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| The Invisible Hand of the Market Touching the Hand of Man Michelangelo, Fresco on the Ceiling of the Sistine Chapel (1512) |
Just
what is meant by “the free market?” Does it exist? Has it ever existed? This debate has raged for over two
centuries. For some, it is an
indisputable axiom from which all economics and their political beliefs are
derived. For some it is a kind of religious
belief. The supporters of the free
market doctrine from contrasting political and economic factions are in universal
agreement that their version of the free market doesn’t exist in the wild of
the real marketplace. There is universal
disagreement between these factions as to who to blame for this.
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| Adam Smith |
The name
most readily associated with the laissez-faire free market doctrine is that of
Adam Smith (1723-1790). As with most cause
celebres paraded about in support of dogmas, a caricature of Adam Smith’s views
replace not only his subtlety, complexity and the historical context of the culture
in his time, but on occasion his actual
message. For instance, in his masterpiece
The Wealth of Nations his statement on
taxes is contrary to the supply side economics he is frequently cited as a avid supporter of: (8, 9, 10)
"The
subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities;
that is, in proportion to the revenue which they respectively enjoy under the
protection of the state."
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| Frontisepiece of the Wealth of Nations by Adam Smith, Published 1776 |
Further
in the Wealth of Nations Smith states
that the government should be tasked to provide the justice system, grant
patents and copyrights, banking regulation, roads, bridges, canals, harbors, public
education, and invention and new ideas by sponsorship of fledgling industrial
endeavors. (8, 9)
Surprisingly,
there has been long standing socialist economic theory dating to the 19th
century and continuing to the present which advocates free markets as the
underpinning of social equality. (5) A version
of this doctrine posits that free markets cannot coexist with class differences
and inequalities in income, power, and influence on government. (4, 5) Once socialism solves these inequities, a true free market can be established. Paradoxically, one of the founders of the
neoclassical school of economics, Leon Walras, which the modern right wing neoliberal
movement of Milton Freedman developed out of, proposed that the state must own
all natural resources and land. (4, 5, 7)
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| Leon Walras (1834-1910) French Economist |
No one would disagree that the free market as an abstract concept is very useful to
philosophers, economists, social scientists, and certain specialties within
mathematics. Zealots of many stripes also
find it very useful. Abstract concepts
in other disciplines for the most part have never attracted the attention of political zealots. For instance, within mathematics the distinction between
rational, irrational and transcendental numbers have been objects of study for
hundreds of years, and many applications outside of mathematics have been found. Familiarity with these topics outside of the
community of scholars and specialists is slight. The concept of the free market on the other
hand has been a lightning rod for a wide range of political viewpoints for over
two centuries.
Richard
Feynman the noted physicist coined the term Cargo Cult Science. This term referred to certain South Sea
Islanders at the time of World War II who were observed constructing
make-believe airports in the hope of attracting real airplanes. They had seen airplanes land carrying
desirable cargo and imitated what they saw to the best of their knowledge and
available materials. Feynman warned
against carrying out a superficial imitative form of science without rigor and
critical thought necessary to success.
Sadly, we see a lot of this as the science behind economic theories,
such as in many conclusions of the well-known economist Milton Friedman and his
colleagues of the “Chicago School” of economics. (3) The science of the “dismal science” as
economics is sometimes referred to is sometimes indeed dismal.
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|
Milton Friedman, American Economist, Statistician, and Writer. Recipient of the 1976 Nobel Memorial
Prize in Economic Sciences
|
Much of
the uncritical enthusiasm now for the radical laissez-faire “free market” is
even less rational, resulting from magical thinking. Some of what is passing now for free market
ideology would make Milton Friedman blanch.
Magical thinking is assuming a cause of a result which doesn’t exist. All growth, benefits, and the increasing
wealth of a society are attributed to the “free market” by some. The only reason there are any economic
problems at all is due to government interference. In a more extreme form, magical thinking can
be the use of incantations, believing that pronouncing a word will cause an
effect in the world. There are
contemporary political factions who now use words such as “free market” as if
they will cast a spell and influence the course of the events in the world. Thus,
we are all invited to seats at the Mad Hatter’s Tea Party, hosted by a movement
of the almost the same name.
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| Jesus Banishing the Planned Economy from the World |
A
favorite phrase of the ardent boosters of the “pure” free market is “the
invisible hand of the market.” Although
this phrase was used many times in different contexts with different meanings
by Adam Smith in whose work it first became known, it is now taken by some as
the rallying cry of a free market movement.
As such, it represents the concept that the free market is
self-regulating and without any of the participant’s intent contributes to the
improvement of all members of society.
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|
Dani Rodrik is a Turkish-Jewish economist and Albert O. Hirschman
Professor of Social Sciences at the Institute for Advanced Study in Princeton,
New Jersey
|
Dani
Rodrick, an economist at the Princeton Institute for Advanced Studies puts it succinctly,
“Markets are the essence of a market economy in the same sense that lemons are
the essence of lemonade. Pure lemon juice is barely drinkable... the kind of
markets that modern economies need are not self-creating, self-regulating,
self-stabilizing, or self-legitimizing. Governments must invest in transport
and communication networks; counteract asymmetric information, externalities,
and unequal bargaining power; moderate financial panics and recessions; and
respond to popular demands for safety nets and social insurance.”(3) This view would be agreeable to Adam
Smith.
The
Nobel Memorial Economics Prize laureate Joseph Stiglitz explains it this way:
“Whenever
there are "externalities"—where the actions of an individual have
impacts on others for which they do not pay, or for which they are not
compensated—markets will not work well...recent research has shown that these
externalities are pervasive, whenever there is imperfect information or
imperfect risk markets—that is always.” (1)
In
regards to the “invisible hand of the market” Stiglitz is blunt:
"The
reason that the invisible hand often seems invisible is that it is often not
there." (1, 2)
In
other words, for better or worse, there is not now nor has there ever been a
free market system existing in the real world as envisioned by its proponents
or detractors.
1)
ALTMAN,
Daniel. Managing Globalization. In: Q & Answers with Joseph
E. Stiglitz, Columbia University and The International Herald Tribune,
October 11, 2006 05:03AM.
Cited in http://en.wikipedia.org/wiki/Invisible_hand
Cited in http://en.wikipedia.org/wiki/Invisible_hand
2)
Stiglitz, Joseph E.; The
Roaring Nineties: A New History of the World's Most Prosperous Decade , W.
W. Norton & Company 2004
5)
Bockman, Johanna, Markets in the Name of Socialism: The Left-Wing Origins of
Neoliberalism, Stanford University Press 2011
9) Smith, Adam, The Wealth of Nations, Published in 1776. Reprint Bantam Classics, March 2003
10) Brown, Vivienne, The Economic Journal, 103:416 (Jan. 1993) 230-232
