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The invisible hand
God created Adam and blessed him to be a good steward of all creation. Made in God’s image we live productive lives. To satisfy our basic needs and various wants we must first toil for them. Fortunately I don’t have to sweat to make the things I consume from scratch or mine would be a very miserable existence. The global division of labor makes us amazingly productive.
The spread of capitalism also makes us interdependent. To make a living I have to serve my fellow men even when I fail to love them as I love myself. At the same time they are persuaded to work for me even if they don’t care much for my wellbeing. As in the story of Jacob’s sons selling their brother Joseph into slavery, we see a good social outcome of some not-so-praiseworthy personal motifs.
I use my God-given talents to Supply education. Those who value my product willingly pay for it in both cash and the opportunity cost of their time. I earn income as a producer and thus my basic needs and multiple desires become Demand for goods and services. Now that I have obeyed my Creator’s mandate, I am in a position to order the production of the things that please me.
As I buy food and transportation, I empower farmers and drivers to enjoy the fruits of yet other hands. In the presence of institutions protecting life, liberty, and private property, an “invisible hand” guides self-interested individuals to promote each other’s interests in the market. And it happens without commissars telling people what to do! I have to be selectively blind not to appreciate the wisdom and beauty of such Divine mechanism.
Is free market capitalism a perfect system? Of course not. But none of the collectivist Utopian alternatives gets even close to its ability to satisfy our needs and protect our rights. Can we rely on the invisible hand and the Constitution to preserve and enhance our freedom and prosperity? Don’t be naïve. As John Adams said, “We have no government armed with power capable of contending with human passions unbridled by morality and religion.”
back to top16 Comments to “The invisible hand”
If the story of Joseph’s brothers selling him into slavery and God using that for good is part of the argument for free market capitalism, I don’t think I need to say anything more.
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So here’s my question for this week’s discussion (
): Is Dr. Tokarev’s decision a product of self-interest? Off hand, it would seem the answer would be only in part if we monetize it. The Doctor’s compensation not only includes the direct wages and benefits but a host of other, non-monetized inputs. He substitutes income for these other aspects (time, availability with friends, a sense of calling etc.). Some of these unspoken aspects are indeed matters of self interest, but clearly not all. He makes a choice to teach at King’s say, instead of SUNY; or for working at bank. What influences this? Perhaps a sense of calling? duty? Is our virtue also self-interested?
He suggests as much in his last sentence. Religion is also a determinative here. So perhaps we should poke a bit at that: when where why do we over-rule self interest? Ah, there’s more.
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Harris #2,
The question of whether virtue in general is self-interest is one for another time and place, also perhaps it is useful to comment on here. I am generally suspicious of anyone talking about the benefits of self-interest, as it is not a virtue particularly extolled by the Bible (in fact, as a defining characteristic the only pertinent association is with the hell-bound!) What you hit on is the sort of discussion that I think we ought to have most frequently about economics and the Bible, namely, what are the things that we ought to value in business, government, and community?
Again, Wendell Berry has a lot more to say on this than I do, and he’s said many more things far better than I. But I think what we ought to start with is the fact that all of Dr. Tokarev’s fortuitous ends as a result of a rigid application of this free market philosophy ought not to be fortuitous ends but rather intentional goals. It is, I think, contrary to a Biblical worldview to piece together a few verses about hard work and kingship in the Bible and say, “aha! If we are to obedient, we should have private property rights and a free market, and everything else ought to fall into place.” That’s a rather pedestrian and uninteresting view of the matter, quite frankly. Rather, I think (to answer your question), that overruling self-interest begins every day in our hearts as we sacrifice for others. Then it spreads to our home & households where we save instead of spend, bear one another’s burdens, forgive sins, keep no record of wrongs, etc. Then it spreads out to our neighborhoods and churches, where we give generously to those in need, invite friends over for dinner, take a stand against moral degradation in our midst, and ask ourselves how the things that we are doing affect the land we live on and the people that might happen to live downstream from us. On and on it goes… and the big argument, of course, is what happens at the top with the government. But that is a subject we’ve argued about before, and I’d much rather talk about how communities can live in such a way that self-interest is not glorified but rather waits its turn at the back of the line behind interest in glorifying God and interest in serving others.
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Given the specular failure of the Washington Consensus model to provide any type of stability to enjoy the fruit of capitalism, a serious critique of the model is needed and not half baked simplistic fairy tales. Deregulation and privatization destroyed the post WWII consensus leading to the decline in real income as well as the present collapse of the US banking system.
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I’ll say it again: Dr. Tokarev’s posts and the discussions they engender are becoming one of my favorite parts of this blog. It’s feeding a growing interest in economic theory. So again, kudos and thanks to all, especially Dr. Tokarev (with whom I regularly disagree, maybe too forcefully sometimes).
I was with you up to here –
– and then you lost me.
Did it not require “commissars” to tell people to stop using slave labor? To stop telling blacks they couldn’t eat at this restaurant? To stop forcing Indian tribes off land you want to settle?
Tokarev seems to have faith that the invisible hand of the free market, while not perfect, will by and large enforce just behavior that promotes the interests of others. That just isn’t true.
I can think of two specific cases that might illustrate what I mean. One I read about in a Business Ethics class (years ago). In the 1970s, Ford became aware that one of their cars (the Pinto?) had a gas tank design flaw that would cause the tanks to explode in crashes. A business analysis determined that it would cost less to pay settlements to crash victims than it would to recall and repair all the Pintos. Guided by the market’s invisible hand, and the only purpose of any corporation — to make money — they decided to leave the cars as they were. People died.
Health insurance companies are another example. They have a profit motive in denying as many claims as they can, regardless of the contract they have with individual consumers. Business analyses have determined the percentage of claims that they should initially deny, completely regardless of the merits of those claims, because a certain number of people will just give up when presented with the first claim denial. The invisible hand of the market tells the insurance company to ignore its contract with as many consumers as it can without hurting its reputation. Given the vast power imbalance between insurance companies and consumers, that turns out to be a lot of denied claims.
The invisible hand of the market is entirely amoral. Greed is its driving force, and Profit is its only god. It may be that many people can benefit from our mutual greed, but it is also true that greed will encourage me to externalize as many costs as I can get away with. And the free market will let me get away with a whole lot. If I can dump waste in this river without anyone noticing, the free market encourages me to do that. If I can buy a cheaper oil tanker and then appeal, and stall, and dance around the penalties levied against me when it spills, the free market encourages me to do that.
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Thanks for highlighting the text. I can’t read entire column without becoming seriously bored and/or annoyed as Tokarev is too doctrinaire.
But its I have to be selectively blind not to appreciate the wisdom and beauty of such Divine mechanism. that motivated me to write again. It appears Tokarev equates the “invisible hand” with a “Divine mechanism”. He’s not debating or discussing economic theory or practice rather he’s practicing theology.
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Popping back in … yes, I’m with JJF about enjoying these pieces.
HRW makes a good point about this equation of Divine mechanism and “invisible hand.” The idea of the invisible hand, at least in its original formulation by Adam Smith, was something akin to the outcome from competing forces. That is, if everyone is competing, we are more likely to get the optimal outcome, guided as it were, “by an invisible hand.” In this concept, there is a lot of wisdom, all the way back to the notion of “iron sharpening iron.” Obviously for this to work the participants have to enjoy a freedom to act. That, and there have to be plenty of them, the better to prevent collusion.
Yet here, Tokarev does an interesting reversal:
Can we rely on the invisible hand and the Constitution to preserve and enhance our freedom and prosperity?
This invisible hand is not an outcome of competition, but rather a generator of freedom. But the IH is actually a product of freedom. This is why the question of ethics comes first. Only when that freedom is constructed in a way to safeguard people can this market mechanism work. we set the boundaries for this freedom first (e.g. Bill of Rights). In pushing for basic dignities we do not violate “the invisible hand” so much as set the groundwork.
As to basic violations, Tom Frank in today’s WSJ has an interesting column about indentured service — slavery, really — in good ol’ mid-America, right there in Branson, no less.
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3
“ought not to be fortuitous ends but rather intentional goals”
BUT HOW DO YOU SERVE “INTENTIONALLY” THE NEEDS OF SOMEONE YOU DON’T KNOW – WHICH IS THE CASE SO OFTEN IN A GLOBAL MARKET?
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4
“decline in real income” ???
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5
“institutions protecting life, liberty, and private property”
IS IT POSSIBLE THAT THE AUTHOR MEANS “life, liberty, and private property FOR ALL HUMAN BEINGS”?
in which case slavery should be punished for taking someone’s liberty and for stealing the fruit of someone’s labor
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5
“cost less to pay settlements to crash victims than it would to recall and repair”
but if you follow that argument we should require that companies make perfectly safe products – is that possible?
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7
“freedom is constructed in a way to safeguard people”
isn’t that what all market economists mean by rule of law?
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Reader! Nice to see you back. Wondered if we had scared you away
.
The phrase “decline in real income” may be unfamiliar. In economic discussions (and political economic discussions such as this), it is a short hand for the inflation-adjusted income of the middle class. And here the economic statistics support HRW.
as to your question in 12
I think the fair answer is that it may. Though often rule of law (in economic terms) refers a fixed legal structure (sanctity of contracts and the like). But as those working in international development will tell you, economics depends on a cluster of social goods together with a fair legal system. For the Christian, this means that law also includes safe guards for the economically weak. What those safeguards should be can be a matter of discussion. The reality is — and here I suspect, Dr. Tokarev agrees — economies need both a solid culture and this law to thrive.
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I’m not that easy to scare
I have heard of “real income” but was not aware of any declining trends (except maybe for the low-skilled Americans)
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On declining trends.
Segmenting family income by quintile shows a minimal growth. Pew Reseach numbers range from 1.0% per annum for the fourth quintile (60-80%) to a growth rate of .01% in the lowest quintile.
If the longer term pattern has been slow growth, the last decade has been worse.
If we look at numbers for the present decade, figures are a little more grim, with an actual real loss of income in median income. This is US Census data. Source.
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#6 HRW
“…Tokarev is too doctrinaire.”
Then you say
“Deregulation and privatization destroyed the post WWII consensus leading to the decline in real income as well as the present collapse of the US banking system.”
Tokarev is not the only “doctrinaire” one on this thread.
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