Monday, November 3, 2008

Adam Smith's "Invisible Hand"

While a number of people are fond of citing or ridiculing Adam Smith's "Invisible Hand," few actually seem to understand this essentially simple concept. It was first used to distinguish between a free and open market system and a mercantilist economy where businessmen tried to get government to award them special advantages and monopolistic protections in the national and global marketplace from domestic and foreign competitors. Given such special governmental favoritism, mercantilism concentrated power in the hands of a tiny ownership elite and caused prices to be much higher, choices to be far fewer and quality to become much lower for the poor and most other consumers. Such a monopolistic environment reduced production and the supply of marketable goods and services, especially for those with limited incomes.

Within a free market, Adam Smith presumed that the rich could only satisfy their wants and needs by purchasing the labor of the poor. Thus (Smith reasoned) "ownership of the earth" doesn't matter, because an "invisible hand" operates to distribute the wealth of the world as equitably as if ownership were equally divided. Interference by the State disrupts the functioning of the "invisible hand," and thus causes injustice either for the rich or the poor, depending on which group the State is favoring. Smith did not take into consideration the possibility that the rich could satisfy their wants and needs without the labor of the poor, that is, by using technology (which displaces labor from the production process) to meet their needs, leaving the poor out in the cold.

What Adam Smith left out of his analysis was widespread ownership for the masses of the ever-more productive and labor-displacing machines and technology as a means for lifting the poor and propertyless many out of poverty — but then, so did Karl Marx and all socialists who ignore democratic access to ownership of the means of production as a means of spreading economic power and distributing profits. Widespread ownership is a way to make a market economy not only more free and just, but more democratically effective for distributing what the machines and technologies could produce in far greater abundance than in an economy with more primitive tools, technologies and advanced production systems. That is why I find Kelso's ideas so much more attractive, productive and humane than the systems advocated by either Smith or Marx or Keynes, who tried to blend the worse of capitalism and the worse features of socialism.

What Smith attempted to describe when he used the term "invisible hand" was how prices are set under ideal circumstances when there is total free choice between sellers and buyers and when no one is compelled to buy or sell and all parties are equally informed. Each person's choice and determination of value is a subjective judgment that varies according to the diverse income levels, personalities, tastes and backgrounds of that person. You can compare it to the political ballot, where it takes a majority of people each exercising their subjective judgments to determine who they value to represent them in the political arena. The majority vote is our method of converting many subjective feeling and judgments to arrive at an objective result of declaring the winner. And the votes cast by those in the minority do not count in arriving at political decisions.

In contrast, in the competitive and open economic marketplace, everyone's vote or subjective determination of the value of something placed for sale counts in determining an objective price, what Smith would call the "market price." That price tells the producer how much he should produce and it tells each potential consumer whether or not to buy that product or seek another alternative that he can afford to meet his personal needs and wants. And in this sense, the economic vote in a free market system is more democratic than one's exercise of the political ballot where only the majority's choice has an effect on who will govern their lives. But, as you know so well, free markets by themselves are not sufficient to achieve justice for the poor and middle-class.

Kelso's "Just Third Way" added the element of justice in ownership to that of a free market system, meaning that the playing field would be more level than under exclusionary, monopolistic and dehumanizing capitalism. Then all consumers, as capital owners, would be able to afford to buy what they need to live a decent life.

What we want to avoid is moving from the frying pan of monopoly capitalism (which was not advocated by Adam Smith) to the fire of State capitalism (socialism), where free choice is bureaucrats and politicians eliminate choice on the grounds that they know better than the people what the people need and want. The State, as civilization's only legitimate monopoly, was never designed to produce wealth or determine the economic choices of all its citizens, and that's why our movement has developed the Capital Homestead Act as a way to check the economic power of the State and spread out power equitably among all citizens.

Power is the key issue in determining whether we will have a free society of economically independent citizens, or a trickle-down nation of dependent wage slaves and welfare slaves controlled by a tiny elite of those who own and control all the technologies, land, natural resources, money and credit, and all the things invented over the course of human history. Everyone is free to choose what side of that line they want to be on.

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