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 the recession, real or imagined, chronic problems that beset the nation, and the celebration of taste and art in a great cup of coffee.

With all that’s been written about the current economic crisis, be it mountain or molehill, it’s been surprisingly (or perhaps unsurprisingly) difficult to get to the bottom of the situation. I can’t escape the impression that the economy moves according to forces too complex for anyone to fully or reliably understand. The wisdom of hindsight abounds, but those still willing to predict what comes next sound more like doom-mongers or soothsayers than thoughtful, commanding economic theorists and commentators.

The Times has a piece that hints at some concrete economic indicators: According to David Rosenberg, a Merrill Lynch economist, the stock market is overvalued by 10 percent relative to corporate earnings and interest rates. And, judging by historic norms (by comparison to salaries and rents,) house prices are overvalued by 30 percent across much of Florida, California and the Southwest and about 20 percent in the Northeast. More about the rationality of these indicators later.

Bob Herbert points to a more urgent matter than the economy, if we judge urgency by the degree of current and long term impact. Bob’s gloomy picture of the shameful state of schools in South Carolina stands as a sad example of the disparity between the haves and the have nots, and, because the poor conditions in South Carolina seem to relate to entrenched and systematic racism, the vast distance between the kind of country we want to believe we live in, and the kind of country we do live in. Talking about a school he happened upon, former South Carolina commerce secretary, Charles Way, says he couldn’t really believe his eyes. “It was the most deplorable building condition that I’ve ever seen in my life. How the hell somebody could teach in an environment like that is really just beyond me.” (Ben Tillman to the right, infamous racist, prominently honored at the SC statehouse.)

A school text book had a volume with the title: “One day man will land on the moon.”

Another dispiriting story reveals that the United States ranks at the bottom of the Group of 8 industrialized nations and 39th among 149 countries for its environmental performance. The United States contributes a quarter of the new releases of greenhouse gas emissions globally.

And how do I reconcile the current economic woes, the chronic, unaddressed problems facing the nation’s poor and its minorities, and the environmental disaster underway with my glee at reading about a $20,000 coffee maker?

I love coffee. I buy premium roasted beans from small companies. I grind them right before I brew. And I take great care to try to get the brew just right. So, the story about the lengths to which coffee houses will go to brew a great cup of coffee drew me in. It made me want to go downtown to Cafe Grumpy’s so that I can try a cup of coffee from an $11,000 coffee maker…

Back to the economic indicators of stock value relative to corporate earnings and interest rates, and house values relative to salaries and rents. Even if we take the calculation on trust, can we agree that these constitue reliable, rational economic indicators? I think not. As the world changes so economic norms change.

Judging stock valuation by earnings and interest rates perhaps works reasonably well over a short time period, but can it be applied consistently, without modification, over a long time period? Here’s one example of why I’m dubious. Technological innovation and the surge in importance of the Internet gives more reason to expect future innovation and technological growth now than ten or fifteen years ago. Isn’t it then appropriate to value companies, in general, somewhat higher than we would have valued them ten to fifteen years ago, because we expect future earnings to be higher?

And the model for judging house values by comparison to salaries and rents must surely change over time, too. As more people squeeze into urban and suburban areas, the relative value of land and space may increase more rapidly than salaries (that are affected by things other than land and space). Also, raw materials for building houses have changed in relative cost, building regulations have changed the way houses are built and what they cost to build, and the skill-sets of the laborers have changed… How can the model work without modification from one period of time to the next?

I’m still ruminating on how I can be so thrilled about a great cup of coffee when the state of South Carolina, for one, discriminates against minorities by so woefully neglecting their education. From a philosophical perspective I understand that I’m not the master of my desires, and that when living in society we need to grapple with our own desires and needs as well of those of others. Ideally I know I should balance my own interests with those of people around me. Which doesn’t necessarily mean disavowing my love of coffee.

If we’re to try to get the balance right, we need more exposure to the problems in our society. The increased public attention given to global warming has finally begun to have an impact on the way we live and the choices we make. We need more exposure to the lingering problems of racism, too. I agree with Bob Herbert that our politicians should be addressing matters of racisim rather than dancing around them.

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On the logic or otherwise of war, protest, and reaction.

Today’s current events drew me to think about the philosophy of conflict in all its forms. Further reports of the violent and brutal repression of protests in Kenya, sparked by a reaction against the election results there, university protests against the Catholic church in Rome, Canadian condemnation (through its torture watch list) of inhumane detention and interrogation techniques being used by the US government, and the growing call for shoring up the economy with a stimulus package.

(Putting the economic stimulus package on this list may seem odd. But I deliberately want to stretch the idea of conflict to include “intervention” since it seems to me that the concept of conflict may be subordinate to the concept of intervention. (Another story I could have used as an example discusses Google’s philanthropic appendage — Google.org.))

The Kenyan troubles provide two philosophical questions: Can we logically and rationally examine whether violent protest is justified and under what conditions? And, secondly, can we logically and rationally examine whether harsh and violent suppression of protest is justified and, if so, under what conditions?

Emotionally, if we sense that a group has been wronged, we tend to sympathize with it in its protests. And if the protests meet with harsh suppression, we may even tend to sympathize with some level of violence on the part of the protesters. (This is why Ghandi’s philosophy of passive resistance caused such a stir and continues to stand out in people’s minds. It struck us as odd.) Conversely, if we feel that the group hasn’t been wronged in proportion to the protest, and that general order and safety is threatened by the protesters, we tend to sympathize with the use of some force (short of unwarranted violence) in maintaining order. I realize I’m not speaking for all of society in saying this, but just painting an emotional picture.

Rationally, though, can we justify violent protests or violent action against protests?

The student protests in Rome against the Catholic church raise a similar question without the violence. The Italian protests revolve around some of the incumbent Pope’s ill-chosen and perhaps ill-meant words.

And Canada’s arm’s-length but telling criticism of the US’s recent human rights record by putting the US on its torture watch list provides an example of confrontation that is charged because of the statement it makes rather than the mechanism it employs.

Which brings us to the sluggish economy and the growing support for some kind of stimulus package. Action, reaction. Situation, confrontation.

The concepts involved in confrontation seem to be 1. dissatisfaction with the status quo, and 2. judgment that it is right to act to effect some change to the status quo.

A conscious actors, human beings have gone beyond the simple response to stimuli that governs the actions of non-conscious creatures. Consciousness gives us the power to act against a stimulated response. In other words, we may be dissatisfied with a situation but decide to do nothing to change it. When an animal is moved to anger, it’s natural response may be to act aggressively. As human beings we can choose to act on this response or not.

As to the concept of dissatisfaction, we cannot control it. An adverse situation will either lead to dissatisfaction or it won’t.

Then there’s the question of whether it is right to confront the situation that has caused our disatissfaction, and how we judge this.

To put it simply, in the non-conscious world it is always right to respond according to the stimulus. Whereas, in the conscious world, it may not be right to respond to the stimulus.

The Fed and the politicians concerned about the slump must judge whether it is wiser in the long term to stimulate the economy than to leave it alone. The judgment on whether to confront the slowing economy should rightly take into account the long term economic impact. A confrontation based only on short term fears about a recession would be misguided.

In Rome, the protesters seem to have forgotten about the value of freedom of speech by forcing the Pope to cancel his visit. Their confrontation seems to be based simply on short term anger at his visit rather than long term consideration of what’s best for the country. Perhaps they’d do more for separation of church and state by letting the sinister Ratzinger visit and countering his dubious social theories with elegant rebuttals.

But what of the philosophy of violent protest or suppression of violent protest? Again, it seems that, however abhorrent violence may be, the long term good or ill to society of violence must be weighed against the ill to society of the status quo. From the perspective of the good of humanity it was right and good for the nations of Europe and the US to fight the Nazis. The long term good to the world warranted the violence and loss of life incurred.

In Kenya, is more being gained through the protests than would be gained without them? If I understand the situation, the Kenyan protesters are confronting not just the election of a president they don’t like, but the suspicion of electoral fraud. In which case, for them, the very basis of civilized society is at stake. In which case, if they have good reason for their suspicions, it seems that their confrontation, meeting violence with violence if need be could be judged to be warranted.

Which is not to say that peaceful means of protest in Kenya or elsewhere should be disregarded or abandoned as either weak or ineffective. Far from it. As Ghandi showed, sometimes non-violence can be far more dramatic and dramatically effective than violence.

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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.