The Invisible Hand #1
by Olivia LaRosa
October 22, 2012
I was raised by a Capitalist-Libertarian-Republican father who persuaded me when I was a teenager that Ayn Rand was a goddess and that if you worked hard you would become prosperous. In short, I used to believe everything that you believe, and supported my beliefs by holding office in the local Republican Party Women’s Auxiliary.
However, it did not take me long, once I entered the adult world, to find out that none of this was true. The Republican Party did not hold the moral high ground anywhere. It started with Watergate. My first Democratic vote was for Jimmy Carter. I voted for Ralph Nader in 2002.
I did not vote for another Republican until the 2006 Presidential election when I cast my ballot for Bob Dole. I knew what I was getting with Bob Dole, and I could handle that. Clinton was just too slick for my taste; merely pretending to hold human rights sacred while approving and supporting legislation that laid the groundwork for the PATRIOT Act, just for starters. The national security apparatus has grown into a monster in the last 40 years.
I was and am a smart person who has always been willing to support any position I take with facts and informed analysis. My son knows this and that is why he has asked me to answer some questions before this election.
If I could accomplish just one thing today, I would like to help a small business owner understand she is not protecting her financial interests by voting for Mitt Romney or anyone else in the Republican Party. The Republican Party only pretends to support small business owners. In reality, the Republicans are the reason that corporations control our US government. Their stated goal is to remove all regulation from business. That may marginally assist a small business, but it leaves the barn door wide open for criminal corporations to steal our resources, pollute our planet, and murder workers and innocent bystanders with impunity.
Republicans and others who seek to limit laws and deregulate industries often rely on a misunderstanding of a quotation by Adam Smith in arguments about how markets and people work together. The article below describes the misunderstanding in some detail. When I have pointed out that their interpretation of this 17th century economist’s words are incorrect, they claim that I am working out of context. Really, it is not me. It is them.
The railroad and oil robber barons supported regulation rather than legislation in the late 1800s, because it is easier to manipulate and avoid regulations than laws.
Transnational corporations have effectively escaped control of any government. Many of these corporations are larger than countries now. Transnational tax gimmicks have resulted in more money being held in tax havens than the annual gross domestic product of the United States and Japan put together.
~Olivia aka Deborah
October 21, 2012, 5:30 pm
Sleight of the ‘Invisible Hand’
By JOHN PAUL ROLLERT
Much has been made of Paul Ryan’s devotion to, and timely disavowal of, Ayn Rand and her work, but little has been said about the Scottish philosopher he and Mitt Romney have cited as the ideological embodiment of what’s at stake in this election. “I think Adam Smith was right,” Romney affirmed in a January debate. “And I’m going to stand and defend capitalism across this country, throughout the campaign.”
Capitalism is a word that Smith never used – the author of “The Wealth of Nations” had been dead for almost 50 years before it entered the language, via Karl Marx – but his most famous expression, “the invisible hand,” is often taken as its proxy. Romney juxtaposes it with what he calls the “supposed informed hand of government.” As he said in a speech on economics at the University of Chicago in March, “When the heavy hand of government replaces the invisible hand of the market, economic freedom is the inevitable victim.”
Heady words, but hardly unusual. Few phrases in Western philosophy have embedded themselves as deeply in the vernacular as Smith’s invisible hand, and no single image has ever so captivated (and occasionally inflamed) the popular mind. This has been the case for a while now – the intellectual historian Emma Rothschild called the 20th century “the epoch of the invisible hand”- but the financial crisis and the federal government’s response have recently made it a cause for celebration and debate.
This development would most likely have surprised Adam Smith. The invisible hand makes only three appearances in his work, all fleeting. Blink, and you will miss them.
The most cited usage is in “The Wealth of Nations,” the foundational text of modern economics, first published in 1776. The invisible hand appears once, several hundred pages into the work during a discussion of trade policy. Mercantilism, then the prevailing school of economic thought, held that the way to secure a nation’s wealth was by implementing rigid protectionist polices. Smith agreed that such polices could strengthen certain sectors of an economy, but he contended that this came at the expense of “the general industry.” If restrictions were lifted, every merchant would pursue the most profitable trade available to him, making the most efficient use of his own time and money. Granted, he would act with an eye only toward his personal “security” and “gain,” but in so doing, he would “render the annual revenue of the society as great as he can.” He would be “led by an invisible hand to promote an end which was not part of his intention,” namely, to benefit society and the broader welfare of its citizens.
“[T]he system works behind the backs of the participants” is how the Nobel Prize-winning economist Kenneth Arrow described this phenomenon. Smith wouldn’t have objected, though what clearly intrigued him was less the enlightened mechanism than the moral paradox. The invisible hand not only works behind the backs of participants, it succeeds despite them.
Consider Smith’s use of the phrase in “The Theory of Moral Sentiments,” the first of his two great works. He describes the landlord who, admiring his fields, consumes in his imagination “the whole harvest that grows upon them.” Fortunately for the poor, the size of a wealthy man’s stomach, if not necessarily his storehouse, is roughly equal to theirs. The rich “only select from the heap what is most precious and agreeable.” The rest they “divide with the poor” such that 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.”
Again, the system yields an outcome that is salutary and humane, but one that stands at odds with the selfish interests of participants. The wealthy, says Smith, spend their days establishing an “economy of greatness,” one founded on “luxury and caprice” and fueled by “the gratification of their own vain and insatiable desires.” Any broader benefit that accrues from their striving is not the consequence of foresight or benevolence, but “in spite of their natural selfishness and rapacity.” They don’t do good, they are led to it.
The moral paradox of the invisible hand often seems lost on those who speak loudest in its favor. Take the stubborn rhetoric of the “jobs creators.” Insofar as it portrays a conspicuous group of people who act with conscious moral purpose, it bears no resemblance to the phenomenon Smith describes. We might as well call this vision of development the “visible hand” of capitalism, for it has the original theory backward. The merchants of Smith’s world busy themselves seeking profit, while the idle rich build monuments to their own self-importance. We can debate the worthiness of either pursuit, but neither activity has the common good as its aim nor, for Smith, does it merit moral acclamation. Wisdom and virtue, he says, are the qualities of the person who is “at all times willing that his own private interest should be sacrificed to the public interest.” Putting our own interests before and above others is nothing special. It is merely being human.
If enthusiasts of the invisible hand often overlook the moral paradox, they don’t fail to appreciate the enlightened mechanism. Individuals, left to their own devices, will engage in commercial activities that ultimately establish a more affluent society than one organized by well-intentioned statesmen. “That’s the American Dream,” Ryan said, embracing this vision in his convention address, “That’s freedom, and I’ll take it any day over the supervision and sanctimony of the central planners.”
For his part, Smith described this state of affairs as “the obvious and simple system of natural liberty,” and he knew that it made for the revolutionary implication of his work. It shifted the way we thought about the relationship between government action and economic growth, making less means more the rebuttable presumption of policy proposals.
What it did not do, however, was void any proposal outright, much less prove that all government activity was counterproductive. Smith held that the sovereign had a role supporting education, building infrastructure and public institutions, and providing security from foreign and domestic threats – initiatives that should be paid for, in part, by a progressive tax code and duties on luxury goods. He even believed the government had a “duty” to protect citizens from “oppression,” the inevitable tendency of the strong to take advantage of the ignorance and necessity of the weak.
In other words, the invisible hand did not solve the problem of politics by making politics altogether unnecessary. “We don’t think government can solve all our problems,” President Obama said in his convention address, “But we don’t think that government is the source of all our problems.” Smith would have appreciated this formulation. For him, whether government should get out of the way in any given matter, economic or otherwise, was a question for considered judgment abetted by scientific inquiry. He offered “The Wealth of Nations” in service of such an inquiry, a two-volume tome he painstakingly revised for years after it was published. Had he known that a single phrase plucked from the dense thicket of ideas would become the first and last word of his philosophy, I suspect he would have made one more revision.
And yet, Smith should have known better than to use an image, even once, that would elevate an operating assumption of his science to an article of blind faith. Before either “The Wealth of Nations” or “The Theory of Moral Sentiments,” Smith used his most famous phrase in “The History of Astronomy,” an essay (published posthumously) in which he observed that, in ancient times, the invisible hand of Jupiter was held responsible for “irregular events” of the heavens – comets, eclipses, meteor showers and the like. As civilization took hold, however, humans expected from the divine a cosmic reflection of their accomplishments: order, coherency, routine. They sought out theories that explained “the whole course of the universe consistent and of a piece,” and to the degree that they fought to preserve the grandest of them all, the system of Ptolemy, Smith said it demonstrated “how easily the learned give up the evidence of their senses to preserve the coherence of ideas in their imagination.”
The invisible hand is similarly beguiling. It claims a propitious pattern for which no one is responsible, even while everyone participates. As such, it absolves us from the conscious burden of building a common world, that work which is otherwise, at least in part, committed to politics.
That sounds nice in theory, but politics is a practical venture, and Smith distrusted those statesmen who confused their work with an exercise in speculative philosophy. Their proposals should be judged not by the delusive lights of the imagination, but by the metrics of science and experience, what President Obama described in the first presidential debate as “math, common sense and our history.”
The president, himself an enthusiast of Smith, was speaking of Governor Romney’s signature policy proposal, a huge tax cut that promises to spur job growth and balance the budget, while protecting the interests of the weakest and most vulnerable. The proposal, he said, fails these metrics. We cannot know what Adam Smith would make of this conclusion, but we can be sure that he would tell his admirers, all of them, that this test, and not the conformity to an abstract idea, is one on which the election should turn.
John Paul Rollert teaches business ethics at the University of Chicago Booth School of Business and leadership at the Harvard Extension School. He is the author of a recent paper on President Obama’s “Empathy Standard” for the Yale Law Journal Online.