A famous theory in economics is “the Invisible Hand” by Adam Smith. Smith said that if people follow their own interests it leads to efficient use of society’s resources. Despite the “human comprehension is so limited” said Smith, the individual can serve other people’s needs well beyond the scope of his intellectual capacity.
The best for everyone is that individuals seek their own best, he reasoned, because the market is a dynamic system that strives for balance. Smith’s theory assumes that the free market creates a balance in resource allocation. It may be so, but it also seeks to expand. There are strong fluctuations in the global economy because the capital movements are self-reinforcing. The global market players have different strengths. When a strong player invests in a market the expectations rise and a lot of investors follow. A stock market crash is preceded by an unsustainable expansion. In a share bubble the factors that create balance – independence and diversity– are gone.
Adam Smith’s theory of the Invisible Hand does not count factors outside the economic system. The theory excludes natural resources like wild animals and plants. I think we should assume that they also want a place to live, eat and reproduce. They cannot express their interest in the market, because they have no money to shop for. Evolution has favored animals and plants that specialize in different things. Different species will find different niches in nature, which means that they do not compete for the same resources. If you can talk about the Invisible Hand’s principle in Biology, it has led to diversity and richness of species.
We are also a kind of animal, but we are not specialized in the same way. We compete with almost all other species and we spread ourselves at their expense. The Invisible Hand in the economy has changed the balance in the ecosystem by single-mindedly focusing on human expansion and growth.
Dynamical systems strive for equilibrium. Equilibrium means that the system’s elements are in balance and that no part dominates too much over the others. But the expansive financial forces are now stronger than the political forces that should decide the rules of the market.
A market needs ground rules. We must distinguish between making the rules and following the rules. Making rules is a matter of policy, playing by the rules is a task for the market. We need a clear division of roles between policy and market, between the creating of rules and playing by them.
In collective decision-making, we could also adopt Adam Smith´s principle. It would be interesting to see what the invisible hand’s principle could achieve in politics. Today we have much more influence as consumers than as citizens. The individual take economical decisions every day, but political decisions only on Election days.
If another “Invisible Hand” shows up in politics, we would have two invisible hands: One hand that creates rules and another that plays – one hand that takes and one that gives. I assume it would lead to a better balance.
A failure or success? 
August 22, 2010 at 10:37 am |
“If another “Invisible Hand” shows up in politics, we would have two invisible hands: One hand that creates rules and another that plays – one hand that takes and one that gives. I assume it would lead to a better balance.”
=> what if the invisible hand that plays is creating the rules for itself – given these rules are subject to a vote by all?
August 22, 2010 at 12:14 pm |
Hi Erdem,
I imagine that both hands are connected to the same body. It’s just a metaphor but I think it fits in this context.