As we saw in yesterday's Economic Creature Feature, the invisible hand is a combination of two essential parts: 1) the self-interest of the rich (or whoever is in the process of realizing effective demand) and 2) the distribution mechanism provided by human labor. The labor of the poor serves to distribute the wealth of the rich evenly throughout society in order to satisfy the self-interested demands, wants, and needs of the wealthy.
The flaw in Smith's reasoning is in the premise that human labor is the sole or primary means by which people produce and, through the operation of Say's Law of Markets, gain access to the distribution of the goods and services that others produce. This blindness is remarkable in Smith. He was fully aware that the rich can either satisfy their wants and needs by hiring servants, buying the labor productions of others, or purchasing technology.
According to Smith, "the rich man consumes no more food than his poor neighbour. . . . The desire of food is limited in every man by the narrow capacity of the human stomach; but the desire of the conveniencies and ornaments . . . seems to have no limit or certain boundary." (Wealth of Nations, I.xi.7) Smith claimed the urge of the rich to surround themselves with servants and employees was a manifestation of this desire for convenience and ostentation.
As Smith reasoned, employing large numbers of people to satisfy your wants and needs is preferred over ownership of technology because it adds the moral sentiment of approbation both from those employed (out of gratitude for their employment) and from others in recognition of the employer's status as a rich and beneficent employer. The user of technology was, as far as Smith was concerned, someone to be ridiculed. A man who satisfied his wants and needs with technology was not due the same sentiment of approbation as the employer of hundreds who provided him with the same utility and convenience as that supplied to the owner of technology.
Smith's invisible hand thus promotes the wide distribution of material goods and the overall good of society based on a false assumption: that people will prefer to employ servants rather than use technology. Technology, as Smith theorized, neither excites approbation in others for the owner, nor, apparently, led to the functioning of the invisible hand to make an equitable distribution of material goods.
Smith's two essential errors are: 1) He was unfamiliar with the power of advertising to excite acquisitiveness and admiration of the possessor of the latest consumer technology, and 2) he failed to consider private property adequately as a distributive mechanism in addition to human labor.
A human being can own technology where it would be illegitimate to own another human being. Further, you have to pay the owner of labor for the goods and services supplied by human labor, but if you're the owner you don't have to compensate technology for its labor. All the profit generated by technology goes by right of private property to the owner of the technology. When a machine replaces a human worker, the income generated by the machine flows by right to the owner of the machine, not to the displaced worker. Since machinery is often hyper-productive compared with human labor, the owner of technology can derive income to a greater degree than he would if he were purchasing or expending an equivalent value of human labor (absent a program of income redistribution).
Technology thus amputates the invisible hand. The ultimate goal of technology is to remove human labor from the production process. The mechanism of distribution changes from a person's ownership of his own labor, to his ownership of technology. Since most people own no part of technology, the ownership of which provides the mechanism of distribution, they have no just or legitimate means of acquiring a fair share of the world's goods.
Relying on the sentiment of approbation, Smith assumed that human labor would be chosen over technology in matters of convenience by most people, and, in matters of utility, that advancing technology would actually provide additional jobs rather than eliminate them. History has proven both of these assumptions wrong. The "service economy" (that which supplies convenience) is disappearing as a supplier of jobs due to automation and computerization just as rapidly as the productive economy (that which supplies utility) is dispensing with the need for human labor, and for the same reasons. (G. Pascal Zachary, "Worried Workers: Service Productivity Is Rising Fast — and So Is the Fear of Lost Jobs," WSJ, 06/08/95, A1.)
Smith implied that the actual ownership of productive assets ("the earth") doesn't matter. This would be partially true only as long as human labor was the primary means of production for most people. As technology replaces human labor as the primary means of production, however, ownership of productive assets (that same technology) becomes critical. Ownership of technology becomes the sole legitimate means to derive income from the primary means of production. With concentrated ownership of the means of production in a modern industrial economy, most people have no legitimate means to generate an income and satisfy their wants and needs. Society becomes divided into those who have, and those who do not.
A society of "haves" and "have-nots" is politically unstable. Under laboristic assumptions, however, a government has only one solution. Since labor is assumed to be the only means whereby people can gain income, income of the "haves" must be confiscated and redistributed in the form of welfare, job subsidies, job creation, and job training programs. The government objective of maximizing the opportunities for generating labor income — the Keynesian dogma of "full employment" (General Theory, V.21.iv (5)) — comes into direct and permanent conflict with advancing technology and its ultimate goal of eliminating the need for human labor in the production process.
The only rational response, then, is to figure out some way for workers who own nothing other than their labor to become owners of the technology that is displacing them.