We've all heard of the "invisible hand of the market." The idea is that each person, acting solely in their own best interest, with no consideration of others or of society at large, will be led, as if by an invisible hand, to do that which is socially the most desirable. It is worth going back to Adam Smith's original formulation of this concept, since Smith is often cited by both conservative and liberal (or neo-liberal) economists and politicians. Here, edited for length, is the original quote from Smith's Wealth of Nations:
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.
First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.
Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade...a capital employed in the home trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of the inhabitants of the country, than an equal capital employed in the foreign trade of consumption: and one employed in the foreign trade of consumption has the same advantage over an equal capital employed in the carrying trade. Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country.
Secondly, every individual who employs his capital in the support of domestic industry, necessarily endeavours so to direct that industry that its produce may be of the greatest possible value...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 the society as great as he can. [emphasis added]
We can see that Smith bases his assertion on a few necessary assumptions. One, that the capitalist will employ his capital in the domestic market; two, that said investment will result in employment for the greatest number of people; and three, that each capitalist will seek to produce that which has the greatest possible value. Of these three assumptions, only one, namely the last, can be argued to still be valid in our modern, globalized economy.
The first assertion, that capital will be employed in the domestic market, is obviously no longer valid, as should be apparent from the "out-sourcing" of ever more American jobs to countries with lower wages and fewer safety and environmental regulations. Somewhat ironically, Smith points this out when he adds the condition "upon equal or nearly equal profits" to his assumption. The situation now being that equal or nearly equal profits are not to be had in domestic investment of capital, Smith himself can be said to point to the current break-down of the "invisible hand".
The second assumption, that a greater investment of capital will necessarily lead to increased employment is also no longer valid in our modern economy. As one can see from the logging industry, for instance, it is now quite often the case that greater outputs and profits can be realized by investing capital resources in labor-replacing machinery (helicopter logging) than in the hiring of more workers. This is not a development that Smith seems to have foreseen.
The third assumption, that capital will be invested in those industries whose product has the greatest value, still seems applicable. However, producing a product with the greatest monetary value need not necessarily be the most conducive to the well-being of society at large. This assertion simply points out that capital will be invested in such a way as to maximize monetary value, while saying nothing of other values that members of a society may have, such as clean air and water, decent-paying jobs, etc.
At any rate, when we look at Smith's original formulation of the causes of the "invisible hand of the market," we can see that most of these causes no longer exist. Economists and politicians who make use of this trope, then, either have no idea regarding the genesis of this idea or (more likely) are simply making hay from an emotionally-charged phrase that now has little, if any, actual meaning.
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.
First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.
Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade...a capital employed in the home trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of the inhabitants of the country, than an equal capital employed in the foreign trade of consumption: and one employed in the foreign trade of consumption has the same advantage over an equal capital employed in the carrying trade. Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country.
Secondly, every individual who employs his capital in the support of domestic industry, necessarily endeavours so to direct that industry that its produce may be of the greatest possible value...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 the society as great as he can. [emphasis added]
We can see that Smith bases his assertion on a few necessary assumptions. One, that the capitalist will employ his capital in the domestic market; two, that said investment will result in employment for the greatest number of people; and three, that each capitalist will seek to produce that which has the greatest possible value. Of these three assumptions, only one, namely the last, can be argued to still be valid in our modern, globalized economy.
The first assertion, that capital will be employed in the domestic market, is obviously no longer valid, as should be apparent from the "out-sourcing" of ever more American jobs to countries with lower wages and fewer safety and environmental regulations. Somewhat ironically, Smith points this out when he adds the condition "upon equal or nearly equal profits" to his assumption. The situation now being that equal or nearly equal profits are not to be had in domestic investment of capital, Smith himself can be said to point to the current break-down of the "invisible hand".
The second assumption, that a greater investment of capital will necessarily lead to increased employment is also no longer valid in our modern economy. As one can see from the logging industry, for instance, it is now quite often the case that greater outputs and profits can be realized by investing capital resources in labor-replacing machinery (helicopter logging) than in the hiring of more workers. This is not a development that Smith seems to have foreseen.
The third assumption, that capital will be invested in those industries whose product has the greatest value, still seems applicable. However, producing a product with the greatest monetary value need not necessarily be the most conducive to the well-being of society at large. This assertion simply points out that capital will be invested in such a way as to maximize monetary value, while saying nothing of other values that members of a society may have, such as clean air and water, decent-paying jobs, etc.
At any rate, when we look at Smith's original formulation of the causes of the "invisible hand of the market," we can see that most of these causes no longer exist. Economists and politicians who make use of this trope, then, either have no idea regarding the genesis of this idea or (more likely) are simply making hay from an emotionally-charged phrase that now has little, if any, actual meaning.
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