishness, greed and amorality that ensure the ‘survival of the fittest’ or rather the survival of the most harmful or toxic of entities and activities. This is why the world is largely in the state it is in today. When we say the result of the FM leads to this, it is not the FM per se because the FM as we have seen is a myth. What is meant here are the driving forces of selfishness underlying the so-called ‘FM’ as it exists in our world channeled through its vicious ‘corrective’ and punishing ethos to create a world of endless suffering and environmental desecration.

The term FM has, alas, been nothing more than a place holder for so much that is reprehensible in humanity.

Enter: Adam Smith

Perhaps one of the most misunderstood thinkers of any time has been Adam Smith. What has been done in the name of that man is as shameful as what has been done in the name of Marx. While Marx’s great Capital was partly a response to The Wealth of Nations (WN), he had a much better appreciation of what Smith’s work was about than many after him. Marx insisted that most who promoted Capitalism in Smith’s name had misrepresented what the good Scotsman was saying. And Marx was right on the money.

The many who are FM fantasists and hard core Capitalists often thump WN as if it were holy writ and claim the kernel of their beliefs lie in that tome. To say that the FM, as has been discussed, was proposed by Smith is to genetically modify his ideas into a Frankenstein monster that is in the process of destroying its creators through the economic crisis of our time

It is important to know that prior to writing WN, Smith had written The Theory of Moral Sentiments (TMS). While the former is his best known work, the latter is perhaps his greatest work. Smith was not, thank heavens, an economist. He was a professor of moral philosophy. Think about that: a professor of moral philosophy. Hence, a work entitled TMS.

The key ideas in TMS are worth noting. They are even crucial to a proper understanding of WN. To Smith, human beings have sympathy with their fellow humans as in understanding what joy and pain mean in others because they have experienced it themselves. But there is much more to this. People have a moral conscience and know what is right and wrong. Smith says that no man who is himself at ease can see another on the rack and avoid sympathy with the sufferer’s plight.

But contrary to those who adulterate Smith’s ideas, he clearly believes in Divinity. He regularly refers to the Deity and God in TMS. He even mentions that God looks after the Universe which is benign, and while God’s will is beyond man’s comprehension, man is responsible for doing what is right on earth.

Here is an important passage from TMS, VI.II.49:

The administration of the great system of the universe, however, the care of the universal happiness of all rational and sensible beings, is the business of God and not of man. To man is allotted a much humbler department, but one much more suitable to the weakness of his powers, and to the narrowness of his comprehension; the care of his own happiness, of that of his family, his friends, his country: that he is occupied in contemplating the more sublime, can never be an excuse for his neglecting the more humble department; and he must not expose himself to the charge which Avidius Cassius is said to have brought, perhaps unjustly, against Marcus Antoninus; that while he employed himself in philosophical speculations, and contemplated the prosperity of the universe, he neglected that of the Roman empire. The most sublime speculation of the contemplative philosopher can scarce compensate the neglect of the smallest active duty.

This is one of the clearest indications Smith gives of a moral centre to the universe with God’s Order behind it; where man has his own sphere of responsibility in discharging his duty on earth together with his fellow humans in alignment with what is right. This is the grounded viewpoint of Smith that fills not just TMS but is the basis for WN.

It is clear that Smith believes that there is a difference between self interest and selfishness. He praises the former and denigrates the obvious. In no uncertain terms does Smith condemn unbridled greed, social injustice, anger, hatred and all things associated with negative human attitudes and behaviour.

Self interested man looks after his own welfare and is always trying to achieve his highest good in a decent, fair and reasonable manner; but by doing so he in turn automatically, irrespective as to whether he is conscious of it or not, serves the greater welfare and good of his society.

Lest there still be any doubts as to Smith’s theistic views and the role of providence in his social and economic ideas, these passages from TMS VI.II.44-45 (bold and italics mine) should be of use:

This universal benevolence, how noble and generous soever, can be the source of no solid happiness to any man who is not thoroughly convinced that all the inhabitants of the universe, the meanest as well as the greatest, are under the immediate care and protection of that great, benevolent, and all-wise Being, who directs all the movements of nature; and who is determined, by his own unalterable perfections, to maintain in it, at all times, the greatest possible quantity of happiness. To this universal benevolence, on the contrary, the very suspicion of a fatherless world, must be the most melancholy of all reflections; from the thought that all the unknown regions of infinite and incomprehensible space may be filled with nothing but endless misery and wretchedness. All the splendour of the highest prosperity can never enlighten the gloom with which so dreadful an idea must necessarily over-shadow the imagination; nor, in a wise and virtuous man, can all the sorrow of the most afflicting adversity ever dry up the joy which necessarily springs from the habitual and thorough conviction of the truth of the contrary system.

Smith goes on to further emphasise this view in TMS II.II.19:

In every part of the universe we observe means adjusted with the nicest artifice to the ends which they are intended to produce, and admire how everything is contrived for advancing the two great purposes of nature, the support of the individual and the propagation of the species…[and studying this leads us to admire] the wisdom of man, which in reality is the wisdom of God.

This pursuance of self interest is expected of man, that is his destiny to the way he leads his life on earth but this in turn seems to align his activity to the moral centre of the universe or God’s will. Smith explains this by trying to account for the way things tend to naturally fall into place through a sense of balance as in laws of nature. So behaving in the right manner for oneself which inadvertently or otherwise benefit others, tends to be in line with the natural moral law of the Universe. Smith uses the corollary of showing that if a person does not look after his own welfare and his highest good as in trying to be a responsible and reasonable member in an economy or society he is not looked upon favourably as he may not doing what is right.

Smith does believe in altruism but he prefers to justify it via a grounded pragmatic approach in which people do not have to be motivated to do good for its own sake. People would be more easily swayed to be good citizens when they realize that helping themselves and a sense of self reliance is how they best serve society, and that in turn creates a society that best serves their own interest.

When you now turn to WN written after the bedrock of Smith’s ideas had been established in TMS, his economic opus starts to make a lot more sense. WN in itself is a sprawling work with such variety of observations in it that it is easy to take any passage out of context and say this supports a general view of the world based on a peculiar view of Smith’s.

But what can hardly be doubted is that while Smith reiterates man’s drive for self interest, he contrasts it to the negative effects of selfishness repeatedly throughout the WN. Smith clearly condemns those who tend towards greed and exploitation, and insists on people being treated decently and fairly. He states how grabby monopolists try to undermine the interests of all others as in WN Book I.11.264 (bold and italics mine):

The interest of the dealers, however, in any particular branch of trade or manufactures,is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

The passage speaks for itself despite the attempts of the ignorant and willful obfuscationists to present Smith as a creature from their own black lagoon.

Furthermore, in what may be one of the most memorable passages in WN, Smith describes the ghastly system of division of labour in a pin making industry. While there seems some form of efficiency in this mechanization of human beings as cogs in an industry, the dehumanization of the process is duly noted by Smith. No doubt a great deal of mechanical productivity ensues in a way, but the human cost of this so-called productivity is questioned.

While Marx and Engels went the extra miles and were more impassioned and dramatic in their portraiture of human exploitation and suffering during the industrial boom of their time, it is hard to deny that Smith’s insistence on human decency in economic growth may have urged them to outdo him in what was wrong with Capitalism.

The humane aspect of Smith is something hardcore capitalists hardly mention if they are even aware of it. After considering the moral sentiments in his work, it becomes clear that Smith does not support the belief by FM fantasists and hard core capitalists that he is their guru.

We will finally ‘put paid’ to the false claims of Smith being the promoter of the FM and Capitalism in what follows next.

That Invisible Thingamajig

Perhaps a key weapon of FM fantasists and hardcore capitalists has been the misuse and abuse of arguably the most famous term in economics: the “invisible hand”. It is an understatement to say that lots have been said and written about it. But so much of it has been to fit ideological obsessions of so many that an actual close look at what Smith was saying reveals something quite different altogether.

There are many takes on the Invisible Hand (IH). Four main types of interpretations will be looked at. The generic meaning of the IH is what is most cherished by the hard core fantasists: that the IH shows that an unregulated market, (yes, baby, the FM) in which there is minimal or non-interference from anyone (especially governments) provides a system of automatic equilibrium and matching of DS which not only satisfies everyone but is for the highest benefit of all with the greatest wealth creation possible.

And anytime anyone says “FM-Capitalism good, all else bad”: they follow it up with the chant “Adam Smith-IH”! When you mention the social consequences of Capitalism, the response is “don’t be a communist/socialist”, ‘greed is good’, human cost etc are just ‘externalities’. And then to round it up again, the all conclusive bang on the head or bullet between the eyes: “Adam Smith-IH”! -- and they blow the smoke from their pistols.

Sadly, this pathetic trite falsehood of what Smith meant with the IH has been handed down generations via irresponsible economic instructors to hapless students. Despite that, there have been a number of useful contributions as to what the IH is supposed to mean. But there are three other interpretations which are quite interesting and deserve closer notice.

For the record, the IH in Smith appears only thrice in his works first in The History of Astronomy (HA), next in TMS and finally, in WN. These days, there seems to be a growing trend in economists trying to distance themselves from overt FM fanaticism and capitalist trumpery. So the current view among some economists seems to be that Smith’s use of the IH is more a passing phenomena that is interesting at best, or a baubley trinket at worst.

On to the three interpretations of which Gavin Kennedy’s Adam Smith and the Invisible Hand: From Metaphor to Myth sits happily in the extremity of its claims that the IH, if not just an example of Smith’s wry humour, is but a random term given undue attention. Kennedy starts off promisingly on how the IH is merely a metaphor and shows that it is quite possible that Smith only intended the term to emphasise a system that operates well on its own without interference including any invisible assistance emanating from a mystical or religious source.

Kennedy almost pulls off his escapade except that claiming the IH is pure metaphor for the obvious actions of self regulating human behaviour does not quite work (as will examined later); and that he forgets, after admitting the distinction, that there is a clear difference for Smith between self interest and selfishness.

There is the even more interesting reply to Kennedy by Daniel Klein In Adam Smith’s Invisible Hands: Comment on Gavin Kennedy. He prefers to see the “mystery” in Smith and not give in to the prosaic justifications of Kennedy. But Klein believes that the IH is more to do with explaining the self regulating, cooperative activity that takes place between people and which occurs naturally when tending to one’s mutual interests.

Klein thinks that Smith’s ideas take place within a spontaneous order of natural liberty that is unknowable in its particulars (part of the delectable mystery). He insists that teachers of economics make clear to students the wonder to be found within economic principles (while implicitly making clear that there is no Divine Order behind any of this). We will look at this closer later.

Klein then becomes like Kennedy in misreading Smith by stating that the IH in TMS is “a terrible muddle”. He strangely goes on to say that the IH occurrence in WN is less muddled but “not without its mysteries”. Neither is he sure if the IH is “a tag for the comparative merit of freedom”.

The only mystery here is how muddled economists are on what Smith said and in particular what was meant by the IH.

But the most fascinating piece is by Paul Oslington called Divine Action, Providence and Adam Smith’s Invisible Hand . After having myself subscribed to ideas as absurd as what has generally been said of Smith, a rethink was caused by Oslington’s insightful view.

Osilington starts off with how Isaac Newton’s ideas affected Smith who even wrote his HA due to this influence. Newton, perhaps more than Einstein, believed that God does not play dice with the universe and that providence allowed for natural laws to keep the universe in order. But irregular events in the universe were also taken care of by special providence in that it allowed for Divine adjustments to take place and keep the natural order of things. It is this aspect of special providence that is said to have been adopted by Smith.

In his HA Smith mentions how the regularity of natural events like the sun rising and setting is hardly questioned by men during early polytheistic times, but only irregular events are noted like meteor sightings. The IH of Jupiter (king of the Roman gods) was not, says Smith, seen as the influence of regular events (as they were taken for granted); but some otherworldly influence comes into play in order to explain irregular events (e.g., eclipses).

To Oslington what this shows is that Smith was developing an idea to explain how man comes to understand that all events, irregular or otherwise in the cosmos, have divine order attached to it. This Smith then goes on to develop more fully in his later works.

In TMS, Smith talks about how a rich landowner cannot hoard everything he has for himself without ensuring that those who serve him have enough to live on as well, so that they can go on serving him. This leads to the rich man sharing, led by the IH, what he has to ensure everyone gains something, so that despite himself, he has helped the rest of society.

Oslington explains it well as:

The hand here is working against the rapacity of the rich, levelling out consumption, and maintaining the stability of the system. Smith understands that the stability [of] a market economy depends on a modicum of justice and not too obscenely unequal a distribution of consumption. This is why the hand intervening to restrain the consumption of the rich serves to maintain the stability of the market system. In Smith’s providential scheme it is special providence, balancing the general providential force of self interest in markets. (p 9).

But to me, the passage below in TMS is central to understanding Smith and his IH and how it is meant to be understood in its famous occurrence in WN. Here is the passage almost in full and in context -- part IV Section 1 paragraphs 10-11 (bold and italics are mine):

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.

IV.I.11

The same principle, the same love of system, the same regard to the beauty of order, of art and contrivance, frequently serves to recommend those institutions which tend to promote the public welfare. When a patriot exerts himself for the improvement of any part of the public police, his conduct does not always arise from pure sympathy with the happiness of those who are to reap the benefit of it. It is not commonly from a fellow-feeling with carriers and waggoners that a public-spirited man encourages the mending of high roads. When the legislature establishes premiums and other encouragements to advance the linen or woollen manufactures, its conduct seldom proceeds from pure sympathy with the wearer of cheap or fine cloth, and much less from that with the manufacturer or merchant. The perfection of police, the extension of trade and manufactures, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions. All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end. From a certain spirit of system, however, from a certain love of art and contrivance, we sometimes seem to value the means more than the end, and to be eager to promote the happiness of our fellow-creatures, rather from a view to perfect and improve a certain beautiful and orderly system, than from any immediate sense or feeling of what they either suffer or enjoy. There have been men of the greatest public spirit, who have shown themselves in other respects not very sensible to the feelings of humanity. And on the contrary, there have been men of the greatest humanity, who seem to have been entirely devoid of public spirit. Every man may find in the circle of his acquaintance instances both of the one kind and the other. Who had ever less humanity, or more public spirit, than the celebrated legislator of Muscovy? The social and well-natured James the First of Great Britain seems, on the contrary, to have had scarce any passion, either for the glory or the interest of his country. Would you awaken the industry of the man who seems almost dead to ambition, it will often be to no purpose to describe to him the happiness of the rich and the great; to tell him that they are generally sheltered from the sun and the rain, that they are seldom hungry, that they are seldom cold, and that they are rarely exposed to weariness, or to want of any kind. The most eloquent exhortation of this kind will have little effect upon him. If you would hope to succeed, you must describe to him the conveniency and arrangement of the different apartments in their palaces; you must explain to him the propriety of their equipages, and point out to him the number, the order, and the different offices of all their attendants. If any thing is capable of making impression upon him, this will. Yet all these things tend only to keep off the sun and the rain, to save them from hunger and cold, from want and weariness. In the same manner, if you would implant public virtue in the breast of him who seems heedless of the interest of his country, it will often be to no purpose to tell him, what superior advantages the subjects of a well-governed state enjoy; that they are better lodged, that they are better clothed, that they are better fed. These considerations will commonly make no great impression. You will be more likely to persuade, if you describe the great system of public police which procures these advantages, if you explain the connexions and dependencies of its several parts, their mutual subordination to one another, and their general subserviency to the happiness of the society; if you show how this system might be introduced into his own country, what it is that hinders it from taking place there at present, how those obstructions might be removed, and all the several wheels of the machine of government be made to move with more harmony and smoothness, without grating upon one another, or mutually retarding one another's motions. It is scarce possible that a man should listen to a discourse of this kind, and not feel himself animated to some degree of public spirit. He will, at least for the moment, feel some desire to remove those obstructions, and to put into motion so beautiful and so orderly a machine. Nothing tends so much to promote public spirit as the study of politics, of the several systems of civil government, their advantages and disadvantages, of the constitution of our own country, its situation, and interest with regard to foreign nations, its commerce, its defence, the disadvantages it labours under, the dangers to which it may be exposed, how to remove the one, and how to guard against the other. Upon this account political disquisitions, if just, and reasonable, and practicable, are of all the works of speculation the most useful. Even the weakest and the worst of them are not altogether without their utility. They serve at least to animate the public passions of men, and rouse them to seek out the means of promoting the happiness of the society.