Wednesday, April 15, 2015

There Is No Invisible Hand, No, Really, There Isn't.

"Adam Smith's invisible hand"
"The invisible hand of the market"
"Just let the invisible hand work"

This gross misunderstanding of the concept that Adam Smith made reference in his work The Wealth Of Nations, namely, that there is some mystic force or inexplicable power, summoned into being by a free market, that oversees and guides it towards the right end. Sometimes it's parodied as being a deity of sorts for Capitalism.

This foolishness makes me want to self-injure.

The entire concept of the "invisible hand" is that there isn't one. It was a comment on the nature of a market economy. Because of the multitude of prices available, and the fact that people work for the maximum amount of profit possible, it appears that there is an overseer guiding people to the most effective use of their effort. But they are not guided, save by the prices. It is only the prices that put people on the most effective path.


As demand in something increases, sellers raise their prices in response. But not only do sellers raise prices, they also try to acquire more of the something in question. That increases the demand from the producers, and as the producer attempts to meet that demand, the producer requires more raw materials, raising demand for those as well.

But the harvester of the raw materials will not know why the prices of the materials have gone up, only that they have. Other potential harvesters will see the increased prices and enter that market as well. Again, they do not know why the prices have gone up, only that they have.

No one is communicating the needs of the sellers and producers to the harvesters. There is no overseer, no guidance, and no controller announcing that need, there is only the increased price. Again, there is no mechanism to directly communicate who needs what. Even the increased prices don't communicate that, but rather incentivize people to provide it.

Likewise, in the other direction, the increased demand of a raw material for Product A may reduce available raw material for Product B. As a result of the increased demand for Product A, the raw material for both purposes gains a higher price. This increases the price of Product B. That increased price dissuades people from buying Product B, and that lower consumption results in more raw material available for Product A.

But the consumers buying Product B don't know anything about a shortage of material, or of Product A. All they is that the price is higher. There is, again, no overseer announcing a shortage and rationing of the raw material for both products. People reduce consumption in one use for the benefit of another without even being aware of it. No one told them to, no one educated them on the complex interplay between the two things. All they saw was a higher price, and modified their expenditures accordingly.

Low prices promote the same thing - a low price signals an oversupply of product. Consumers see the low price and buy it, producers see the low price and shift to other products. No one knows why there is a low price, and it doesn't matter. The oversupply is corrected simply by virtue of it's low price. No overseer, no guidance, no hand at all. It appears as if these people were guided by invisible hand, but the reason the hand is invisible is because it isn't there at all.

SCHEDULING NOTE: I am shifting from Monday/Wednesday/Friday at 9am to M/W/F at 7am for updates, at least as an experiment. We'll see if it matters. If you have any comments on the change, or the piece, let me know below.

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