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The 'Invisible Hand' is a foundational principle of America's Free Market system.  All participants are free to "buy and sell" as they see fit.  And as a result, the Theory goes, the Markets will "automatically adjust" to provide quality products and services, at reasonable prices, to both the buyers and sellers;  ie. a "fair price" is usually established.

According to Adam Smith, and his adherents, it's almost as if there is an 'Invisible Hand', working behind the scenes, that "conspires" to cause Free Market participants, to allocate our collective resources, in the most efficient way possible, to the Benefit of the most people possible, in that Free Market Society.

Nice, in Theory.  But how has it been working out in Practice, lately?

Here's the explanation of that 'Invisible Hand', from Wikipedia:

Efficiency.  It's suppose to be the Point of our Free Market system.

So Why is it so full of Bumps, Spills, Crashes, and general Heartburn, and Heartache, to Society at large?

Well, even an esteemed Professor Emeritus, and adviser to the Fed, has posed a serious critique to the supposed Efficiency behind that all important 'Invisible Hand' ...

Is the "Invisible Hand" Still Relevant?
FRBSF Economic Letter [Federal Reserve Bank of San Francisco]
By Stephen LeRoy -- May 3, 2010
Stephen LeRoy is a professor emeritus at the University of California, Santa Barbara, and a visiting scholar at the Federal Reserve Bank of San Francisco.

The single most important proposition in economic theory, first stated by Adam Smith, is that competitive markets do a good job allocating resources. [...] The financial crisis has spurred a debate about the proper balance between markets and government and prompted some scholars to question whether the conditions assumed by Smith and Pareto are accurate for modern economies.

The single most important proposition in economic theory is that, by and large, competitive markets that are relatively, but generally not completely, free of government guidance do a better job allocating resources than occurs when governments play a dominant role. This proposition was first clearly formulated by Adam Smith in his classic Wealth of Nations. Except for some extreme supporters of free markets, today the preference for private markets is not an absolute.

The financial and economic debacle of the past few years, however, has led many to revisit this question, particularly in Europe, but also in the United States and elsewhere. To many, financial markets in the last several years appeared dysfunctional to an extent that was never imagined possible earlier. Did Adam Smith get it wrong about private markets?

Pareto’s efficiency result was first formulated in mathematical models of economies that were static and deterministic -- that is, models in which time and uncertainty were not explicitly represented. [...]

[Arrow and Debreu] showed that, in any economy, there is an irreducible minimum level of risk that somebody has to bear. In a competitive economy with well-functioning financial markets, this risk will be borne by those who are most risk tolerant and who therefore require the least compensation in terms of higher expected return for bearing the risk. This is exactly as one would expect -- risk-tolerant participants use financial markets to insure the risk averse. [...]

However, demonstrating these results mathematically depends on assuming symmetric information -- that is, assuming that everyone has unrestricted access to the same information.

Reevaluating the balance between markets and the government

[...] those who take a more critical view about the functioning of private markets believe that the crisis stemmed mainly from the destructive consequences of factors such as information asymmetries in financial markets and distortions to incentives that encouraged excessive risk-taking. The problem was not government involvement per se, but rather government’s failure to place checks on destructive market practices.

This latter view dominates most of the recent proposals for financial reform.

* information asymmetries.   (Insiders game the system.)     Check!

* distortions to incentives.   (Risk rarely properly assumed.)    Check!

* govt's failure to place checks.   (Govt excels at Looking the other way.)    Check!

Maybe that Professor is onto something.  Maybe Key Market Information is NOT distributed freely and equally to all Economic players.  Maybe some of are just kept in the dark, by accident, or by design?

The 80's and 90's were the Decades of exalted Greed.  And the decade of the 00's they took that principle of Greed, to a whole other level. The 'Ownership Society' was unleashed and rationalised -- but only very FEW actual took permenant Ownership of the "creative wealth" vehicles, unleashed on the world then.  

The result:  was more like the Decade of "Take the Money and Run".  And run they did -- from any assumption of Risk and Responsibility.

And after decades of unbridled Greed, Voila, we now see a Society where the American Dream is in shambles.  The majority of us, work hard, (when we can find work), yet still end up living from paycheck-to-paycheck. While Billionaires rake it in, countless more Billions, while leaving us the hard-working Tax-payers, with the Real Tab for their Risk Aversion.

I often find myself among the old Dream adherents, stunned, wondering "What Happened?"

I work hard, play by the rules. So why do I keep losing ground?

Why do those who make these Economic messes, never have to "pay a penance" to the economies that they exploited?

Why do these Wall Street Players, still get away with Trading in Illusions?

Where is the Invisible Hand of the Govt, to protect our dwindling Collective Resources?  Afterall they can only squeeze SO many 'Phantom Trillions', out of this 'Turnip' -- before we are through.

Here's a different, pragmatic take, on the FREE Market Economy, that the esteemed Professor and his Fed buddies, may want to factor in, to their new Theories.  It seems the Systematic Problems on Wall Street, and their impact on OUR Economy, may go a bit deeper than a few "asymmetries" ...

JUAN GONZALEZ: Your book’s subtitle, From a Phantom Wealth to Real Wealth -- What is 'Phantom wealth'?

DAVID KORTEN: Yeah. This is part of understanding the current Wall Street system, which is built around an illusion, the illusion that money is wealth, which then translates into the idea that people who are creating--or who are making money are in fact creating wealth. And what Wall Street has become extremely expert at is creating money out of nothing through financial bubbles, through pyramiding lending to create fictitious assets that become collateral for more bank lending, and then combining that with the predatory aspects of usurious lending and deceptive lending and the use of credit cards as a substitute for a living wage--all the games that Wall Street is playing.

And it’s actually based on a philosophy that says we don’t need to produce anything as a country, if we can—you know, if we can do all this financial innovation that allows us to create financial assets without producing anything of real value. I mean, it’s absolutely insane. And yet, it is the--it’s been the foundation of our economic policy in this country for decades now.
DAVID KORTEN: I mean, basically, we need to realize we’ve been told that there are only two economic models. One is the capitalist model, and the other is the communist or socialist model. One, the capitalists own everything, and the other, the government runs everything. The real alternative is, in fact, a real market economy that looks a whole lot more like what Adam Smith had in mind, which is--which looks more like a farmers’ market. And I think--you know, we talk about Wall Street and Main Street, and really the solution is to rebuild a new economy based on Main Street, which means local businesses and people who are rooted in their community and working within a framework of community values and a set of public rules that enforce basic conditions of market efficiency.
JUAN GONZALEZ: --aspects of the financial system, and then the rise in recent years of all of these private equity firms. At least in the classic corporation, there are shareholders, and there are boards of directors, and you have filings with the SEC, and you have some sort of transparency. But now, with these private equity firms dominating so much of investment and with all of these off-the-books financial systems, you really have a system that no one even knows how deep the problem is.

DAVID KORTEN: That’s absolutely right. And, you know, the values have morphed further and further away from any kind of connection to or commitment to a larger public interest. And, of course, underlying this is also this immoral philosophy that says if we each simply pursue our individual financial benefit, that this maximizes the benefit for the society. Now that is about as corrupt a theory as one could imagine. We are seeing the consequences of it.
DAVID KORTEN: Well, because Wall Street is totally in the business of creating phantom wealth. You know, it goes back to one of the fundamentals that I realized when I was working in international development and I began to wonder, "Why is it that the more developed the country gets, there’s more and more people living in poverty?"

And it comes down to a very simple recognition. All the decisions that we make and official aid agencies are based on, What will maximize the returns to Money, which means to people who already have money. And People who DON'T have any Money basically DON'T fit into the equation. And that’s the way our whole economy, the whole Wall Street picture, is defined.

Democracy Now! Transcript and Video

People who DON'T have any Money -- DON'T fit into the equation.   They are just one of those, 'insignificant variables', I guess?

Hmmmm?   that could pose a problem or two, to Adam Smith's 'Invisible Hand' Theory now, couldn't it.

Poor People don't count, because they can't move Markets.

Working People don't count, because the type of Wealth they produce, can't be easily expanded into Market Bubbles.

Eco-People don't count, well, because their Market Risks DON'T matter -- NOT in the "short run" anyways -- you know, the place where the Quick Profits are actually made!

The American Dreams doesn't count, because we now live in a Flat, Global Marketplace.  A place where NEW cheap (global) resources await -- just lying there, waiting to be Exploited Allocated, by the most daring and ruthless entrepreneurial.

And "Real Wealth", for the Humanity at large -- Isn't that one of those Quaint Economic Myths, much like the "Free Lunch" --

It doesn't really Exist! ... There is NO SUCH Thing as a 'Free Lunch'! ... (4 out of 5 Economists agree!)

At least not in any "efficient" Market Allocation Method that we've managed to dream up so far!  (and afterall us Economic Experts, we have such a winning track record, so far, don't we?)

Maybe getting a "Free Lunch" is NOT so far-fetched? ... (In any Economic System, based on "Human Values" other than "Quick Profits", eh?)

Afterall, Big Banks and Big Oil, manage to finagle them (very BIG Free Lunches), every few years, at OUR Expense --
whenever their Risk Aversion gaming and market-making, finally rises up and bites them in their collective Butts -- Big Time!

Is the 'Invisible Hand' really stealing our Future well being?

I don't know, Do professionals Pick-pockets, really contribute much to Society?

I think not, but you be the judge ... just keep one hand on your wallets.

Originally posted to Digging up those Facts ... for over 8 years. on Sun May 09, 2010 at 05:19 PM PDT.

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Comment Preferences

  •  Tip Jar (17+ / 0-)

    The press is impotent when it abandons itself to falsehood. --Thomas Jefferson to Thomas Seymour, 1807

    by jamess on Sun May 09, 2010 at 05:19:10 PM PDT

  •  I looks to me like the neoliberals have (12+ / 0-)

    been gaming the system for the past 40 years or so. This is not something that is just happening in the US. It's a global project.

  •  When there are markets which use a person's money (7+ / 0-)

    without that person having any way to know what's going on, there's more than a hand that's invisible, and there's nothing to check and balance the market's use of money.

    Then it's just a game of chance.  Adam Smith never considered such an insane system.

    I'm in favor of market based decisions, but only when all players have access to the key information.  Since this can no longer happen, some degree of regulation is needed to keep the crazy schemes from wrecking the system.

    "Trust only those who doubt" Lu Xun

    by LookingUp on Sun May 09, 2010 at 05:29:58 PM PDT

    •  market based decisions (1+ / 0-)
      Recommended by:

      can make intelligent "collective" decisions,

      when as you say,

      all players have access to the key information.

      But how many really knew what those subprime mortgages, and CDO's where really about, before they bought them.

      When Experts are saying, don't worry, no problem -- it's a chance of a lifetime.

      Just sign right here.

      Insider Information, is a dangerous thing.

      The press is impotent when it abandons itself to falsehood. --Thomas Jefferson to Thomas Seymour, 1807

      by jamess on Sun May 09, 2010 at 07:08:52 PM PDT

      [ Parent ]

  •  The only "invisible hand" is the invisibility- (3+ / 0-)
    Recommended by:
    opinionated, jamess, thethinveil

    glove hiding the meddling hand of finance capital into most aspects of our lives.

  •  The 'Invisible Hand' just sucker punched America (3+ / 0-)
    Recommended by:
    opinionated, jamess, thethinveil


    And now we're expected to say "Thank you can I have another?"

    No thank you.

    Time to take the brass knuckles off of the Invisible Hand.

    "These old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner." - Will Rogers

    by Lefty Coaster on Sun May 09, 2010 at 05:55:52 PM PDT

    •  maybe it's about time (1+ / 0-)
      Recommended by:
      Lefty Coaster

      we started thinking about

      the 'invisible' under-employment

      and the 'invisible' homeless ?

      where are the conspiring forces out there,
      posed to lend them a Hand?

      Thx Lefty Coaster, as always.

      The press is impotent when it abandons itself to falsehood. --Thomas Jefferson to Thomas Seymour, 1807

      by jamess on Sun May 09, 2010 at 06:58:17 PM PDT

      [ Parent ]

  •  I happen to think that the Invisible Hand (2+ / 0-)
    Recommended by:
    Richard Lyon, jamess

    It actually a pretty good system...

    Then again, so is communism, at least on paper.

    The problem with the "Invisible Hand" is twofold:

    1.)  It was never intended to a a totally hands off, laissez-faire system.  Wealth of Nations was, in part, a response to the laissez-faire ideas of his French counterparts.  Smith points out that the enemy of his system is monopoly and undue pressure by both the government AND the market to manipulate the system.  

    2.)  Greed.  After all, I personally believe that Smith's Invisible Hand was arguing about a person's self-interest, rather than their greed.  In fact, there was an entire book of Wealth of Nations (which actually spanned 5 books in total) regarding how the greed of business that is solely in the business to make money (in his day, trusts and companies like East India) rather than produce a product, was anathema to the overall system, and should be regulated by the government.

    Personally, I'm all for capitalism.  I think that its a pretty good system when it works smoothly, and fairly.  And that can only happen when the government adequately regulates business to be safe, fair, and honest.

  •  Here is the total of Smith's "invisible hand" (3+ / 0-)
    Recommended by:
    jamess, Marja E, thethinveil
    - The Wealth of Nations

    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. 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.


    - Theory of Moral Sentiments

    The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.

    Note the context of the latter statement: agricultural production.  In foodstuffs, there is some natural limit to gluttony.

    But most of what is being attributed to the "invisible hand" today is actually the results of the very visible hand of corporate executives gaming their boards and bilking the government.  Getting an MBA is not about allowing the "invisible hand" to work.

    50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

    by TarheelDem on Sun May 09, 2010 at 06:36:13 PM PDT

    •  thanks TarheelDem, appreciate the research (0+ / 0-)

      nice points about the "invisible hand"
      and those barely visible exec's.

      getting markets to work for the many,
      has very little to do with it anymore.

      The press is impotent when it abandons itself to falsehood. --Thomas Jefferson to Thomas Seymour, 1807

      by jamess on Sun May 09, 2010 at 06:49:47 PM PDT

      [ Parent ]

  •  An excellent diary (3+ / 0-)
    Recommended by:
    opinionated, jamess, thethinveil

    And you could sum it up simply by saying, in a systems analysis kind of way, "If you give someone the opportunity of gaming the system, what is the chance that sooner or later he will do so?"

    The regulation that prevented the gaming was established after the Crash of 1929, and did a reasonable job until it was systematically dismantled and destroyed. That regulation, all of it, has to be put back. Until it is, unbridled greed wins.

    I love that quote from Matt Taibbi, to the effect that civilization is the agreement not to screw each other even if we can.

    See where that leaves us based on recent events. Wall Street seems deliberately set up now to screw as a standard method of operation.

    •  great points VA, thanks for the feedback (0+ / 0-)

      most excellent summary:

      "If you give someone the opportunity of gaming the system, what is the chance that sooner or later he will do so?"

      Perhaps we need to start Protecting against excessive Greed,
      instead of culturally Encouraging it.

      The press is impotent when it abandons itself to falsehood. --Thomas Jefferson to Thomas Seymour, 1807

      by jamess on Sun May 09, 2010 at 06:54:25 PM PDT

      [ Parent ]

    •  Problem is (1+ / 0-)
      Recommended by:

      that now that so many ways of screwing others for profit have been devised, the corporate masters pretty much have to use them, because of the fiduciary duty they owe to stockholders to maximize profit.

      What we need to do, if we cannot get rid of the corporations, is to restructure the system of incentives by which they operate, so that screwing the public will actually cost the corporations, rather than increasing their profits. Then the interests of the shareholders and the interest of the public will be aligned, and execs will get fired for making decisions that lead to things like the oil spill or the Massey mine disaster.

      Removing the ridiculous $75 million cap on consequential damage liability for oil spills would be a good first step.

      Relax - the adults are in charge now.

      by NWTerriD on Sun May 09, 2010 at 07:14:44 PM PDT

      [ Parent ]

      •  A lot of life insurances (1+ / 0-)
        Recommended by:

        are not paying off for people who have paid on them for years.  They get rid of the customer by making the monthly payments unaffordably high or come up with a clause that they say you should have changed to permanent life 20 years ago.

        We didn't say Wealth Care, we said Health Care

        by relentless on Tue May 11, 2010 at 03:35:40 AM PDT

        [ Parent ]

  •  Don't blame it on Adam Smith. (1+ / 0-)
    Recommended by:
    Marja E

    Excerpt from a a diary I wrote last year about how Smith's vision of capitalism has become distorted beyond recognition in the current age:


    Smith's advocacy of a free market presupposed that each indivdiual was merely one drop in a sea of individuals, and that any person's actions within the marketplace would carry as much power as any other. He was fundamentally opposed to concentrations of power, whether in private or governmental hands.

    It is true that at that time, joint stock companies existed (such as the Dutch East India Company), the predecessors of our modern corporations. Smith grudgingly admitted that for large endeavors such as banking and transportation (car manufacturing?), such concentrations of capital might be necessary. (Smilarly, in today's global market, there are industries in which large corporations may be necessary to survive the battle with competitors in other countries.)

    But as a general principle, he objected to the joint stock companies because they were "unlimited" in four important respects: lifespan, size, power, and [lack of] accountability (due to the bifurcation of ownership and management). Their potentially perpetual existence led to continuing growth and accumulation of capital and profits, which could too easily be mismanaged or used to bad purposes, and the limited liability of absentee, non-participating owners prevented the invisible hand from exercising the powerful influence that it exercised over small farmers, artisans and shopkeepers who ran their own businesses and were accountable to their community (which was also their customers).

    The only differences between 21st-century mega-corporations and 18th-century joint stock companies are: (1) the mega-corporations are much more numerous and prominent players in the nation's economic life than were the joint stock companies, and (2) all of the things Smith hated and feared about them have increased by orders of magnitude.

    Thoe original contained a citation, but the website cited has since ceased to exist, and I don't have time right now to do additional research. I don't think it would be hard to find support for it, though.

    Relax - the adults are in charge now.

    by NWTerriD on Sun May 09, 2010 at 07:09:16 PM PDT

  •  It has always seemed to my gut that (2+ / 0-)
    Recommended by:
    relentless, jamess

    an individual cannot "earn" upwards of $125 M per year without screwing either his employees or his customers.

  •  Tame immigration/free trade and tame capitalism (1+ / 0-)
    Recommended by:

    There is still no better alternative than capitalism.  Socialism and communism have at least the same level of problems.  What's mostly creating pain these days is globalization which manifests itself through easy immigration and "free trade" policies.  

    It's only natural for those seeking to maximize profit to use cheaper labor when possible.  That's the main force behind our current absurdly easy immigration policies.  Flooding the market with people from low wage countries lowers US wages.  And "free trade" with the likes of China is just a way to make our workers compete with slave labor.  Of course neither of these are good for anyone except employers and owners of capital.

    The solutions have become obvious:  Greatly reduced immigration and confronting China over their currency manipulation which allows them to undercut American prices.

  •  Recced, if I could (1+ / 0-)
    Recommended by:

    Missed another good one.

    Thank you for this.

    It's time for the pitchforks and torches! Guillotines are way too complicated.

    by No one gets out alive on Tue May 11, 2010 at 07:51:11 AM PDT

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