American Political Myths – The “Invisible Hand”

As the theory goes, in a free market, each individual strives to maximize his or her own gain, and in doing so is “led by an invisible hand to promote an end which was no part of his intention.”  The end that is promoted is “to render the annual revenue of the society as great as he can.”  As explained by Investopedia:  “Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off.  Furthermore, any government intervention in the economy isn’t needed because the invisible hand is the best guide for the economy.”

Well, this makes some sense and does seem logical, at least on the surface.  I believe that the “invisible hand” does have the postulated effect, but certainly NOT to the magical extent claimed by free market advocates and anti-government zealots.  The economy, free market or otherwise, after all, is a system.  Like with any system, the cause & effect or natural order of things is not absolute.  These things only exist within a certain set of parameters, and even if the needed parameters are natural and expected, that does not mean that they cannot be changed or corrupted.  In other words, any system can be “gamed” by changing or messing with the parameters.

Versions of this theory, or similar theories, come under the guise of many names –  free market, free enterprise, capitalism, laissez-faire, and so on.  These ideas are gospel, and used like weapons, by those in America who support, or are controlled by, big money and greedy power.  Decades of indoctrination by the Corporate/Conservative power structure on the Right against “big government” and social programs have been based on some of these ideas.  These attacks attempt to pass these theories off as simple, absolute and undeniable, none of which is true.

The idea that government should stay completely out of all commerce and business activities is ludicrous.  Total deregulation would mean nothing stopping drug companies from advertising placebos as a cure for cancer, or worse yet, selling dangerous and untested drugs as wonder cures, even if the patients always die from taking them.  Lemon laws, false advertising laws, safety inspections of food products, usury laws, and laws preventing the defrauding of customers are ALL government interventions in business and commerce.  And these are only a few of the many laws, rules, and regulations that prevent businesses from harming customers.  Do you want to live in a country with such a small central government that none of these protections exist?

Many die-hard government haters would respond to this question with the assertion that businesses would refrain from doing these things because they would soon have no customers at all.  This is another of the pervasive off-shoots of the theories mentioned above.  Business is self-regulating because those who best satisfy customers will have the most, and those who don’t will go out of business.  Even forgetting the severity of the damage that could be done before these “bad” companies went out of business, there are other flaws in this idea. 

The obvious flaw is in a monopoly or an industry that provides necessities.  Without regulation, nothing stops a monopoly from doing whatever it wants, especially when what they provide is a necessity to people.  Second, this idea assumes that the goal of the decision makers is the continence of the business over time.  Decisions in businesses are not made by the totality of employees working at the business, but rather by a very few elite executives at the top.  These are the same executives that earn the big bucks, and can vote themselves huge bonuses.  Without regulation what is to stop unscrupulous executives from getting rich quick, even as they destroy the business?

Another idea in this vein is that government regulation and taxation of businesses stifles entrepreneurship, and creativity.  The desire for wealth is what motivates people to come up with ideas and work hard to bring them to fruition.  Well yes, but who believes that making a million at a 35% tax rate is less desirable than making 50,000 at a 20% tax rate?  Who actually believes that?  And worse yet, if Republicans in Congress had their way, billionaires would pay even less then millionaires.  The motivation to go from poor to the middle class is probably very strong.  Going from middle class to a millionaire is also a strong motivation, but probably less than getting out of poverty.  So how about becoming a billionaire, or earning hundreds of billions.  Exactly how does that maximize the total revenue of society?

As I have written before, maximizing the revenue, success, strength, or affluence of society as a whole is NOT best accomplished by each and every individual increasing and maximizing their own success (especially if maximizing means going from a millionaire to a billionaire), but rather by maximizing the fulfillment of the potential of all members of the society.  The accomplishment of a society is the aggregate of the accomplishment of all members of that society, and the wealth of a nation is NOT measured by the average wealth of its citizens, but by the MEDIAN wealth.

If this makes sense, then what is important is how to help all Americans reach their full potential, and thus maximize their accomplishment.  In something I call The Humanity Formula, I postulated an equation for maximizing accomplishment. 

Accomplishment = (potential * opportunity) –  hardship

This formula, along with the fact that potential does not adhere to socio-economic boundaries (just as much potential exists in the ghetto as in Beverly Hills, probably more), explains why social programs, educational programs, and fairness in taxation are GOOD things for society as a whole, including the wealthy.

So yes, excessive and unnecessary government regulation and involvement in business and commerce is stifling, and a bad thing for society as a whole.  But sensible regulation is absolutely necessary.  Sensible regulation must accomplish two things.  First it must keep the economic system working within those parameters that will maximize its effectiveness.  This means preventing cheating, fraud, and short-term excessive gain at the expense of destroying the system in the long run.  The second thing sensible government action must accomplish extends beyond regulation and involvement in business and commerce.  Government must do everything it can to see that as much of the available potential amongst its citizens is realized as possible.  This not only requires sensible regulation of business, but also social, educational, and financial programs that maximize the Humanity Formula above.  This means providing opportunity and reducing hardship in any way it can.  This not not a gift or welfare, but an investment in the future greatness of America.



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  2. dadepfan says:

    Thank you! The Reverse Spin is my political blog, but I also run several other sites, including The Boomer Blogs, David & Malen’s Treasures, and others. As a result, I am very busy and don’t get to write much anymore.


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