Wednesday, January 13, 2010

Adam Smith's "invisible hand" in context

Princeton University economics professor Alan Blinder puts Adam Smith's concept of the "invisible hand" in context:
When economists first heard Gekko's now-famous dictum, "Greed is good," they thought it a crude expression of Adam Smith's "Invisible Hand"—which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call "asymmetric information" (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.
Greed is a natural human vice, just like aggression. As much as we may try, we cannot get rid of them because they are part of human nature. But just as sport channels aggression into productive use, free enterprise does the same for greed. Free enterprise is only productive when its goal is to benefit consumers. When it becomes acceptable to screw consumers (or taxpayers) in the quest for wealth, the benefit is entirely lost.

Greed is not good. It is the productive work and investment we do as a result of our greed that is good.

3 comments:

  1. Anyone read "The Pentagon's New Map?" Sound military-esq and there is a bit but the discussion is all about how systems and structures that are open and "fair" can make countries stable.

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  2. 100% yes to this. i just had a conversation last night with someone who basically felt I was anti-capitalist and a "socialist" because I support "appropriate incentives, effective competition, safeguards against exploitation of asymmetric information, regulators to enforce the rules and keep participants honest, and protection of taxpayers against pilferage or malfeasance by others". The problem with so many who consider themselves free market conservatives. They quote adam smith without understanding the caveats of his thoughts and blindly parrot the corporatist talking points that all government regulation is bad, stifles innovation, hurts the economy and proponents of regulation are socialist, communists etc.

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  3. I agree that greed is good if properly channeled; so long as there is no coercion involved and that increased rewards come with increased risk to help throttle irresponsible risk-taking. In other words, greed is good so long as it is not at the expense of another and so long as it is accompanied with risk of loss. Greed and risk of loss balance one another.

    In our society today, we have lobbyist who use the force of government to coerce the market to their gain and at the expense of another. We also have a corporate nanny state in which profits are privatized and losses are socialized. These create the negative externalities that fuel populist outrage.

    The average American has no problem with someone getting rich by providing a service - i.e. Steve Jobs making a fortune on the iPod and iPhone, Steven Spielberg making a fortune producing movies, J.K Rowling making a fortune writing Harry Potter books etc. What the average American dislikes - based on the populist uproar of late - is those who get rich from gaming the system, through coercion or by avoiding the losses of their bad bets in passing the losses onto society.

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