Invisible Hand

Best of All Worlds

The Invisible Hand of capitalism is an important concept in free market economies. Unfortunately, it is often wrongly used to argue against any proposals for change. The basic argument is that the current situation is the best situation. It is the result of the Invisible Hand of market forces aggregating individual choices into the optimal solution.

How? you may ask. Well, have you ever heard a commentator say, let the market work it out? or that’s just the free market in operation?  That’s the Invisible Hand of Adam Smith in operation.

The Invisible Hand (from Scrooge McDuck-looking character hoisted aloft on the Invisible Hand, looking down at 5 identical factories with tall chimneys spewing smoke in their industrious pursuits
The Invisible Hand

Economic Concerns

Many of us worry about jobs going overseas. Proposals are floated to stem the tide, for example tax imports. The technocrats argue that free trade is an overarching good. To interfere with it is to distort the market, the free market. Nothing should be done. It’s unstated but understood they mean by government. There is no such restriction placed on corporations.

The free market is invoked to explain the high income for CEOs and the low income for the rank-and-file. The CEOs are such a rarefied creature that he must be paid gobs of money. How do we know the CEO is worth it? Because that is the result of the free market, the Invisible Hand in operation.

Status Quo

The Invisible Hand is especially useful to those who have benefited from the status quo.  How?  They don’t want the status quo changed and the Invisible Hand is the mechanism that put them in their rightful place in the economic universe.

Circular Reasoning

This use of the Invisible Hand in the free market involves circular reasoning. It is non-falsifiable. It can’t be proven wrong. The meaning of the results are backcast onto the inputs.  Here’s what that means, restricted to a single case, while the free market Invisible Hand is operating on many cases. Say you try to predict who will get the promotion next week. You make your pick. If you were right, then the you feel vindicated. Your pick had the needed skills and works hard enough. If your pick didn’t get promoted, then your pick didn’t have the needed skills or didn’t work hard enough. However, it’s the same person in both cases and your knowledge of the requirements hasn’t changed. You can explain both results, which are contradictory, with the same reasoning. A case of shifting definitions to accommodate the result.

I freely admit there is much wisdom in Adam Smith’s capitalism, but it is not divine truth.

The goals of society precede the goals of economics. Freedom of opportunity and equal pay for equal work should not be sacrificed because the Invisible Hand of market forces might operate better if those societal goals were ignored.

Best World

This world is not the best of all possible worlds. It is simply the world we have gotten to.

The Invisible Hand, from

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