ANOTHER GLIMMER OF LIGHT IN THE FOG OF MISUNDERSTANDING

Matthew Ebert posts (29 October) on Metric’s Country Club HERE 

“THE INVISIBLE HAND”

“Ever since the Occupy Wall Street protests grabbed international headlines in 2011, the issue of income inequality has moved to the forefront of public discourse. Regardless of where someone finds themselves on the political spectrum between liberal and conservative, the fact that income gains in the United States have increasingly gone to the wealthiest citizens after the 1970s is not in dispute. In a speech at the Federal Reserve Bank of Boston in October 2014, Federal Reserve Bank Chair Janet Yellen mentioned various highly credible studies which demonstrate “significant income and wealth gains for those at the very top and stagnant living standards for the majority,” and said that “the extent of and continuing increase in inequality in the United States greatly concern me” (Parker). Where people disagree is in identifying the cause of this inequality, and what steps should be taken to address it. Generally speaking, people with conservative viewpoints believe in an extreme form of free market economics, where the “invisible hand of the market” in laissez faire capitalism works to distribute the fruits of effort based on merit, and where government intrusion through public policy is seen as a form of tyranny that robs the gains created by the producer class in an ideal meritocracy and distributes them to the undeserving, underperforming classes. The flaw with these viewpoints is in the assertion that such an “invisible hand” exists, that it acts to create an egalitarian outcome, and that public policies tend to benefit the poor. The simple truth is that there are inefficiencies inherent in capitalist economics and public policy that disproportionately benefit the wealthy over the poor and work to maintain the status of the wealthy and powerful elite.

First, it is important to understand the term “invisible hand” and how it has come to be used to describe economics. The term originated from Adam Smith’s seminal work, The Wealth of Nations, widely considered the foundation of modern economics. In this initial work, however, the term had a more nuanced meaning than it has today. Smith wrote:

“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention”.

Smith specifically references the support of domestic over foreign industry as a self-interested action that supports society through the unwitting decisions of an individual actor. Even in this more nuanced instance, it is questionable whether an individual actor in a modern global economy can exert noticeable pressure on larger trends. …"

[Read the whole piece by following the above link]

Comment

The above piece is interesting, though the whole post contains many errors. Nevertheless, it is worth reading as an attempt to cut through the falsehoods of the current misunderstanding of Smith’s use of the “invisible hand” as a metaphor and not as an analytical description of how market economies function despite an individual’s so-called “selfishness”, etc.  Smith’s main point was that by investing locally from fear of risking his capital abroad, the merchant intentionally added his capital to the domestic economy, which unintentionally benefitted the local economy arithmetically - not “miraculously”. See: Wealth Of Nations, IV.II. 1-10: pp 452-56).