The invisible hand- is it still invisible and infinitely wise?

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.

this post reeks of communism..

Know what I like about capitalism?

I -could- go to accountant school and become a banker, or telemarketer.

And know what else?

YOU COULD TOO!

CAPITALISM IS BOSS! -wilkow

and sorry don't mean to yell...just tired of the America bashing

Got another question

how much pie was your professor receiving to brain wash you?

reply to post by rbnhd76


There is nothing wrong with bankers, they have always served an important function, namely distributing capital. The problem I have with bankers is that everybody is going to school to be a banker. Do you want to live in a society that is by, for, and of the bankers? Do you want to live in a society where the person that cuts your hair only gets 5% of the money you give him and the bank gets the other 95%? Do you want to live in a society where a car costs $100,000 because 95% of the sales price goes to bankers and salesmen?

Or do you want to live in a society where bankers play their important role, but other people who also contribute to this society get to earn a good living, contribute to society, and shape its policies.

reply to post by rbnhd76


My economics professor was a Nobel Laurette and did a lot of consulting work for banks, so my guess is he earned a lot of pie.

By the way, I did not like the guy too much. He felt he was too good to teach an undergraduate economics class.

The point the OP raises is valid. Star and flag.
That the holy cow of Western economic teaching may not be so holy at all.
The OP does not say - even more, he/she explicitly denies - that such criticism equates to Communism or Socialism.

However, if you actually study the books on the subject, instead of just repeating state propaganda, you could think outside the box of preprogrammed thinking many Americans have when they hear those words - Communism and/or Socialism. It is a knee-jerk reaction programmed from the Fifties.

Marx's criticism of classical capitalism is actually valid in my understanding, while the Soviet Bolshevik dictatorship that was supposed to be an answer to that is obviously not. Technically, Soviet rule was a case of state capitalism, and this was stated by serious Socialist thinkers themselves. So it is inside criticism.

Real Socialism is perhaps closest to the past practices of a few Scandinavian countries as well as certain tribal traditions.

The free market applied to everything as it is by many these days is a mere dogma consisting of a clever metaphor and linguistic tricks to deceive your mind.
George Soros conducted financial experiments on the NYSE on his own capital to prove that the basic rule of Economics 101 - that supply and demand would regulate each other - is simply not real.
Unfortunately, stock decisions are at least as much influenced by the beliefs of traders (the "mind" side) as financial realities (the "matter" side). See the history of how NYSE traders valued stocks of Latin American debt...

Check out Soros's book: The Alchemy of Finance.

Originally posted by hotpinkurinalmintHowever, 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.

Regulated markets more often lead to disastrously poor decisions driven BY GREED and are even more costly. The principle of "hey, you have money, give me some of that so I can spend it the way I want" is called theft. Socialism is equally greedy or more greedy than capitalism.

I can't imagine how one could be so ill-informed as to believe the banking system (at the dead center of the economic collapse) is a free-market system. Its like saying black is white and white is black. Surely you should learn more about the banking system. Its a government-controlled monopoly system governed by not thousands but rather tens of thousands of pages of regulations. And that is just the banking industry. Tens of thousands of pages of regulations is "under-regulated" to you? Wow, unbelievable. What would over-regulated be then? Tens of millions of pages?

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.

What Bernie Madoff did was against not only regulations that communists like, but also against regulations that capitalists like to see... in specific regulations against fraud. Nobody is going accept fraud as an accepted part of the marketplace. What happens when you get defrauded is that you have a right to forcibly get your money back if at all possible. I have never seen an under-regulated market, so therefore I have never seen such a market leading to disastrous results. We have hundreds of thousands of pages of business regulations in the US. And that is too little for you. What do you want 5 million pages? Is that not enough?

The trillions of dollars in fraud on Wall Steet, built on a foundation of fraud through the government creations of the Federal Reserve system, Freddy Mac, and Fannie Mae, already had regulations there to prevent all of the fraud to take place. The problem is regulations are just words on paper and therefore don't actually prevent much of anything.

You should actually research the cause of the economic collapse. The repeal of the Glass-Steagal Act was a small part of the collapse taking place. The collapse taking place is due almost entirely due to regulations, not deregulations.

In the past hundred years we've had about one hundred years of increasing amounts of business regulations. Yet somehow the entire economic disaster is due to that one time in 1999 where Bill Clinton signed a single piece of deregulation?

Originally posted by hotpinkurinalmint
reply to post by rbnhd76

 

My economics professor was a Nobel Laurette and did a lot of consulting work for banks, so my guess is he earned a lot of pie.

By the way, I did not like the guy too much. He felt he was too good to teach an undergraduate economics class.

My economics professor was Ben Bernanke. (not a joke). It was the worst class I had in 4 years of college.'

I had a Nobel prize winner teach a freshman physics class of mine. That was was pretty good.

Originally posted by hotpinkurinalmint
In our current economy, bankers, sales people, and marketing people are playing the role of the invisible hand.

How is a 100% government monpoly system going to play the role of a free-market "invisible hand"? Bankers? They have tens of thousands of pages of regulations to comply with in the US. Sales people and marketing people? If they lie they are breaking rules capitalism agrees with... rules against fraud. And last I checked, these rules capitalists support against fraud didn't really work that well. Why? Because people expect the government to enforce them, when they won't.

Had people assumed the government wouldn't to a single damned thing to enforce the laws, have never done a single thing to enforce the laws against fraud, and never will do a damned thing to enforce laws agaisnt fraud, then the system would get better starting now and it would get better fast. How do I know? Well gee, my brother was a victim of fraud, and the FBI did exactly ZERO(0) to help. Nothing. Nada. None. Get it? The government isn't going to help you out. They are in it for the money and for the power. They don't care about you and me.

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?

Distributing goods is what logistics companies do. Given how the price of everything in low-regulation industries is going down, has been going down, and will continue to go down, *ADJUSTED FOR INFLATION*, I'd say our system of distribution is wonderful. As for the distribution of capital, well that is going terrible. Just awfully. But well, that is controlled by the government in a fascist framework, so that should be exactly what can be expected from a system under tens of thousands of pages of regulation. The goods distribution network on the other hand is a low-regulation network in the US in comparison.

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.

There is only one reason any industry could ever remain at an extremely high profit margin for an extended period of time: excessive government regulation. Profiteering in the drug industry. Profiteering in the military-industrial complex. Profiteering in banking. Profiteering in the medical services sector. All this profiteering happens only... ONLY over the long term where excessive government mandates and excessive government regulations crush the competition. You can't start your own medical practice these days with all the regulations. You have not been able to start a bank for ages because of the regulations. You have not been able to start so much as a lemonade stand without a government license for Gods sake! And you call that capitalism? LOL, no. That is quite simply fascism.

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.

How can something that does not exist "work better" if this or that? Capitalism does not exist in the USA, so it can't be improved upon. The one and only place capitalism comes close to existing is Hong Kong. Shouldn't they be doing worse by your estimation since they are "under-regulated"? And what do you know, their economy is improving now for all classes of people there. Amazing how that works.

Originally posted by seachange
How can something that does not exist "work better" if this or that? Capitalism does not exist in the USA, so it can't be improved upon. The one and only place capitalism comes close to existing is Hong Kong. And what do you know, their economy is doing very well right now. Amazing how that works.

First off Hong Kong isn't great for everyone.

Urban poor in Hong Kong

According to this 33% of the population lives in state housing. How capitalist is this?

Or this

Hong Kong citizens living in cages

Name says it all. Actually I think you agree with the OP. Capitalism looks good on paper but never really works out that way in the real world.

reply to post by daskakik


Given the population density of Hong Kong, I really don't see how a typical person in the city could avoid living in a very tiny space regardless of the form of government they adopt. Its only through extreme skyscraper construction that the well off can get extremely small apartments, and the poor can get even less than that.

If you see stories about Hong Kong residents suffering from malnourishment, or high levels of infant mortality let me know and I will stop telling everyone that Hong Kong is a great place to live (except for the lack of space).

reply to post by seachange


Really except for having to live in a cage it's great? Sounds like a cop out to me.

This sounds sad:

Chung, 67, is now waiting for welfare to kick in and is on a long list for public housing. The government says it is doing its best to meet its citizens' needs, but Chung says he has lost all hope. Economic recovery or not, he feels forgotten.

Living in a cage in Hong Kong

There is nothing that resembles the milk and honey promised by capitalism in that story.

Originally posted by daskakik
reply to post by seachange

 

Really except for having to live in a cage it's great? Sounds like a cop out to me.

This sounds sad:

Chung, 67, is now waiting for welfare to kick in and is on a long list for public housing. The government says it is doing its best to meet its citizens' needs, but Chung says he has lost all hope. Economic recovery or not, he feels forgotten.

Living in a cage in Hong Kong

There is nothing that resembles the milk and honey promised by capitalism in that story.

Your story about Hong Kong is strong evidence that capitalism isn't a utopian fairy tale where everyone is happy and prosperous. What your story does not show is how much worse other economies are under heavier regulation for all income groups (rich and poor).

The poor in Paris, France apparently are not doing better if this video is any indicator:
www.youtube.com...

You would think there would be some circumstances where government business regulations help with something, but I've never seen any solid evidence of that. Civil law should be used to regulate businesses based on restitution, not criminal law or other codified regulations.

reply to post by seachange


Actually I'm not a proponent of any particular government model. It seems to me that except for very extreme cases (dictatorships and anarchy) things are usually pretty similar. No matter what -ism is used to call them they are always oligarchies.

Actually the idea that Hong Kong is capitalist is what I was trying to point out as wrong. In that story they talk about public housing and welfare. It is said that their market is freer than the US but the same can be said of some European contries that are considered socialist.

Originally posted by daskakik
reply to post by seachange

 

Actually I'm not a proponent of any particular government model. It seems to me that except for very extreme cases (dictatorships and anarchy) things are usually pretty similar. No matter what -ism is used to call them they are always oligarchies.

Actually the idea that Hong Kong is capitalist is what I was trying to point out as wrong. In that story they talk about public housing and welfare. It is said that their market is freer than the US but the same can be said of some European contries that are considered socialist.

The main reason that I consider Hong Kong a capitalist country is that their government spends less than 15% of the total money spent in the country. In the US the Federal government spends about 47% of the total money spent. I consider Hong Kong to be at the threshhold of Capitalism. If they had just a little bit more spending on social programs, I would not consider them capitalist. You're right there is no country out there that is considered strongly capitalist. Hong Kong has a weak capitalism. I think its there... just barely.

I think that the single most important measure of capitalism by a long-shot is the spending-to-GDP and revenue-to-GDP numbers because high government spending is a symptom of government controlling capital. The private sector controlling spending is a symptom of private parties controlling capital. The best definition of capitalism is private parties in control of capital. Its true that the government can skirt around capital problems through direct regulations such that a country, so its not a perfect indicator. I suppose that is why the most elaborate measure of economic freedoms out there tracks a very large swath of variables. But, I don't think they give nearly enough weight to the spending/revenue ratio.

What free market are you talking about? I only see only distorted and manipulated markets as far as the eye can see.

Although admittedly probably for not much longer.

reply to post by hotpinkurinalmint


I agree with your premise. To me it seems that the conflict we have in changing this design is that as a country we value property and contractual rights. Increasing profits in business is really accomplished only through inflation. What we have today is an invisible hand that can be predicted in every aspect of the sense. The goods and materials can be obtained through contracts established previously, instead of being guided to the best part of the economy. Companies will not bring a product to market without a ready supply of all the material they need to produce the product. This didn't always used to be the case. Things were less definite then they are now.

One example is the emergency food market. The government steps in with a huge contract, and the average person cannot get the same deal and has delayed service because the government contract takes priority. There really was no invisible hand at play.

Another example is the gas market. Each day the world consumes more gas as populations grow. Oil is not the problem, rather it is the refining process that escalates our oil supplies. Speculation on the market also raises our oil prices. Yet, everyday people can go fill their gas tank up. There is really no supply problem. However, one refinery goes down and the disruption can elevate the cost of gas. My question is why haven't they built a back up refinery? The simple answer is because they know that when a refinery goes offline they can justify higher gas prices, even though there has rarely ever been a supply problem attributable to lack of gas. Generally, it is the transportation of gas that has been disrupted but not the lack of gas itself.

I agree there is no invisible hand, and it definitely is not wise.