The invisible hand and the global reality

Escrito el 1 Febrero 2008 por Gayle Allard en Uncategorized

Economics draws its lines straight and clear. Supply slopes downward. Demand slopes upward. Where they intersect, we have equilibrium and, according to the faith preached by Adam Smith, the maximum social benefit for society is achieved thanks to the invisible hand.

Smith´s message is simple and attractive. Leave markets alone, let the selfish desires embodied in those well-defined curves be satisfied, and wait to see the revelation of a better society.

In many ways, Smith and the pro-marketers were right. We have witnessed since the Industrial Revolution a true revolution in living standards, generating levels of prosperity, development and human welfare that no one had ever believed possible, for wider and wider segments of the world´s population. Surely the free market is one of man´s greatest discoveries, and an essential part of his future.

And yet as development proceeds we see ever more clearly that those straight lines fail to capture a fuzzy reality. A demand curve that expresses only the selfish preferences –personal “utility” or satisfaction—of a consumer ignores all of the effects that his/her behavior and consumption choices have on the surrounding society. A supply curve that embodies only the producer´s pursuit of short-term profits omits all of the effects that his/her production decisions have on society, the environment, the political equilibrium and the welfare of the world. As markets grow increasingly interconnected and development extends into greater areas of the globe, our classical supply and demand curves give us a less and less adequate picture of the reality of global social welfare and the state of the environment.

How do we fill in the gaps between these “private selfishness” curves and the reality of social wellbeing; the so-called “externalities” that escape the price system? Economists are quick to prescribe “internalizing” externalities: imposing taxes or payments or creating markets that oblige consumers and producers to pay for their effects on society, thus giving incentives for correct behavior. Examples are carbon taxes, carbon markets and various other eco-taxes and recycling programs. There is great potential in these types of programs, if they are well designed and enforced.

But can taxes and markets really correct all of the externalities that are springing up everywhere in our globalized world? The task of internalizing all of them is more than daunting. And I would venture to add that treating man as an essentially economic creature who only responds to material incentives is to accept an impoverished view of the human race. It seems that a much more comprehensive and lasting solution lies in reawakening our collective consciences; returning to a sense of social responsibility and a respect for the environment and the dignity of man. Corporate social responsibility is a step along this path, but a deeper and better aligned sense of personal morality is needed to make the objectives of social welfare deeply ingrained in producers and consumers. Only a radical change in attitudes will convert Adam Smith´s selfish supply and demand curves into more enlighted preferences that can give us a better society and a liveable planet.


Fernando Peral 1 Febrero 2008 - 19:58

I tend to agree with the author. Adam Smith has become again one of the essential economic thinkers of all times. The greatest difficulty globalization is facing is the need, now essential for developed countries to switch their approach to less developed countries from the traditional exploitation/charity approach to a true (market) development approach. Continuous growth and perfect competition leave today no other option to development but emerging new markets born from externalization of production. The so-called paper tigers (Indonesia, Vietnam, etc), China and India are good examples of this. I would wholeheartedly recommend to all readers of this blog to re-visit “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776), as there is much into it that provide a vision of a global free market.

Luis Jerez 5 Febrero 2008 - 13:43

Hello Gayle,

Though it is not a pleasant picture to see individuals deprived of their human touch (compassionate, caring, concerned, and above all moral, fair) as a factor that has somehow resulted in the wealth of nations, it somehow makes it interesting to imagine how the picture of man, together with the resulting picture of its surroundings will be if the radical change you mention goes into effect.

It is understandable our quest for a more equitable society where the balance does actually benefit all, but I wonder whether the cost of that balance however it is obtained (thanks to that invisible hand, that is) is actually the current state of affairs, meaning, to achieve some sort of abundance globally, we have to pay a certain price.

Now some questions that picked my curiosity while reading this column: Could it be practically possible to regulate the doings of man so that no one is left with the short end of stick, or no stick at all? Given the chance to rebuild the system from scratch, would we be able to avoid those things that are affecting the world today in terms of economy?

Kind regards.

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