Rational Philosophy

The Invisible Hand

Ah, the invisible hand, what a fine, dark metaphor to match these dark times. Adam Smith in The Wealth of Nations: The individual who “intends only his own gain is led by an invisible hand to promote an end which was no part of his intention.”

Wednesday’s New York Times editorial “Mr. McCain and the Economy” criticizes McCain on several fronts. 1. His claim that the economy is fundamentally sound, despite the latest cataclysms. 2. His clarification that what he meant by “fundamentally sound” was that he “believed in American workers.” and 3. His broadside that any blame that could fall fell surely on Wall Street’s “unbridled corruption and greed.”

“The crisis on Wall Street is fundamentally a failure to do the things that temper, detect and punish corruption and greed. It was a failure to police the markets, to enforce rules, to heed and sound warnings and expose questionable products and practices,” says the editorial, and with a flick of the wrist ends with a call to McCain to proffer new solutions or approaches that might correct the problems.

McCain, we’ve heard and he admits, suffers from a fundamental lack of interest in things financial (he doesn’t recall how many properties he and his wife own — eight). This is an unfortunate quality in the prospective leader of a country, especially during economic upheavals.

Record Profits in 2007 $1,300 per second

The invisible hand has another meaning here, too. McCain, intent on gaining the presidency is led by the invisible hand of greed in the Republican power-makers. It is no part of McCain’s intention to lead the country into financial disarray, to risk further dismantling of what was, prior to Bush’s presidency, a remarkably strong economy.

Economics is a complex subject. Even the experts don’t understand how economies really work. They are too vast, multi-faceted and irrational.

This last is an incredibly important point. Emotion, fear, mania, addiction, overoptimism all play significant roles in the way the economy heaves and rolls. The concept and model of a completely free market fails in the real world on this basis alone.

Subprime mortgage rescue plan (Simplified Diagram)

Subprime mortgages and the resulting current woes illustrate the second point about the illusion of the completely free market. A free market, a market without restraint, is free to collapse. If we want to prevent this (and who would argue that it’s not in the nation’s best interests to prevent occasional collapse of the economy) someone outside the market needs to be monitoring, reviewing and, if necessary, regulating such things as new financial instruments.

The last problem with the notion of a completely free market is the dangerous relationship with the seat of government. Large, wealthy corporations have deep pockets with which to influence government policy. And, worse yet, if agents of those corporations influence government thinking, policy and strategy (think Rove and Cheney) the power of government will exert an ultimately skewed and even destabilizing influence on the market.

This is exactly what has been happening, as the Times editorial points out: “The disconnect between work and reward has been especially acute during the Bush years, as workers’ incomes fell while corporate profits, which flow to investors and company executives, ballooned. For workers, that is a fundamental flaw in today’s economy. It is grounded in policies like a chronically inadequate minimum wage and an increasingly unprogressive tax system, for which Mr. McCain offers no alternatives.”

The free market is a nice idea, a useful model to illustrate one of the forces at work in an economy. But we should not forget that the invisible hand bends and shapes the market according to the will that wields it.

Related posts from around the Web:

Senate Democrats Discuss Bush-McCain Economic Policies - Senators Boxer, Stabenow, and Menendez discuss how the turmoil on Wall Street is a direct legacy of Bush-McCain economic policies that have failed this nation for eight years. Refusing to police lenders and neglecting to protect …

McCain’s Economic Solution: Hemorrhage More Money - … GOP nominee for his statement this morning — which they asserted was an announcement of support for $25 billion in government loans to the auto industry. So there we have it. McCain’s solution to our terrifyingly failing economy? …

McCain Follows Obama With Direct Economic Ad (VIDEO) - “You, the American workers, are the best in the world,” says McCain. “But your economic security has been put at risk by the greed of Wall Street. That’s unacceptable. My opponent’s only solutions are talk and taxes. …

On economic expansion, the fear and actuality of recession, and global warming.

Top stories today dwell on the economy: “U.S. Markets Open With Steep Fall,” “Fed Cuts Rate 0.75% and Stocks Swing,” “Bank of America Profit Plummets.” The president’s confirmation last week that he would support a stimulus package didn’t seem to raise anyone’s level of optimism. All this fear of economic recession has me wondering about the much-touted virtue of economic expansion. As stocks tumble, losses post, and job markets shrink there’s an underlying presumption that growth is good, that higher economic value is good. But, if I understand this correctly, economic growth typically means higher consumption driving higher production. The exact mechanism of a stimulus package will be debated, but all seem to agree on a formula that supports economic growth by creating incentives for consumption and production.

The nagging question this raises for me is whether we should be thinking about economic growth in isolation from other important factors, such as global warming. I understand that at the most fundamental level a sharp recession means unemployment with associated misery and suffering; it seems entirely rational and appropriate to ward of an extended economic depression. What I’m curious about is whether economic growth is intrinsically good for the world.

People work for money and use that money to buy goods and services. In large part these these goods and services consume natural resources such as raw materials, power and water. If the economy grows, therefore, we’re consuming more natural resources.

(Even the so-called “virtuous circle” of macroeconomic expansion by which an innovation leads to reduced costs and a corresponding increase in consumption, demands increased consumption of natural resources, unless the innovation reduces consumption of natural resources without generating a higher level of product consumption. A great counter-example of this is the length of time it’s taken to bring more efficient, longer lasting light bulbs to market. A great innovation from a natural resource perspective, but until recently, lousy from an economic perspective — the higher cost and lower profits inhibited the innovation from taking hold for a very long time.)

This is all incredibly obvious, and of course global warming has brought focus to the consumption of natural resources, particularly as the economies of third world countries grow and they become more industrialized, but what about economic growth in general? What about the seeming inevitable equation between growth and consumption? Can we really think about them separately?

I realize that I’m raising questions that are to some extent naive. Consumers consume what they want to consume. So, as with more efficient light-bulbs, influencing production should really begin with an influence on consumers. This is why raising awareness of global warming, disappearing species, and environmental protection plays such an important part in determining the future of the planet. But it strikes me that there can also be important governmental and economic influences on production and consumption, too.

This leaves me with two questions:

1. Is there a good balance between the size and health of the economy and the welfare of the planet?

2. At this time of threatened recession, and in general, does the government have an opportunity to stimulate “green” growth rather than “gray” growth?

In contemplating an answer to the first question, I’m thinking of something quite controversial: When considering the welfare of the planet we live on and feed off, consumption beyond that required for our health, sustenance and shelter is superfluous. If we use resources to make our lives easier or more comfortable we should be prepared to anwer for the consequences of such excess consumption. The size and health of the economy and the welfare of the planet already exist in an imbalance (in developed areas). Shouldn’t we be constantly measuring the degree of that imbalance and trying to keep it steady or falling? Isn’t a “green index” an essential economic measure?

This leads to an answer to the second question: If we were to develop a measure or index for our overconsumption, it would push us to develop strategies for stimulating the economy in ways that helped keep the index steady or falling. Why stimulate the economy indiscriminately? Why not disproportionately stimulate “green” sections of the economy?

If the government is good for anything, let it be good for good things, things that help society and the world.

On a cautionary note, if governments don’t do it, corporations will, and not always to the benefit of society. Is it beneficial to the world that Microsoft has pledged cash for technology training in the developing world? On the face of it, the investment seems noble enough. But Microsoft of course will be training the developing world to use Microsoft systems. Bill Gates is not one of the wealthiest individuals in the world for no reason. And despite Gates’ incredible focus on philanthropy, does his generosity and selfless distribution of a good part of his wealth justify retrospectively the profits that Microsoft has reaped from the unbridled growth in computer systems (much of which has been completely unnecessary — if Windows 95 had been a better quality operating system we wouldn’t have needed Windows 98, Windows ME, Windows XP, and Windows Vista…)

 

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(My computer erased my first attempt at this post. A circumstance I’m trying not to take to heart.)

In writing yesterday’s post (”The Joy of Sexual Reproduction“) I came across the work of Herbert Spencer, who apparently first coined the phrase “the survival of the fittest” after reading about Darwin’s theory of “natural selection.” While Herbert Spencer’s ideas seem to have much soundness in some respects (that all organic and inorganic stuff must exist according to the principles of space and time, for instance) they are run through with an idealistic belief that evolution has an end point, at which life will have reached a state of perfect equilibrium. A thrust that comes across implicitly in his spin on Darwin’s theory of natural selection in his misleading use of the absolute term “fittest.”

(I love Wikipedia’s choice of this marvelously sinister-looking photograph of Spencer.)

I didn’t set out to write about Spencer. It occurred to me though that a parallel may exist between the Spencer-like utopia of a perfect evolutionary end point, and the common belief that markets should be left to freely find their form; that a theoretically perfectly free market (which is impossible) would ultimately most benefit society. I don’t want to get stuck in attacking or defending absolutes, just examine whether flawed idealism might be doing us a disservice.

It’s easy to pick on George Bush, but in this case (as in so many others) he serves as a great example of what may be wrong with freely advocating a free market. While it’s hard to imagine that he ever had anything to do with actually writing a book, he did put his name as Author to one called “A Charge to Keep.” Herein we find a quote that will be perfect for our discussion: “A free market promotes dreams and individuality.” (I must add that I found this quote elsewhere; I didn’t read the book. But I can readily imagine Bush subscribing to this perspective.)

It’s easy to point to failures in the market — for instance the recent shakiness caused by subprime loans. But it’s also easy for a free market proponent to point out that poor choices cause these problems and that they are actually examples that indicate that the market isn’t yet operating transparently or efficiently enough. As Alan Greenspan argued: “the securitization of home loans for people with poor credit - not the loans themselves - were to blame for the current global credit crisis.”

If we get into debates between free market advocacy and free market opposition, we’ll never get anywhere (that’s just politics as usual).

Instead, I’m wondering whether there may be a philosophical basis for understanding whether a free market is necessarily good or bad. I’ll try to explain what I mean. If we consider the free market as a concept it must rest on the two concepts of impulse and friction. Market changes require impulse or friction. An impulse initiates a market motion or activity based on an expectation of return or profit. A friction or counter-impulse provides inhibition to the momentum of the market in a particular direction. I’m being deliberately abstract. But we quickly determine that nowhere in the concepts for a free market do we come across any concept of virtue or goodness, other than the reflexive concept that freeness is virtue.

To be more specific. Let’s say a person engaging in commerce spies an opportunity for profit. He or she pursues that opportunity freely, responding to the impulse to benefit from the profit. And let’s say that in a perfectly free and transparent market, another person or group responds to that action by providing friction, thereby reducing or sharing in the profit, or generating an alternate profit for themselves.

A free and transparent market consists of a multitude of such transactions. Each person operates always according to impulse or friction. Never, in free market terms, does any subjective desire to act virtuously enter the equation.

Now, if we look again at Adam Smith (the father of the free market concept?) we find that he firmly believed that selfishness was immoral and that the individual would a act in accordance with the good of themselves and the good of all, since society is required for the market to exist.

But I go back to this idea of impulse and friction. People have coopted the concept of the free market as a virtuous mechanism. But a perfectly free market just “is.” People act and it responds, not according to any virtue, but according to its internal structure (which can never be perfect).

As the real market (synonymous in some ways with the stock market) becomes more abstract and more remote from the worldly barter and trade that Adam Smith witnessed, we lose the very connection to humanity that transforms a morally neutral market into a socially responsible market.

People love to tout the idea of the free market because it notionally frees them from worrying about the fiscal responsibility of the government in ensuring that markets operate responsibly and sensibly. Bush may be right in saying that a free market promotes dreams and individuality, but if we think that’s a good thing, we should perhaps think again.