The Visible Hand we need today


According to the “invisible hand” theory—long celebrated (in America) as the most effective mode of human economics—private commerce should now be busy directing our efforts and resources toward those things we truly need to prosper as a collective society. Instead, the “invisible hand” seems to be willfully guiding us in the opposite direction. How can that be? Has something fundamental shifted, causing the mechanism of the Great American Enterprise to steer not just blindly, but recklessly?

The answer appears to be YES. And what has shifted is that the secret formula of the “invisible hand”—the profit-motive—is no longer capable of ignoring, or hiding, the collateral damages (unpaid “costs”) that have floated from its wake for two centuries. Or, to put it more accurately, while the profit-motive and the “invisible hand” continue to both hide and ignore those damages (most dangerously exemplified by carbon pollution) human society (which supposedly is the beneficiary of the “invisible hand”) can no longer allow it to happen.

To come to the point: the damages (which are now far beyond “collateral”) must, at last, be stopped and ameliorated—but the celebrated “invisible hand,” with its profit-motive guidance system, is incapable of accomplishing the task for the simple reason that doing so will be UNPROFITABLE.

If you remove its profit-motive guidance system, it turns out, the “invisible hand” doesn’t have a clue what needs to be done. As a result—and because America’s current political-power structure insists that only the “invisible hand” of market economics be allowed to operate the tiller—the ship “Great American Enterprise” is now floating and bumping around without any rational direction to pursue other than increasing the wealth of the already wealthy.

Let’s take just one example: Something America (and the rest of the world) desperately needs is a fully operational zero-carbon transportation system—not fifty years from now, but ten years from now. Short of accomplishing that, we face the unfolding prospect of near certain (and potentially catastrophic) climate-change commencing in the next decade. What is the “invisible hand” doing to confront this issue? Its pinky finger is getting some “market-twitches” that tell Elon Musk and the major auto manufacturers that someday, in the future, there’s “money to be made” in electric vehicles. In the meanwhile, the rest of the invisible digits are busy auctioning off more and more leasing rights for oil and gas drilling—because that’s where the profits are today, because fossil-fueled cars, trucks, and buses are what will be making profits for the foreseeable future. It’s an unbreakable logic.

But modern society has, as of this very moment, run out of time for the “invisible hand” to get to that “future” where zero-carbon enterprise is profitable! Maybe that, really, is the fundamental change that’s happened: There’s just not enough time now to reach “profitability”—because the train of climate-change is no longer an abstract notation on some future schedule, it’s a whistle-blowing reality just on the other side of the hill.

Something has to be done. But what?

Interestingly, the only one moving anywhere close to fast enough—and decisively enough—seems to be the Chinese Communist Party. Gerry Shih, of the Washington Post, reports that while the Washington, D.C. Metro recently unveiled (with much fan-fare) fourteen electric buses—making it one of the largest electric-fleet operators in the United States—the Chinese metropolis of Shenzhen has already deployed more than 16,000 electric buses and 12,000 electric taxis, making it the first carbon-free public transport system in the modern world. How did it accomplish this seemingly impossible transformation?

ANSWER: It used the VISIBLE hand of intentionally targeted state spending to undertake the accomplishment of an agreed upon goal—(whether it made profits or not).

In other words, according to the Trump administration and the “invisible hand” idealists, China cheated. “Government” is not supposed to decide what needs to be done—and is certainly not supposed to create money to pay for doing it. That is not playing fair. That’s foul-play. That’s illegal! Adam Smith said something about that a long time ago—and any one of our mainstream economists can write gleeful gibberish in the Wall Street Journal explaining why the “invisible hand” continues to be the only way to avoid catastrophe.

Ho-hum, answers China: We have a major city with a fully operational zero-carbon public transport system. So far as we’re concerned, that’s all that matters. The fact that, in getting there, we also created from scratch an electric vehicle manufacturing capability that will enable us, starting right now, to export zero-carbon transport systems all around the world—we’re not complaining about that either. So far as creating money is concerned, what’s the difference between you creating money to build things that make profits, and us creating money to build things that we decided we need to have?

Personally, I think if Adam Smith were alive today, he’d say something like this: “The invisible hand works great so long as it’s getting great results—but when it starts making big mistakes that threaten the well-being of all Nations, it’s time to hand the steering wheel to a VISIBLE HAND that can see—and directly steer toward—what needs to be done.”

8 responses to “The Visible Hand we need today

  1. Mike Meeropol

    Interestingly, the real Adam Smith (rather than the caricature that the right-wing has created) utilized the concept of the “invisible hand” only ONCE in The Wealth of Nations. It was all the way into BOOK IV where Smith attempts to counter the analysis of the mercantilists. In a passage designed to show that it was unnecessary to use government intervention to promote domestic as opposed to foreign (colonial) industry, Smith argued that concerns for the SECURITY of the investment (security was essential for any society based on private ownership of property — a strong state was necessary to safeguard property rights) would promote a “natural” preference for home investment over foreign investment.
    Here are the appropriate words from The Wealth of Nations, book IV:

    First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry …
    Secondly, every individual who employs his capital in the support of domestic
    industry, necessarily endeavours so to direct that industry, that its produce may be
    of the greatest possible value …
    As every individual, therefore, endeavours as much as he can both to employ his
    capital in the support of domestic industry, and so to direct that industry that its
    produce may be of the greatest value; every individual necessarily labours to
    render the annual revenue of the society as great as he can. …
    By preferring the support of domestic to that of foreign industry, he intends only
    his own security;
    [THESE ARE THE CRUCIAL WORDS – my editorial comment!]

    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.(TWON: 475-7)

    It is amazing how many Principles of Economics textbook writers completely ignore the context of Smith’s use of that concept.

    Clearly, in the era of international imperialism, the 18th century concerns for “security” did not prefer domestic to foreign investments — the British navy took care of that in the 19th century, the war against “godless communism” took care of that in the second half of the 20th century, and the “war on terror” is attempting to do that now.

    But JD’s major point remains essential — Smith was emphasizing the SECURITY of investments as the key to what the “invisible hand” was telling investors. The key to the security of investments was a strong state. Right now, we also need a strong state — but one responsive to the desire rapidly emerging among the people at large for a world that humans can live in, 30-50-100 years from now.

    The “security” motive trumped the profit motive for Smith in his formulation — we should be arguing that something similar — the motive for human —MUST trump the profit motive TODAY. And the “real” Adam Smith is on our side — not the side of the profit motive.

  2. Excellent post, but I would change one word. What we now need (and have needed for quite a while) is the HUMAN hand steering the economy. Is not the replacement of the arbitrary invisible hand by the purposeful human hand the underlying story of civilization itself? I have always loved the tagline to E.F. Schumacher’s “Small Is Beautiful”–ECONOMICS AS IF PEOPLE MATTERED. Now, In light of the looming ecocide Schumacher warned us was coming, we should amend it to say: ECONOMICS AS IF PEOPLE AND PLANET MATTERED. Obviously, as you point out, the two are inseparable.

  3. John Graham

    I never met my maternal grandmother. She died of sepsis from an accidental cut on her hand from a kitchen utensil. Presumably, had antibiotics been available to her, her fatal wound would likely have been no more than a passing annoyance. The carnage from bacterial infections only a century or so ago was terrifying. Yet we plunder the effectiveness of these life-saving drugs, and big pharma, based on profit calculations, has dragged its feet on finding new ones; one of many ways the monomaniacal obsession with short-term profit literally courts disaster.

    It’s not that private enterprise has no place in a just and healthy economy, but there are some things it can do very well, and others that it cannot and/or should not. The same is true of a government of, by and for the people (which the Chinese Communist (?) Party is not). For most of America’s history there has been widespread recognition that there is a legitimate role for both. In times of national emergency the government’s role as coordinator becomes more pronounced, as it did when eagle populations were declining, LA kids were choking on smog, and the Cuyahoga Rive was on fire. It was democracy not enterprise that stepped up to the plate.

    One large caveat; impunity for the ultra-wealthy goes back at least as far as feudalism, and the US has never entirely let go of it. But apart from the horror and hypocrisy of slavery, it seemed surge, along with government corruption, in the laissez faire policies of The Gilded Age, and then ebbed though most of the 20th Century. Until we chose Reagan, of course. Profit is not an inherently bad deal, but the tendency of any form of power to snowball into a monopoly is (to which democracy is a remedy).

    We learned that lesson at least once before. Fool me once, shame on you. Fool me twice, shame on me.

  4. OLA fellow MM theoreticians!
    I’m new here.
    I have a question:
    – This article signed by JD ALT represents fundamentals of the Modern Monetary Theory on “climate change” …
    Obrigado !

  5. Michael Crews

    But then… Mother Earth raises her hand to inform us of some additional collateral damage we had not yet considered recognizing.

    “Report: Going 100% renewable power means a lot of dirty mining” (full report is linked in the story)

    “Take cobalt. Each electric vehicle needs between five to ten kilograms of the bluish-white metal for its lithium-ion batteries. The authors consider cobalt a “metal of most concern for supply risks,” because nearly 60 percent of its production takes place in the Democratic Republic of Congo, a country with a dismal record of child labor and human rights abuses. Should the world’s transportation and electricity sectors ever switch to running entirely on renewables, demand for the metal would soar to more than four times the amount available in reserves, according to the researchers.”

  6. It should be clear by now that the “Invisible Hand” is an article of religious faith, not substantiated by evidence. In 2007-8 we witnessed one of the catastrophic failures of unregulated market capitalism, yet even fairly enlightened, politically-concerned adults still cling to their “God has an Invisible Hand” religion.

    Historically, the idea of unregulated capitalism is a myth anyway (see The Visible Hand by Chandler), and no stateless society has ever had an economic market…but people are awfully stubborn about this.

  7. The invisible hand is controlled by at least two invisible forces–the least cost criteria and the affordability criteria.

    The least cost criteria usually is the consequence of labor hours needed to accomplish a task. If we take transportation as an example, we see that it takes much less labor to acquire the fuel needed if we use fossil fuels. Fossil fuels are the ‘least cost’ fuel source.

    The second criteria, affordability, is a little more complex to describe. It basically relates to access to products. Access is controlled by both ownership and proximity. Perhaps an example will help here: if you own and live near a gravel pit, you clearly have access to gravel. If you own but live far from a gravel pit, you have access to gravel but need to move either yourself or the gravel to gain physical proximity access. If you both live far from a gravel pit and lack ownership, you have to find a way to interact with both gravel pit owner and transportation provider before you have physical access to gravel. This third ‘you’ is confronting ‘affordability’.

    This last person, lacking both ownership and physical nearness to the desired product, is the one most in control of the invisible hand.

  8. rick shapiro

    The invisible hand is so tautological as to be beyond argument. However, it does not address either externalities or market failures due to market frictions. Where externalities cannot be addressed by an the tort system, they must be addressed by government regulation and pigovian taxes. Your example of the need for electric transportion would easily be addressed by them.