The Invisible Hand

by Dennis Green

In spite of my generally libertarian leanings, I’m completely disabused of Adam Smith’s “Invisible Hand” theory, which says that left to its own devices, the marketplace, the consumer, the investor needs no protection whatsoever against fraud. Left to our own devices, America has fallen to 18^th place globally in broadband penetration and even lower in our outcomes with health care and education. No thank you, Mr. Smith!

“We can stifle innovation. We can stifle economic development…” complain the so-called conservatives, such as Orin Hatch, who simply stand aside and let the bankers roll the dice. Oooops! House odds.

What trumps Adam Smith’s theory, for me, is John Calvin’s notion of “Total Depravity,” that our human natures are corrupted by imperfection, by failure and weakness and sin, in all their many aspects and to their greatest depth. The Great American Demiurge, in what might be called the “Puritanical Reaction,” is the belief that our best efforts toward perfection are quite enough to counter that human nature.

Thus, we are always looking for excuses, for exemptions from such a state of providential depravity. Milton Freedman’s “Possibility of cooperation without coercion” is one of those. And let’s face it, behind Smith’s concept of the “invisible hand” is the Deist image of a benign, even benevolent godhead nurturing his Creation. If there is a hand in this, it is God’s.

The Enlightenment poet Alexander Pope expresses it one way:

Thus God and Nature formed the general frame,

And bade self-love and social be the same.

It was, so far, viewed as a natural inclination rather than a social mechanism as defined by later economists such as Leon Walras. At this stage, the belief is still that self-interest drives actors to beneficial behavior, since the welfare of the entire community is served by a balanced trade-off of goods, values, prices and returns. And the key to this balance is open and free competition.

Critics of the “Nanny State,” on the other hand, argue against any form of protectionism or regulation, but say that man should be left to his own devices. If he wants to smoke tobacco, that is his choice, they say. “Let the smoker beware!” would be their motto.

Others argue that “Informed Choice” is more often a myth of the marketplace, that credit card companies, for example, count on the failure, or neglect or inability of a borrower to calculate the penalties for making a minimum payment on an outstanding balance, but must be informed of the penalties for doing so — the difference in ultimate cost and extension of such a payment schedule compared to even a slightly accelerated one.

Smith developed his own version of such general theories into six common virtues found in man, which he detailed in his The Theory of Moral Sentiments. Along with The Wealth of Nations, Smith’s sentiments became the foundation of much of laissez-faire modern economic theory driving GOP policies for the past century. Only recently have we been reminded by circumstance of the counter-theory, often referred to as “The Tragedy of the Commons,” that is, an example where self-interest tends to bring about disastrous results.

Smith also famously wrote: “The rich…consume little more than the poor…and in spite of their natural selfishness…They are led by the invisible hand to make nearly the same distribution of the necessities of life…” So much for that invisible, impartial hand! It is invisible because it is so often not even there!

“Enlightened self-interest” is an attractive theory of human nature, but when it leads a major investment firm like Goldman Sachs to bet against its own investors, and profit from their enormous losses, something is amiss. The Greater Good is not amused.

©2010 Dennis Green