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Grading Free Market Capitalism and "The Invisible Hand"
Free market capitalism is based on the idea that "the invisible
hand" of the market will create the best possible outcome for the most
people.
But as I noted a couple of weeks ago, the man who came up
with idea of the invisible hand did not believe in unrestrained free
market capitalism:
Americans have
traditionally believed that the "invisible hand of the market" means
that capitalism will benefit us all without requiring any oversight.
However, as the New York Times notes, the real Adam
Smith did not believe in a magically benevolent market which operates
for the benefit of all without any checks and balances:Smith railed against monopolies and the political influence that accompanies economic power ...
Smith worried about the encroachment of government on economic
activity, but his concerns were directed at least as much toward parish
councils, church wardens, big corporations, guilds and
religious institutions as to the national government; these
institutions were part and parcel of 18th-century government...
Smith was sometimes tolerant of government intervention,
''especially when the object is to reduce poverty.'' Smith passionately
argued, ''When the regulation, therefore, is in support of the workman,
it is always just and equitable; but it is sometimes otherwise when in
favour of the masters.'' He saw a tacit conspiracy on the part of
employers ''always and everywhere'' to keep wages as low as possible.
Moreover, as I pointed out in September:
One
of the leaders of the new science of financial modeling - Rama Cont -
points out that Adam Smith was wrong about the "Invisible Hand".Specifically, investors in financial markets rationally pursuing individual profit can produce outcomes that are bad for almost everyone.
As an article in City Journal notes:
Simple
forecasts can also be mistaken if they fail to account for the actions
of market participants themselves: investor strategies can influence
prices, which in turn influence future strategies in a feedback loop
that can cause considerable instability. Cont recalls the severe
stock-market crash of October 1987, which seemed to strike out of the
blue, since nothing significant was happening in the real economy.
Subsequent research, though, blamed the crash in part on a new
investment strategy, “portfolio insurance,” which a large number of
fund managers had simultaneously adopted. Based on the famous
Black-Scholes options-pricing model, this strategy recommended that
fund managers reduce their risks by automatically selling shares
whenever their values fell. But the approach didn’t take into account
what would happen if many investors followed it simultaneously: a
massive sell-off that could send the market plummeting. The 1987 crash
was thus not provoked by events in the real economy but by a supposedly
smart risk-management strategy—and the current downturn, of course,
also derives at least partly from a global craze for a seemingly
foolproof financial innovation...Investors
in financial markets rationally pursuing individual profit, then, can
produce outcomes that are globally negative. Doesn’t that contradict
classical economic theory? “Both theory and empirical facts do tend to
show that, on the financial markets, the Invisible Hand does not always
lead to welfare-improving general outcomes,” Cont replies.
Does this mean that free market capitalism is dead?
No. And I'm not sure that there is any better system.
But
capitalism has to grow up and become less naive, relying less
on a blind faith in "the invisible hand" and more on an understanding
of human nature, including insights from the field of behavioral economics.
It must include sophisticated checks and balances to make sure that the system is not gamed, instead of childish ideas about the "inherent stability" of the market.
And it must make sure that the poker game doesn't suddenly end when one of the players gets all of the chips.
Of course, with high-frequency trading dominating the market (and see this), frontrunning, permanent bailouts (and see this), government-sponsored credit rating scams and enterprises, the creation and maintenance by the government of banks so big that their very size warps the entire system, socialism for the big boys, and all of the other shenanigans going on, we don't currently have free market capitalism.
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There's plenty of situations where a system of individual, non-cooperating players acting in their own self-interests does not yield an outcome that's systemically optimal. It's so common that game theorists came up with a model for such a scenario called a "Prisoner's Dilemma".
Of course, the free market ignoramuses who've been engaging in a mass circle-jerk for the last 30 years don't bother studying anything that can't be displayed in chart form on their Bloomberg terminal.
So, they cling to this stripped-down quasi-religion about low taxes and no regulations. And like the Jesus-based religions, these financial true believers can't even seem to agree on what the savior Adam Smith even actually stood for.
+1
Prisoner's dilemma outcome matrices can actually generate the "worst" possible outcome from players acting out there self-interests.
The "invisible hand" tends to allow and then give the vast majority of the people the "invisible finger".......
Iron fist in a velvet glove, nothing new under then sun.
LOL of course the finger is extended from our own hand
This commie fucker who calls himself "George Washington" of all people is a part of the problem and not the solution. What we have to fight is ANY government interference on anybody's behalf. Yes, it's true that "the rich" often get too much influence on the government. It is just as true that "the poor", such as the unions or ACORN influence it a great deal too. In practice, any government action is to benefit one group or the other in an effort to help the government itself, at a great and increasingly unsustainable cost to society. Whenever you see "benevolent" government helping this group or that, or the whole economy or science or whatever, just stop it. No "help" from the government = no economic ruin.
Captialism is the free exchange between individuals. It is not based on an "invisible hand" benefiting the most people. It is based on property rights and allowing individuals to freely exchange their property as they see fit. Begin with that and you won't fall into the banal analysis that capitalism needs "to grow up" or that's it's "naive".
Huzzah, if more people understood that that right to property and association (free exchange) are what capitalism really is (as opposed to the proto-Marxist stereotypes placed on it), we'd all be better off.
banal analysis that capitalism needs "to grow up" or that's it's "naive".
exacto ,,, but the free hand is part of the whole .. do unto others , as you sow you shall reap,,, work in the context of laws , and property rights ,, allow the results of the invisable hand to be seen ,
Ha! Let the invisible hand pull the rug out from underneath the current ponzi. Then let's see just how well the oligarchs are at growing, and preparing their own food, or building their own house without the heavy hand of government.
=
, yadda ,,
And it must make sure that the poker game doesn't suddenly end when one of the players gets all of the chips.
impossible in a truly free capitalism ,, division of labor , yadda ,,
all the chips end up in one hand under keynesian economic and government control
the yet to be understanding of economics here on the zero hedge is at best sub par,, and at worst dreadful
best sub par,, and at worst dreadful
http://www.capitalism.net/articles/A_Blog_11_09.html#Start
read also reismans capitalism ,,
http://www.capitalism
while all those idea are fine and dandy ,, who is the final arbritator of what is to be,, some government panel,, some guy in behavorial science lol
the free hand of adam smith is a concept that is beyond the meaning and ideas of contemporary thinking ,, it goes to the hand of the infinate ,,
We haven't had anything resembling free market capitalism for a good long time. The problems of monopolies and the other "ills" of capitalism exist because of government interference. Monopolies do not last for very long without government interference in the market. Monopolies invariable get support on the government, who are themselves monopolies. The East India Company didn't get to where it was without the backing of the British Crown, and I'm sure most of us are "blessed" with government mandated monopolies for our choices in utilities.. Once you allow for government interference in the markets it only invites more interference, and eventual control, Mises wrote on this. Intervention by government is only the slow road to a planned economy.
+1
In. Deed.
+1 more
I have been trying to press the need for the Governemnt t
to break up monopolies of land, labor and capital without success. Its these monoploies that were promoted by the politicians and thise that have access to the political process that will destroy this Country.
You cannot create jobs where the system encourages the destruction of companies by eliminating employment to increase earnings; where access to capital markets is controlled by size and financial statements and labor becomes more and more a political weapon that bargains for non market edges and ignores real world competition for labor that will ultimatley result in protectionism.
Go back and watch the 1970s movie "Roll Over" if you want some history.
the free hand of adam smith
cast your bread on the waters and it will return to you
but what was he doing with that free hand prior to touching the bread?
LOL
"but what was he doing with that free hand prior to touching the bread?"
In the basement with Newton trying to alchem a little mercury into gold... and sipping a few mercury concoctions as elixirs...
Ask Tycho Brahe how that works out...
PS: It's a joke. I know they lived roughly a century apart...
thats a 10-4
thats a 10-4
+368 Shameful.
Until further notice, I will assign blame to the .gov Axis with the Fed and TBTF bankers (and other cronies there at the tit) as well as Big Union and other Obama Buddies for any catastrophies to come.
Bush has been gone over a year. Time to man-up Barrack, Nancy, Harry! Are you deliberately cratering America or are you just stupid?
Time is short to save America. Can we do it? I don't know. A suggestion: BUY GOLD! And those who can might want to consider having assets outside the USA.
My $0.02.
It is known to be deliberate. Barry told us what he planned to do before he ever took office, but nobody believed he was serious.
well I aint buying gold over 900
well then say goodby to any more gold purchases
we will not see 900 again in my very humble opinion