The Invisible Hand

WHAT ABOUT THE INVISIBLE HAND?

The capitalist gospel includes myth of the "Invisible Hand" - the idea that the marketplace will magically balance out personal motives to create goods and services with optimum efficiency. This is more of an axiom than a sensible economic doctrine. Without a shred of evidence, conservatives believe that any attempt to interfere with the "free market" will produce inefficiencies. "Government" is regarded as a cost to be minimized.

Even though the idea of the "invisible hand" was dead on arrival (Adam Smith himself hardly mentioned it and never in the context it is used today), it is core current economic wisdom - accepted as an obvious truth.

Adam Smith first introduced the concept in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution. In this work, however, the idea of the market is not discussed, and the word "capitalism" is never used.

Wikipedia 

Looking at the above example, we can see how regulation may interfere with the perversity of the underlying process. After all, everyone in this chain of events is acting to maximize his/her own "utility", just as the invisible hand idea assumes.

1. The rush to satisfy a "market" motivates R&D performed by a corporation that has motivations that, if they were motivations of an individual, could be described as psychopathic. R&D performed by governments will presumably be specifically in the public interest, not in response to the opportunity for profit. However, R&D by a government is not represented in GNP, nor is there provision for the value of knowledge generated in this way.
2. The doctrine of the invisible hand ignores the perverse effect of competition, which drives down wages, encourages misrepresentation and moves competition into a psychological war to (a) persuade the public they need something they don't (such as bottled water) and (be) promotes a "brand" rather than a product when all products are essentially identical.
3. It is Government regulation, or lack of it, that allows corporations to create a long list of "external" costs, such as environmental costs and health risks.
4. It is laughable that a corporation like Coca Cola can draw water treated at public expense from the public water supply and sell it back to the same public at an insane markup, packaged in a bottle that it is somebody else's problem to dispose of. At the same time, the public will resist taxes for any reason, including improving the safety of the water they drink.

In our example above, the public would be better off if all the relevant players were sent home and paid to do nothing. It is no coincidence that this is pretty much the way we treat criminals.

While we are at it, it's worth mentioning David Graeber's idea of "Bullshit Jobs", jobs that contribute nothing (or less than nothing) to the general welfare. Again, such jobs add to the GNP, which (according to prevailing economic theory) assumes that a service is "worth" what somebody is willing to pay for it.

By the way, Graeber's "Debt: The First 5000 years" is a must-read for anyone who wants to understand "money".

ESSENTIAL GOVERNMENT

I recently played with a "Toy Economy" (IOUTopia) just to get a feeling of how an economy might work. I started by stripping things down to a minimum number of goods that might be traded, but with a "society" that was large enough to support a marketplace. Historically, "barter" appears only between cultures. Within cultures, the tradition of a regular marketplace seems to be a common attribute of civilization. I found that it was impossible to model (imagine) a marketplace without at least some light touch of regulation. In modern times, stock and commodity markets require a "market maker" who makes sure that there is always a market to buy and sell the underlying commodity. This, in turn, seems to require an agreed-to currency that allows us to compare the value of apples and oranges and make it possible to trade apples and oranges.

Another concept that creeps in is banking. As we have seen recently, the banks are an international government onto itself - above and beyond the powers of any nation to control. The evolution of banks actually precedes the evolution of the nation-state. Again, I recommend Graeber.

I also found that it was not possible to model an economy without including an explicit entity we might call the "environment". The environment provides a wide range of goods and services that are systematically ignored in prevailing economic theory. Returning to our subject, this deliberate blindness results in perverse incentives, for example: to pollute and over-fish.