The horizon is not so far as we can see, but as far as we can imagine

Capitalism’s “Invisible Hand” Is Prescriptive More Than Descriptive

The invisible hand is the idea that people operating based on their own self interest in a market economy will optimize “value” and by doing so will increase human welfare. If a person runs a company which makes something that people are willing to buy, they must want or need that thing, and the person will want to make more of that thing so that they can become richer. They do it out of greed, but the richer they get the more they improve the common weal, as it were.

So even though they aren’t doing what they do because they care about the welfare of others (Adam Smith is very clear about that) operating from greed leads to increase human welfare.

Works, except when it doesn’t.

Descriptive statements describe how the world objectively is. Prescriptive statements describe how the world ought to be.

It is certainly possible for someone to get rich doing good. It is also possible for them to get rich doing evil, and it is quite common for them to get rich doing both good and evil things.

Oil companies produces something people want. Oil, natural gas and coal have lead to a large chunk of the world being much better off. But the oil companies knew about climate change and not just suppressed the information, they funded denialism, for the obvious reason that they would make a lot less money if there was a political consensus that less oil and gas and coal had to be used.

Every company wants cheap labor, to reduce their costs, but wants consumers to buy their goods. This led to the Great Depression, in effect (the story is a bit more complicated but this is the essence), and was only fixed when the government forced them to give good wages to employees, and provided price and wage supports along with social security and medicare for old people who couldn’t work, but could continue consuming.

All companies who provide necessities, things people must have, have the ability is they are a monopoly or an oligopoly acting in a collusive matter (which doesn’t require meeting) to raise prices much higher than is good for human welfare. This includes food, water, housing and medical services, among others.

Many companies produce what economists call negative externalities: they do something which hurts other people, but don’t pay the cost. Right now in Britain, privatized water and sewage companies are paying record dividends while dumping record amounts of waste into Britain’s waterways.

Walmart and Amazon both tell their workers how to apply for food stamps and other benefits: they take the profits from cheap labor and dump much of the costs onto the government.

Positive externalities are as big a problem: you do something good and someone else gets the profits, so you have trouble doing more good or even continuing to do good. I like to use the example of the British Museum: without them many people wouldn’t come to London or stay as long, but almost all of the money is spent in hotels and restaurants and the British Museum gets almost none of it, even when you consider the government funding based on taxes it receives.

Universities are another classic: they produce a great deal of value, but are able to capture almost none of it. A good government keeps them well funded and emphasizes teaching and research not administration because they know that universities create value the government will eventually capture.

In dozens of ways markets actually incentivize acting in ways that don’t lead to human welfare, but they can improve human welfare. That’s the issue. It isn’t automatic. Sometimes it works that way, sometimes it’s nothing but oligopolies grasping an excess share and companies dumping their costs on society while taking the profits.

So the invisible hand making greed work to the benefit of all is prescriptive: it is a way that an economy with markets can work, not a way that it must work. If you want the invisible hand to do what Smith said it would, you have to stay right on top of capitalists and make sure that the can only get rich if they increase human welfare.

To a large extent, in the New Deal and post-war American period, that’s what government did. Once Reagan took over, it didn’t, it did the opposite because a rich middle class with a lot of money was like sheep in full coat waiting to be sheered for wool, then eaten.

Most economic issues are politics in drag and the vast majority of politics is just about power and coalitions. The remaining economic issues are about natural laws: ecology, geology, physics, biology: mother nature bats last and she doesn’t give a damn what happens to stupid humans or any other species.

All economic systems are prescriptive. “This is how the economy should work” and are descriptive in the sense that if the economy is organized according to the prescription, it is expected to produce certain results.

Capitalism can, for certain periods and places, produce increased human welfare. But it’s not automatic, it requires keeping capitalists under firm control. Capitalists, as it were, make fine servants, and terrible masters.

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Week-end Wrap – Political Economy – May 21, 2023


The Debt Ceiling Crisis Is Just Politics


  1. Griner for Bout

    Thank you Ian Welsh. I love your summation:

    “Capitalists, as it were, make fine servants, and terrible masters.”

  2. Ché Pasa

    The question I generally ask in these sorts of discussions is

    “for whom?”

    because in fact, the Invisible Hand or whatever is not postulated to work for everyone or all the time, but merely for some, some of the time.

    So who would that be? Cui bono? right? Does it work for the Natives from whom so much is stolen to provide for the well being of the thieves? Hardly. Does it work for the peasants from whom the Commons are expropriated? It’s a little more complicated, but on the whole perhaps no, it doesn’t. Does it work for the environment ever subject to the tender mercies of the exploitative class? Again, up to a point, maybe; beyond that point, no.

    And so on. It’s my understanding Adam Smith was aware of these contradictions and had no easy answer, but perhaps to hope for a better future — somehow. And too, he was not against all forms of public interest and government interference on behalf of the commonweal.

    Did Alexander Hamilton propose that Caribbean or American enslaved people were or would be better off in a “civic republic” which did not include them (any more than Ancient Athens or Rome included its slaves or women) in the concept of “commonweal” — but were dependent upon them for their comfort and prosperity.

    While I generally agree with the premise of the article, I struggle with some its facts. Such as the New Deal forced employers to pay “good wages.” It did not. It enabled some workers in some industries to obtain good wages through union bargaining, but those were a minority. The majority of the working class struggled as they do still to make enough money to live comfortably. The New Deal made some progress, true, for the working class, but not enough, not nearly enough, nor, we’ve found, was much of that progress sustainable. Because of power imbalances, not because “we couldn’t afford it.”

    I’m still a believer in building a better future, but it’s becoming more and more difficult to do so, yes?

  3. Z

    cap*i*tal*ism (/ˈkapədlˌizəm/)
    Def.: A religion of false profits


  4. Willy

    The whole invisible hand thing assumes a far higher level of competency and discernment on the part of the consumer than reality demonstrates. Those theorists either forgot the part where most consumers are suckers born every minute, or they knew that full well and were bullshitting for profit the way most corporations do today.

    I remember this little phrase that was memetic a while back: “People are smart”. Seemed weird to me. Compared to what exactly, mice? Won’t a typical mouse dropped naked into a rain forest survive a lot longer than a typical human? Aren’t people just people, smart and/or dumb? Another was “the difference between a man and a boy is the price of his toys”. Where the hell did that one come from? The only man toy I know of on my block is a fancy RV. No bikes or boats or quads, just that one fancy RV. And then I recently learned that that particular homeowners’ parents are living in it.

    There’s plenty of evidence that our culture has been guided by other kinds of invisible hands, the kind that prefers “slight of”. I had a conservative insist that a hallmark of the left is that lefties can’t control their jealousy. Of what, greed? I don’t mind when somebody gets rich off a useful idea, as long as they’re a creator and not a parasite. I mean, how the hell does anybody become jealous of a greedy parasite? And why the hell aren’t these “invisible hands” busy plucking greedy parasites off our system?

  5. mago

    When the going gets tough the tough get going walk your talk and so forth. Superficial slogans fit for bumper stickers.
    Invisible hands? Por favor. Sounds like some porn site dedicated to masturbation.
    Simplifying complex issues into sound bites is our specialty. To learn more call Saul.

  6. StewartM

    A wonderful article in the abstract, though I acknowledge CP’s criticisms.

    Capitalism can, for certain periods and places, produce increased human welfare. But it’s not automatic, it requires keeping capitalists under firm control.

    This is exactly why I’m leery of just ‘going back to the New Deal’. To use a JRR Tolkien analogy, it’s like the coalition of free peoples on Middle Earth trying to hide the ring to keep it out of Sauron’s hands—sure, it might just work, for a while, but eventually it will fail. We, like they, need a permanent solution to the problem (as we’ve been shown that just patching it won’t last) which is why I favor some ‘socialist’ route.

  7. Purple Library Guy

    This is true as far as it goes. But the problem is that capitalism always pushes towards transforming the capitalists into masters. Concerted political pressure can limit them for a time, but it isn’t stable. As long as you have that basic thing of private owners of the means of production running those means to make a profit and accumulate capital to then reinvest, you have this loop that creates concentration of wealth, and therefore concentration of power.

    So, sure, what we’ve come to call “social democratic” policies of keeping capitalism on a tight rein can give you a pretty good society, but it never seems to last more than a few decades before the capitalists gather enough power, influence, capacity to create propaganda, to break it. The slope is slippery–keeping the capitalists useful requires eternal vigilance, which doesn’t happen in human societies. Worse, it requires eternal vigilance despite capitalists tending to control much of the information that reaches us.

    “Good” versions of capitalism cannot be sustained. That’s the main reason I want a fundamental break with capitalism. I want something that does not build in those incentives and pressures towards increasing concentration of power.

  8. DMC

    Getting private money out of politics would go a long way to fixing the problem. If the individuals who comprise the government weren’t massively corrupt, we’d still have Glass-Steagall and a decent social safety net and wouldn’t be squandering the national treasure on useless boondoggles via so called “defense procurement “.

  9. Willy

    A major problem with socialism is that nobody’s ever figured out how to get the mob to think straight. For millions today, Trump is steadfastly held blameless for anything he does “because of the Biden crime family”. Even right here in this place, Billy Browder’s tax evasion is considered much worse than the willful bombing of innocent civilians. Talk about messed up moral thinking.

    For beneficial governments to be maintained the mob cannot view the line between good and evil as being some fuzzball they get to play with at emotional whim, or far worse, forced upon them at the emotional whims of some authoritarian.

  10. Richard Holsworth

    The New Deal came about as a reaction to the real threat of revolutionary social current called “Bolshevism.” Name another sweet spot in the history of Capitalism.

  11. Richard Holsworth

    Yes, Purple Library Guy; ‘“Good” versions of Capitalism cannot be sustained.’
    Scandinavian Success was short lived. “the economic stagflation crisis of the 1970s was noticeable, and the crisis represented a fertile ground for new thinking and trans formation in the organizations of economic production and the institution al functions of the state.“

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