The (False) Myth of the Invisible Hand

 

 

The concept of the “invisible hand” of the market is one of the all-time misunderstood concepts of both our era and economics in general. The idea, so simply put by Milton Friedman — one of the high priests of economics — is that individuals, acting for their own self interest, bring about the social benefit without having intended to do so.

Milton is wrong. Not just about the general point but also about who benefits from the invisible hand –Milton asserts its customers but Smith describes the general welfare. Milton’s myopic (mis/dis)interpretation pervades common understanding of economics; and it justifies all the selfish impulses of individuals; as well as that ultimate self-collective expression: corporations. Again: this is NOT what Adam Smith said. To see what he meant, let’s go to the source: An Inquiry into the Nature and Causes of the Wealth of Nations.

The invisible hand is mentioned in Book IV, chapter II (the only place in this 1000+-page tome where this phenomenon is ever mentioned). The chapter is entitled, “Of Restraints Upon The Importation From Foreign Countries of Such Goods As Can Be Produced At Home.” The passage reads as follows:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

In this chapter, Smith is discussing the preference for one’s domestic industry over that of foreign industry in so far as there is a comparative advantage in the production of goods and services domestically, vis-à-vis the value of those goods and services. In other words, holding both cost and value as constant, if goods at home can be produced as advantageously – at least – as they can be produced overseas, then the capitalist will produce at home. The “invisible hand” here is, in short, the restraining force of economic patriotism: concern for his/her fellow countrymen/nation. This is the only “invisible hand” Smith ever mentions.

Not only is this original meaning entirely divorced from contemporary economics, it is also paradoxical. On the one hand, Smith argues that capitalists do not intend to promote the public interest but only their own gain; on the other hand, Smith explicitly states that capitalists simultaneously support domestic industry by preferring it in so far as it may be of the greatest value to their own society, by increasing the annual revenue of it, i.e. the wealth of nations. Therefore, capitalists are, indeed, intending to promote social welfare – they are actively engaged in it – by preferring domestic labor to that of foreign labor. It seems as if Smith himself had some trouble reconciling these seemingly contradictory ends or articulating this antagonism in satisfactory ways.

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What does this mean, exactly? Why is it significant? Starting with the first question: it means that contemporary Economics gets the meaning of the invisible hand wrong. The discipline, like Milton, confuses it with the forces of supply and demand and, even here, Milton oversimplifies to the point of caricature. Moreover, and more importantly, if these experts – the priesthood of the religion of economic capitalism – get such a simple idea like the “invisible hand” wrong – what else have they gotten wrong? Which segues into the second question of significance.

Why this is relevant can be seen globally and domestically. U.S. companies, like Apple, more often than not have their products manufactured and assembled by foreign labor in foreign countries. Not because it is more efficient but because foreign labor can be exploited, and this means even greater profits – a practice known as “outsourcing.” This is because foreign labor is not paid the wages to which U.S. labor has grown accustomed; is not protected by labor laws that have been won by unions and activists; and it works in conditions that create misery and which frequently lead to the mass deaths (from exhaustion, to factory fires and collapses, and even suicides) of workers.

For domestic labor markets, U.S. workers lose their benefits, pensions, raises, or in some cases: their jobs – this is the practice of “downsizing.” Similarly, those workers who remain in their jobs are given extra work, without raises, often with work hours that increasingly encroach into their personal lives, exhausting them to the point where civic engagement or family rearing become evermore-difficult activities for which to devote time (or afford). All this amidst a rate of inflation that outpaces real wage growth and living standards for the majority of U.S. citizens.

Why this matters, in short, is that mis-/disinformed ideas about what the invisible hand is has profound and detrimental effects on society (U.S. society in this example). According to Smith, outsourcing would – and should – not occur because capitalists would be concerned with their fellow countrymen to the point that they would restrain their greed: for this is the true invisible hand. However, this notion is not only misunderstood it is actively violated – this is how policies such as NAFTA and other “trade agreements” (although, they are more accurately designated as “investors’ rights” agreements) get codified into law, contradicting capitalist notions such as the “invisible hand.” Yet, the current economic system continues to use the language of Smith in confusing and deceitful ways.

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What is often referred to as a capitalist economic system is in reality not that at all. Many concepts, like the “invisible hand,” are misinformed and misapplied; as such they do not describe the capitalist system envisioned by Adam Smith. Smith’s capitalism was concerned with ethical behavior, labor conditions, public education and healthcare, the plight of widows and orphans, tempering the consolidation of power and money of capitalist and investor classes, etc. – this should come as little surprise given he was an ethicist and not an economist.

Contemporary economics is not concerned with social justice, income and wealth inequality, or any of the other “negative externalities,” like pollution, that its actors create; it is a system concerned only with the rapacious accumulation of money (primarily) by the richest within “capitalist-economic” society: it is an ideological cancer, rationalizing the leeching of resources away from the social body, weakening its host to the point of destruction. A system that diverts most of the prosperity of a society to a handful of actors in the financial, investment, and real estate (FIRE) sectors – as evinced by growing income and wealth inequality, the increase in poverty and food insecurity, declining wages despite increasing productivity, and higher costs of living; local, state, and national budget shortfalls, decrease funding for social welfare programs, and an ever increasing military budget as well as aggressive foreign interventionist posture – is not sustainable.

The U.S. is fast approaching a day of reckoning. And this is largely due to the fact that it abides by an economic system divorced from the one it professes. It uses the language of that economics to both rationalize its own parasitic behavior and deceive the victims of it so that they may not properly identify the problems of such a system and correct for them. While there are many predicaments with the current economic system in terms of fidelity to theoretical capitalism, the major one is similar to that of the problem of Milton’s understanding of what the “invisible hand” is: namely, the “experts” are simply wrong (and in many instances are outright lying). The U.S., and most of the West, does not abide by the tenets of Capitalism any more than the Soviet Union, China, or even Vietnam abided by the tenets of Communism.

We must recognize that words and concepts have meanings. We must also recognize when meanings shift, change, are misunderstood, and/or mis-/disapplied. This is true of the “invisible hand,” and this is true of Capitalism proper. The Rational must adhere to established and stated meanings of words, or else chaos.