The Invisible Adam Smith

Many who claim to be "free market proponents" cite the "invisible hand" of Adam Smith in "The Wealth of Nations".  However, Adam Smith only uses the term once, only in reference to individuals, and in the context of trade among nations. The chapter is "Of Restraints upon the Importation from Foreign Countries of Such Goods as Can Be Produced at Home".  Among the questions Smith raises is :

If a restriction benefits an industry, does it also benefit society?

As to the "invisible hand", Smith does not apply it as a metaphor for an absolutely free market, but as an indication that the acts of an individual can lead to consequences not intended by the individual.  A more complete citation than "invisible hand" is:

"[The individual] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." - pages 242-243

In other words, seeking his own security he may benefit society and seeking his own gain he may harm society, or otherwise, depending on the circumstances.  In no way does this describe a "perfect market".

All page references are to the PDF version of "Wealth of Nations" transcribed by the Gutenberg Project.  You can select your preferred format from http://www.gutenberg.org/files/3300.

For the most part, I don't think Adam Smith provides a prescription of how an economy works.  Instead he provides a description of what he observed worked or didn't work.

Smith only uses "free market" once, in a discussion of the bad effects of restricting exports - pages 353-354.  Woolen manufacturers wanted to restrict exports of wool so that their supply of wool would be increased.  The problem was that English wool was inferior for clothing compared to wool from other countries.  The prohibition of exports caused the price of wool to drop drastically, making it unprofitable to produce.  The "invisible hand" now works to raise the price of mutton because the farmer has to pay his costs.  That means to give the woolen manufacturers cheap wool is to give the consumers expensive meat.  So, restricting exports did not give society much benefit.

A word that Smith uses frequently is "labour", would you believe over one thousand times?  And how many times do you hear proponents of the "invisible hand" talk about labor, other than "greedy labor unions"?  Smith looked favorably on labour, both as the basis of all economic activity and how labor can be marginalized by those with power.

The opening paragraph of "The Wealth of Nations" is:

"The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies [sic] of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations." - page 3

In other words, without labor, nothing happens.

"The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition, that they are going fast backwards."

As the National Football League found out, not paying referees what they asked lowered the owners wealth.

As for those who complain about "greedy unions" and promote "right-to-work laws", consider:

"The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment." - page 142

Few seem to understand the need to balance interests.  When profits and wages are out of balance we are in deep trouble.  Given the rising cash hoard of many large corporations and the still uncertain job market, we should consider:

"It is the stock [materials, equipment, and workplaces] that is employed for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operation of labour, and profit is the end proposed by all those plans and projects.  But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin." - page 142

In other words, without corporations much work doesn't get started and without labor it doesn't get finished.

Finally, Smith didn't think business people ["those who live by profit"] should be trusted in public affairs:

"The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." - pages 142-143

Adam Smith was an academic who read widely, considered what he read, and wrote an opinion for the powers-that-be.  Those who consider "invisible hand" and "free market" as the only things important about economics, should consider reading more of modern economists, who have the benefit of having read all of "Wealth of Nations" and over two centuries more of data to consider.  They are no more in an ivory tower than Adam Smith was.

For a poster of "The proposal of any new law…" see "Poster: A warning from the 'Invisible Hand'".

Updated 2013-07-21 to include Adam Smith's words for "business people.
Updated 2013-08-20 to include link to the poster.

The fallacy of Buy American

Once again the cry "Buy American" is heard from high and low places.  One was Chip Cravaack, R-MN8, putting a statement into a transportation bill that the steel used in highways should be American-made.

A little aside I can't resist.  Aren't the Republicans the one who are all for free markets and no government intervention?  Shouldn't the free market decide the best quality for the lowest price?  Not some government bureaucrat or politician?

I try to buy American and buy local, but in general this is only a preference, not an iron-clad rule.  We buy local produce when it is available.  I love my made-in-Minnesota Red Wing work boots and some of my made-in-America yard equipment.  For decades I wore 36-30 Levis and then they suddenly became too long.  It wasn't me that changed; I found the 30-inch inseam was actually over 31 inches!  Could that have been because Levi Strauss outsourced the making of Levis and that somebody didn't make a proper conversion to metric?

On the other hand we own one American vehicle and one Japanese vehicle, each bought for specific reasons, not the country of manufacture.  Can you find an American-made digital camera?  Same for most computers and related stuff.  The software might be made anywhere.  I prefer a French music-composing program to a Minnesota program.  Do you know anyplace in the U.S., other than Hawaii or greenhouses where bananas are grown?  Would you rather have chicory than coffee?

On the other hand, we should be grateful that many other countries aren't pushing too strongly on Buy English or Buy German, and surprise, Buy Chinese.

Personally, I'm very glad that in the 60s and 70s European governments weren't pushing very hard to buy only European computers.  Otherwise, I wouldn't have been able to live in Europe for six years maintaining software for Univac computers made in Minnesota.  Our customers included Lufthansa, the French Army, and the Swedish Police.

Minnesota doesn't make many computers now-a-days, but many medical devices are designed and made in Minnesota.  If we don't buy goods from other countries, should they buy our medical devices?

Farmers in the U.S. are glad that they have a big export market for all kinds of agricultural products, from grains to meat.  Although India still has many import restrictions "Indian Consumers already buy almonds and grapes from California, and apples by the truckload from Washington." Adam Belz, "Minnesota looks for a bigger taste of India", Star Tribune, 2012-07-19

The military-industrial complex is probably very glad that military establishments around the world aren't restricted  by Buy Nationally policies.  Even the most militarily-oriented Congress couldn't raise enough taxes to buy all the weapons that the U.S. military-industrial complex could produce.  So, those countries buying U.S. military hardware have to raise funds to purchase the hardware.  To do that, they have to sell goods and services outside their own countries, for example, oil!

One of the most interesting news items is the direction of parts for wind turbines passing through the Duluth Harbor.  Big blades are coming from Europe to U.S. destinations.  Big blades are going out to many other countries, the latest being Brazil.  Probably each set of blades had different features that met the requirements of the buyers.

And then there is the name game.  Some years ago a U.S. city was considering buying a piece of heavy equipment.  The city council favored Caterpillar over Kubota because the later was an American name.  Surprise!  The Caterpillar was made in Japan and the Kubota was made in the U.S.

It isn't easy being a free-marketer and a protectionist at the same time.

NAFTA, CAFTA, and HAFTA

Many people rail against NAFTA and CAFTA, equating "free trade" with large corporations running roughshod over poor people. Free trade means it is free for all participants. That is, all participants are free to enter and exit the market, they have free access to all the information they need, and they do not cause harm or cost to non-participants in the transaction.

If so-called "free-trade" agreements do not meet these criteria, then they should be rewritten to do so.

If NAFTA and CAFTA are free-trade agreements for North America and Central America, is HAFTA a free-trade agreement for Hemisphere of the Americas?

No, HAFTA is a free-trade agreement we make with ourselves concerning our own "free-time". We freely choose to do something and then we get sucked into it so much that we hafta do it. Our WANNAs become our HAFTAs.

A few personal cases.

This blog has become a HAFTA. I like to write and I like to share what I write. If I wanna have people read what I write, I hafta to keep writing so they come back. This is true with my Reader Weekly column, print and online, and with my Flickr photos.

I wanna improve my singing ability, and so I take voice lessons. So, now I hafta practice regularly so I show some improvement, no matter how small, when I show up for the next lesson.

We wanna heat with wood to reduce our need for fuel oil. So we hafta cut and haul wood, hafta build a fire in the fireplace insert, and hafta regularly clean the glass and empty the ashes. Oh, for the days of cheap gas or oil when one just set the thermostat and paid the bills. Oh well, we have dropped our monthly budget payment for oil by $26/month, and maybe more now that we are using better wood (dryer, not better species).

Now I'm stuck in another wanna that became a hafta. In rebelliion against all these other haftas, I decided to read and watch Harry Potter as much as I wanna. Once I take a book out of the library or rent a DVD, hafta read or watch.

I wanna do nothing. Oh, oh! Then I'll hafta! How am I going to eat?