Understanding money and credit — two aspects of the same
thing — is impossible without first understanding private property and
something called “Say’s Law of Markets.”
Both are not merely important, they are interdependent when speaking
economically. From a monetary perspective,
however, it may be easier to understand private property if we first understand
Say’s Law, but we won’t understand Say’s Law until we understand Adam Smith’s “invisible
hand.” So we will post today on the
invisible hand, then on Say’s Law and private property in future postings on
this subject.
This will allow us to come to a better understanding of
what money and credit are by looking at what money and credit do . . . or are
supposed to do if the financial system and the economy are set up in accordance
with the principles of economic and social justice and, frankly, just plain
common sense.
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| Adam Smith |
Contrary to popular myth, Smith is not the High Priest of Laissez
Faire Capitalism and the Apostle of Greed.
Although his “invisible hand” argument has been used to justify the
belief that “greed is good,” nowhere did Smith ever make that claim.
Instead, what he said — using the invisible hand as a
metaphor for a properly arranged economic and financial system — was that,
assuming that people act in conformity with the principles that guide how the
system functions, the system will operate for the benefit of everyone. This is in spite of the greed and rapacity of
the rich, not because the rich are being selfish and greedy. The system will do good even if the people
using the system intend no such thing.
To illustrate, take the system of roads as an
example. If drivers always stop at red
lights in the manner prescribed by the system, then people will be able to
cross the street at the light safely and cross traffic can proceed without
causing a wreck. Does every driver who
stops at a red light do so in order not to hit pedestrians or refrain from
causing wrecks? Of course not. Many people stop at a red light because the
rules of the system say that is what must be done.
Thus, even though a driver does not intend that any good
result from stopping at a red light, even though he may curse rather loudly and
view it as a great inconvenience, if he obeys the law requiring that he stop at
a red light, no one will be hurt.
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| Milton Friedman: "Greed is good." Not according to Adam Smith. |
At the same time, suppose that someone who intends only
good refuses to stop at a red light . . . even for the best of reasons. He is late for work and doesn’t want to get
fired; she is picking her kids up at school and doesn’t want them standing
around in the rain; whatever.
A great deal of damage can be done by someone who tries to
circumvent the system, even with the best of intentions. The driver who is cursing everybody and
everything because he caught yet another red light is benefiting society by
staying within the system, while the driver who intends only good goes outside
the system and people die when he runs them down while going through a red
light.
Thus, as Smith pointed out, the greedy and rapacious
individual who does not intend to do good, indeed, doing good is the furthest
thing from his mind, nevertheless benefits society when he pursues his
self-interest but stays within the parameters of the system. This is because he cannot benefit himself except
by benefiting others, whether or not he wants to.
In the labor-centered economy that Smith was looking at,
even the greediest individual could not satisfy any but his most minimal
desires except by employing others to work for him. At the same time, people who claimed that
others should be provided with what they need without having to produce
something greatly harmed society, for if people could get what they needed
without being productive, they would have no incentive to produce anything.
Thus, in a sense, Smith’s invisible hand argument is the corollary
to his first principle of economics. As he
expressed it in The Wealth of Nations, “Consumption is the sole end and
purpose of all production.” (Adam
Smith, An Enquiry into the Nature and
Causes of the Wealth of Nations, IV.8.49.) In other words, in a rational system, nothing
is produced that is not intended to be consumed by someone. Producing for any other purpose amputates the
invisible hand (so to speak) by attempting to circumvent the system.
This, in fact, was one of the biggest mistakes made by
John Maynard Keynes. Instead of
producing solely and exclusively for consumption, Keynes said the economy must
produce a surplus to provide savings for new capital investment. There must be goods produced that are not for
consumption in order to be able to accumulate savings to produce more
unconsumed goods in the future!
But if you don’t produce except to consume, then —
obviously — you can’t consume unless you produce! And that leads us directly to Say’s Law of
Markets, which we will look at in the next posting on this subject.
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