Faith & Social Justice: In the spirit of Richard Overton and the 17th C. Levellers

Economic Justice Primer 2): On “the Invisible Hand” of Market Distribution

First, let me say that unlike some Marxist-Leninists who designed “command economies” that were centrally planned and extremely bureaucratic, I do not deny the need for markets or for private businesses.  “Command economies” failed the test of history:  They were grossly inefficient and only worked at all by suppressing individual freedoms in a totalitarian state–and even that fell under its own weight eventually.

Market economies distribute things efficiently–but not always fairly.  It is a myth that the “invisible hand” of a “free market” will always distribute goods and services in an optimum fashion for a society.  The myth is based on a misreading of Adam Smith, founder of modern capitalist economic theory.  Smith said that value and the wealth of nations was created not primarily by agriculture or trade, but by labor.  He argued (rightly) against monopolies tied to aristocratic families and to government preference for one company over another.  Rather, trusting in competition between companies, with everyone acting in his or her own interests, the good of the whole nation would be served.  That was his “invisible hand.”  We ought to be suspicious of this for it amounts to saying that if everyone is as greedy as possible, everyone will benefit.  Think of that: Every religious and moral system in the world condemns greed as a vice.  But the “invisible hand” (a secular substitute for God’s providence?) of a benevolent free market supposedly works by turning greed into a VIRTUE.  (Not Smith, but the later American philosopher Ayn Rand, made this explicit in her horrible, but widely influential, book, The Virtue of Selfishness.  Milton Friedman was a disciple of Rand and, in turn, Ronald Reagan was a disciple of Friedman.)

But the real Adam Smith was not the hyper-capitalist of later American myth. (In fact, the term “capitalism” did not exist when he wrote The Wealth of Nations.) He argued against what today would be called “globalized free trade,” for instance by arguing that tariffs that made another nation’s goods more expensive and favored one’s own nation could be especially helpful when one was developing an industrial society. He argued against policies that would “outsource” jobs to other lands.  Believing that poverty could hold down the development of a nation as a whole, Smith advocated taxing the rich to provide for the poor.  He also recognized that external factors such as pollution or war debts could undermine the “invisible hand” of the market in creating and distributing wealth.

So, while Smith advocated “free markets,” what he meant was an end to monopolies tied to aristocratic families or to fuedal guilds.  The extreme laissez-faire form of late modern capitalism owes more to Milton Friedman and his political disciple, Ronald Reagan, than to Adam Smith. As well, Smith didn’t believe that all moral values should be reduced to market values. The man who wrote The Wealth of Nations also wrote A Theory of Moral Sentiments.

For more on how Adam Smith would not fit very well in today’s capitalism, see Thom Stark’s “Quest.”


September 22, 2009 - Posted by | economic justice

1 Comment

  1. This is not a free place to advertize one’s own writings. Therefore, I classified Pete Murphy’s response as spam, even though he touched on many important topics–most were in the context of promoting his new book and economic theory. Sorry, Pete, use your own blog for that.

    Comment by Michael Westmoreland-White | September 23, 2009

Sorry, the comment form is closed at this time.

%d bloggers like this: