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THE INVISIBLE HAND AND OTHER FREE MARKET MYTHS REVISITED

April 16, 2015

THE INVISIBLE HAND AND OTHER FREE MARKET MYTHS REVISITED

Recently I blogged on some of the early free market propositions laid down by Adam Smith which are now discredited, one of which was his invisible hand theory. I did not explain just what his vision of the invisible hand entailed in my earlier piece, but have in my reading run across precisely what he was postulating in such connection in his ground-breaking book, The Wealth of Nations, published in 1776, courtesy of Jeff Madrick in the latter’s article published in the Winter 2015 edition of The American Prospect entitled The Libertarian Delusion. I quote:

“The premise of Adam Smith’s invisible hand is that buyers and sellers, free of any government interference and merely following their self-interest, will arrive at an optimal distribution of goods and services at the ‘right’ price, as if guided by an unseen hand.”

Modern mainstream economists say they don’t literally believe in Smith’s invisible hand theory since they must concede that many assumptions must be made for free markets to produce optimal outcomes, including transparent access to information and product prices, no undue power for oligopolistic corporations to set prices or control distribution, highly rational buyers and sellers pursuing their self-interest, etc.

That’s what they say, but that’s not how they act. The fact is that mainstream economists still honor the invisible hand as a default principle whether or not these assumptions are met. The invisible hand, long since discredited, is still with us. If you think not, consider the government’s “interference” in imposing minimum wage scales. Communities where there has been an increase in the minimum wage have not experienced lost jobs because the increase in demand as a result of higher purchasing power predictably offset such additional costs.  A hike in the minimum wage did not thus perform according to the invisible hand’s predictions when there is “government interference.”

Madrick in his article points out that if labor markets worked according to Adam Smith’s principles, one could explain wage inequality not as a market failure, but rather as an efficient market mechanism! Wow!  Some (and I am one of them) worry about the social costs of unequal wages, but most mainline economists employ the invisible hand sieve and look to such rises in inequality as proof of the economy’s technological progress, i.e., if people are better educated and qualified, the market will justifiably pay them better.

This idea allows mainstream economists to ignore the fact that some have better opportunity for education than others and that frequently the good jobs go to those who know somebody or who have rich and/or well-connected parents, situations beyond the grasp of invisible hand theory. Nobody I know thinks that education is unimportant, but when unequal opportunity starts at birth it is clear that we need to devise a system of educational opportunity to compensate for such a brutal reality in leveling the employment playing field for people who are literally “born to lose” with such a poor start at avoiding poverty.

Libertarians and right wing Republicans are typically invisible hand purists who oversimplify economic history in telling us that in the 19th century America lived by the invisible hand and laissez faire. They are not telling it the way it was. Railroad building and the law establishing land grant colleges and wage protection proceeded apace even during the Civil War. Government was active in pursuing important initiatives and was not ruled by the invisible hand or captive to laissez faire policy – quite the contrary – but never mind the facts.

Libertarians and right wing Republicans with their invisible hand and laissez faire frontal lobe  implants hold that an economy is almost always self-adjusting, so government intervention is unnecessary and almost always bad. They are doubly wrong: economies are not always self-adjusting or anywhere near it, and “government intervention” (aka giving the people a seat at the nation’s economic table) in the market, while not perfect, is more often good than bad.

If libertarians and right wing Republicans want to talk about how well their Wall Street patrons and their predecessors have handled the market in light of the panics, recessions and depressions they have caused from the Panic of 1837 through Bush’s Great Recession of 2008 (and continuing for those of us in the 95%), economic disasters that have impacted average Americans so dreadfully and relentlessly;  and if they want to talk about why the great majority of our people are still mired in economic malaise from the last adventure of their Wall Street bank patrons from which they had to be bailed out, and why the Dow is at historic highs while median family wages are in the tank, I will be pleased to vigorously participate in such debate.

Let’s be frank. The rich and investment class and their congressional toadies and right wing think tanks know full well that ALL of Smith’s invisible hand theory is an artifact of history but cannot give up that portion of Smith’s edict within such theory that requires no “government interference” in a free market economy. They blithely skip over the reality that much of our economy is not free but rather subject to monopolistic practices (which were not within Smith’s assumptions when formulating his invisible hand theory) and they have yet to explain their selective use of Smith’s legacy in this connection, to wit: “government interference” in the “free market” is bad unless, of course, when government “intervenes” to bail us bankers  and  even our shareholders and insurers out after our crapshoot went sour and our big banks became insolvent in 2008 while Bush and his regulators slept. Then “government intervention” is good. Free market capitalism, you know. . . . Such hypocrisy! Wall Street banks, which (pretentiously) abhorred “government interference,” went to Washington as bankruptcy loomed and (on bended knee) begged the government to “intervene.” Their toadies responded positively, with OUR money, and now that such banks are back in business, they are again loudly opposed to “government intervention in ‘free markets’” (until their next crapshoot goes awry).   GERALD   E

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