What Happened To The Invisible Hand?
By John Harline
I do not profess to be a scholar of American history, or even an expert of the inter-workings of our financial system, but there are so many examples in our past that can be correlated to the web of chaos and trouble we currently find ourselves entangled within.
When Adam Smith wrote the Inquiry Into the Nature and Causes Of The Wealth of Nations in 1776, an economic blueprint was born with a vision for a System of Perfect Liberty, or simply stated, the origin of capitalism. There were many questions that he was trying to answer, but there was one that challenged central planning authority in a community in which everyone was busily following their own self-interest. He asked, “what is it that guides each individual’s private business so that it conforms to the needs of the group?”
This question helped him formulate the “laws of the market.” What he sought was the “Invisible Hand” whereby “the private interests and passions of men” are led in the direction “which is most agreeable to the interest of the whole society.”
He would argue that self-interest in an environment of equally self-interested people would result in competition. However, the market would regulate itself by “a man who permits his self-interest to run away with him will find that competitors have slipped in to take his trade away.” These laws of the market and the ultimate birth of capitalism seemed simple and would use “the selfish motives of men to yield to social harmony.”
So what has occurred since 1776? Is this country today what was envisioned by way of the original theory? Obviously, the world today differs greatly from that of Adam Smith’s and although run by large corporations and strong labor unions, which can avoid pressures of competition, disregard price signals and look at self-interest in a more long-term view, the rules of self-interest and competition provide basic rules that cannot be disregarded entirely.
However, as we watch, our world markets and financial systems fall right before our eyes and endure the violent volatility of commodities and currencies, and stomach world powers conflicted and forced to make desperate decisions to fix the by-product of a decades of greed and concentration of wealth, we are left to wonder where the natural effects of the “invisible hand” have gone.
During the Great Depression, the Hoover administration did something eerily similar to the Fed’s recent Quantitative Easing (the “bailout” – “buy-in” – “rescue” plan.) In 1932, the Reconstruction Finance Corporation (RFC) was created and authorized to extend loans to all depository institutions in the nation. For three years, the RFC loaned out and acquired equity positions of institutions in the equivalent of $3 billion in today’s dollars. Although the plan worked to temporarily slow the crisis, the bleeding continued. Bankers soon restricted lending to entrepreneurs, consumers and each other. Sound
familiar? It was not until the Roosevelt administration insured bank deposits, broke up financial conglomerates and separated commercial banking, investment banking and insurance industries that the nation began to rebuild its financial system and thus, confidence was slowly restored.
Adam Smith was very specific in his opinion of the economic role of government. In fact, he listed three things government should do in a society of natural liberty. First, it should protect against “the violence and invasion of other societies.” Second, it should provide an “exact administration for justice.” Finally, it has the obligation of “erecting and maintaining those public institutions and those public works which may be in the highest degree of advantage to a great society.”
What Smith was against would be the interference or manipulation of the government with regard to the “market mechanism,” such as restraints on imports, or bounties on exports and government laws that shelter industry from competition. These types of activities weaken the overall market system and could put the very nature of capitalism in jeopardy. He would say, “whatever interferes with the market [government or monopoly] does so at the expense of the true wealth of nations.”
Now arguably, Adam Smith lived in a much different period of history. He did not live to see the market system threatened by enormous enterprises, concentration of wealth, world consumption, economic globalization and vast population increases. When he lived and developed this theory, there had not even yet been what we know today as the “business cycle.” So, the world has changed. The question is, has our strategy or theory as a society changed? Would it be reasonable to expect the theory of yester-year to evolve or even change as the world has matured?
While I was in San Francisco recently, I was taken by my surroundings. It was a beautiful sunny day in the city, and the streets, shops, restaurants and parks were filled with tourists and locals. I was amazed at the energy and spirit that clung in the air as each person I saw went about their business. While strolling in Chinatown, there was a great commerce taking place at the multiple markets that lined Stockton Street. As I made my way down Columbus in Little Italy, hundreds of people were already waiting in line, not at the bank to withdraw deposits, but to get into their favorite restaurants for a late breakfast. Later, while sitting at a quaint little “trattoria” looking over Washington Square, what seemed like hundreds of families played and frolicked in the day. In the afternoon, the bustle of Fisherman’s Wharf with its diverse mass of people, the barking sea lions on Pier 39, along with the Golden Gate backdrop to the thousand yachts and sailboats rhythmically carouseling around Alcatraz Island on the blue-green choppy waters of the Bay, heightened my sense of prosperity and peace.
The only thing missing from this was worry. As the world powers in Washington, D.C., Europe, Russia and China debated the future of war, refugees and financial systems, no one seemed the wiser in this city at the edge of the Bay. In fact, as I peered into restaurants and bars at televisions or overheard conversations of those around me, there was no discussion of war, refugees or financial systems. The televisions were not blaring
CNBC and CNN, with people gathered around silently, watching their fate. There were people gathered, but it was to watch the final quarter of a 49ers game. No, on this day at least, there was not a sign of government or domestic or geo-politics to be found.
Is this to suggest that no one really cares? Or perhaps, no one is really worried? Or have people just given up? It was a beautiful day in the city and how much would be resolved with worry?
I don’t know. Maybe we have just become too smart in spite of ourselves. Maybe our society, the revolutions from man to machine to digital communication, sociology and psychology has just evolved away from the simple theories Smith wrote about during a much simpler time.
So when we ask the current whereabouts of the “Invisible Hand,” perhaps we are calling for a break from the past and from the histories and traditions attached to it. Perhaps what we are really asking for is true reform and change. However, when you ask, you need to be prepared for the answers, which in some cases will cause all of us to rethink the way we have lived in this period of innovation and advance.
Additionally, as we have enjoyed a great deal of freedom in every facet of our lives that we have fought wars inside and outside our borders to protect, will we compromise? It was Ronald Reagan that once said, “Freedom is never more than one generation from extinction.”
Often these shifts in paradigm, many times for the good of society as a whole, will not come without deep personal sacrifice. The question then becomes, are we ready for the sacrifice individually and as a country?
This country has always stood as a beacon to the world. It stands tall with its beliefs and ideals as a model for democracy. Robert Kennedy once said, “When a man stands up for an ideal, he sends a ripple of hope.” My hope and optimism, or what I heard this week referred to as “hopetimism,” is that this country will follow the lead from its ancestors and persevere as one united in a cause for survival and a new ideal.