posted on Sep, 20 2011 @ 05:49 PM
It is a matter of blind faith for some people that free markets are always the most efficient and best way for an economy to allocate resource.
(For those of us who actually took economics in college and remember it, we know free markets often allocate resources well.) As the theory
goes, the "invisible hand" of the marketplace guides capital and resources to their most efficient use with seemingly infinite wisdom.
Before you get your knickers in a bunch, please recognize I am not trying to argue that free markets never work or are always bad. I am not trying to
argue that systems like socialism and communism are perfect and work far better. However, it seems that the "invisible hand" is not so invisible
and not so infinitely wise because unregulated free markets (i) can often lead to disastrously poor decisions driven by greed and (ii) are costly.
The first premise, that the invisible hand of the free market is not infinitely wise should be self evident. We have all seen how greed in an under
regulated market can lead to disastrous results. Bernie Madoff-like people cheating investors out of billions, people ripping each other off by
flipping houses and junk securities, and people profiting off of insider trading are all examples of this. This leads to the invisible hand dishing
out slices of pie not in the most efficient manner, but in an inefficient manner.
The second premise that the invisible hand is not so invisible is a little more difficult to grasp. The orthodox idea is that the invisible hand
guides markets without "being seen", i.e. it leaves no signs or effects on the economy. The fact is the invisible hand grabs a piece of the pie for
itself while it "efficiently" distributes the pie in the marketplace. This piece of the pie the hand grabs in getting large, and at the current
time might be onerously large.
In our current economy, bankers, sales people, and marketing people are playing the role of the invisible hand. Their role in this economy is to
distribute goods, services, and capital. The rest of us produce goods, services, and capital. If the hand were truly invisible, these people will
make nothing or close to nothing. They would simply be guiding the allocation of resources rather than using up resources themselves. Of course
these people need to receive some compensation for their work, and would need receive some of the resources this economy produces. However, is the
invisible hand receiving to much?
Banking, marketing, and sales seem to make up an ever increasing portion of the economy while those that actually produce services get little. Take a
pair of designer jeans as an example. It may only cost the manufacturer of the jeans a few dollars to buy the material and pay someone to sew it
together or operate the machines that sew the jeans together. A pair of jeans may sell for $100 or more. The people that pocket the profit are not
the actual manufacturers of jeans, but bankers, marketing people, sales people and others. If a pair of jeans costs $5 to make and sells for $100,
$95 goes to the advertisers, sales people, and bankers. Only $5 goes to the jeans maker. So when it comes to distributing a resource like
designer jeans, the invisible hand may pocket over 90% of the resources while "efficiently" distributing the jeans to market.
Perhaps capitalism would work better if regulations were in place that prevented the invisible hand from making dumb decisions. It may also work
better if the invisible hand did not take such a big bite out of the pie as it distributed the pie.