Somebody needs to raise the bar. An incredible amount of statements made by politicians of all stripes shouldn't pass the smell test and should be rejected.
That said, I would venture to say that while most people feel comfortable mentioning the idea of "invisible hand," they likely have no sense of the history of this term, nor any good frame in which to reason about it. So, I'd like to at least put something forward that I can build upon.
History:
Adam Smith's "invisible hand" idea was a mind-blower for his time. He wrote about it as early as 1759. While I doubt many readers have ever read any of Smith's works, many readers likely know that the "invisible hand" refers to market forces like "self-interest," "competition" and "supply and demand" which in conjunction allow for a relatively self-regulating free market where people can decide how to make a living. Before that moment, the solution for all this was central planning.
But now, just think back with me to feudal times - the day when people thought the way you make sure all the jobs in society get done from street-sweeping to bread-making to blacksmithing was to assign people to these tasks (roughly) by having children do what their parents did - and this system was to be aided by guilds and such. Else, how would a society make sure that all the jobs get done?
Then along comes Adam Smith. He explains that you don't have to assign everybody a job. All the jobs that need to get done can be handled by a market system where prices fluctuate until the right incentive is there for someone to fill the various jobs from garbage collection to real estate development. So, even though the forces of competition, supply and demand and so forth aren't visible, they take effect nonetheless like a sort of "invisible hand."
What you get in return for matching up jobs in a market is that people get an unprecedented amount of freedom of choice in economic matters. Naturally, people have to contend with the trade-offs and consequences of their economic choices, but new possibilities of freedom get unlocked that are worth pursuing.
For the people of Adam Smith's time, this idea was a total mind-blower that all the work of coordination and assignment could actually be done by relatively free markets. Mind blown! It was a stroke of genius.
In essence, the West went from having no idea that this could be done on a macro level, to realizing that it could be done. Central planning wasn't the only option.
When people complain about "invisible hand" or "Laissez-faire" economics, they should be aware that we are comparing the central planning solution against a more market-driven solution.
Framing:
When I'm asked whether I'm more socialist or more free market leaning, my response is that I'm more for balance of powers.
This was one of the core concepts yielded from the debates surrounding the US form of government. The Constitution is based on a pragmatic view of both human nature and governing bodies - that ambition for power and concentration of power are variables that are significant. They must be taken into account. Those forces must be checked by opposing powers (not just wishful thinking). People's ambitions have to be checked, as does their strength of influence.
I should note that modern science, including evolutionary psychology, has vindicated those views mentioned above, to a large degree. If I have any readers in doubt, I'd love to chat about it. Consider the following sources for that discussion:
- A Conflict of Visions: Ideological Origins of Political Struggles
- The Blank Slate: The Modern Denial of Human Nature
These days, we're used to thinking about political power being checked by a balance of power. Now, one should apply the same principle to economic power. For instance, think of the power wielded by large multi-national corporations - and one will see that the only check available on that kind of power is through the collective action of the people - i.e. government.
Now I can anticipate objections by my libertarian reader who is for the merits of minimal government. That's understandable. I too see merits in getting optimal benefits from the costs of government. However, as a practical matter, government is the power that must balance certain powerful economic actors. If there are any doubts about this, I'd love to discuss it further.
So if one believes in balance of powers, and accepts as given that ambition and greed get out of hand and are inherent in human nature, one should not think that economic powers can be left completely alone to do whatever people want. That's just not consistent. This isn't some kind of leftist trick. It is what it is. Balance of powers brings sanity to the discourse.
The alternative to low-quality discourse is a view that is both skeptical of government regulation in protection of liberties, and pragmatic in the application of balance of power logic applied to the realm of the economy where some (but not any and all) laws and regulations are seen as necessary props to check certain problems.
What we end up with is a new minimum bar for a more sophisticated view of markets and regulation.
This "skeptical but pragmatic" view should be educated by the following problems that come up under economic competition so as to understand why certain powers and problems need to be checked. I have future blog posts coming up that will address some of them:
- The problem of mutually-offsetting, escalating competition
- The problems of risk: temptation to take on too much risk, shifting risks onto others
- The tragedy of the commons
- The free-rider problem
Now, there are also problems we need to appreciate for concentration of power in government and the problems and inefficiencies of government interventions. Communist Russia is a cautionary tale that should be accounted for.
Before I end, I'll mention a couple of my favorite sources:
- Economist Robert H. Frank.
- This book is one of the most profound books out there: Passions Within Reason: The Strategic Role of the Emotions
- Podcast: Econ Talk with Russ Roberts
You can get both Econ Talk and Robert Frank rolled into one since Robert Frank has been a guest on the podcast a couple of times. I found this one to be particularly thought-provoking.
Till next time.
