Endless Curiosity

February 21, 2009

There is no Market, there is no Invisible Hand

Filed under: Economics — Alec @ 6:10 pm

There is no Market and there is no Invisible Hand.

There are only people trying to make money.

I’ve been putting off writing this piece because I wanted to give lots of details, but I realize I’ll never get it done that way, so here’s the brief version.

Certainly if you define what exists as the market, there is a market, but what most people mean when they say the Market will solve things is the Free Market.

We all live, work, and behave in a framework, and that framework consists of cultural norms, and rules. Most importantly, the rules define the structure and bounds of the cultural framework, and where rules are not enforced, we end up with corruption.

In other words, we have rules and laws to set limits to people’s behavior. There will always be some people who act ethically, and there will always be some people who try to maximize their own benefit, who push the limits of what they can get away with to benefit themselves, their family, and their friends. The only way to curb their actions is to have enforceable laws, where the enforcement is reliable and predictable.

So back to my original statement: there is no Market and there is no Invisible Hand; there are only people trying to make money.

The U.S. Tax code totals almost 3 million words – about four times the length of War and Peace. Why is it that long? Because it’s mainly tax breaks to corporations. Tax breaks (corporate welfare) are one of the few things Congress can give in return for campaign contributions. These days most bills in Congress are written by lobbyists for industry, and again most of the bills are related to subsidies and tax breaks for corporations. So much for a free market.

Then there are all sorts of subsidies: the cotton industry, the sugar industry, farm subsidies, oil and gas subsidies, and the list goes on. Why do they get subsidies? Because they can. Because they pay to have powerful friends in high places. Nothing to do with the intrinsic value of their product, and everything to do with being able to make more money through lobbying and influence. Then there are plenty of examples of the military being used to benefit U.S. corporations.

As I said, there is no Market and there is no Invisible Hand. There are only people trying to make money.

Now I’ll just sit back and wait for my Nobel Prize in Economics.


  1. Even deeper: the free market, by its very nature, opposes itself. There are four requirements of a free market: consumers have equal access to competing goods; consumers have full relevant knowledge of competing goods; consumers make rational buying decisions based on this knowledge; and prices reflect costs. These requirements are rarely, if ever, met in a true marketplace.

    Let’s focus on “prices reflect costs”. Such costs include not only the easily-measured costs of production, transportation, and so forth, but also social, environmental, and other long-term costs not usually accounted for. These costs are ‘externalized”: paid for by society in general rather than by the producer. Every time a paper mill dumps its waste in a river (killing the fish and poisoning the water that a community relies on), it is externalizing its costs.

    But: without regulation, only the most ethical and altruistic businesses voluntarily internalize their costs. Everyone else follows the profit motive and externalizes costs as much as possible.

    The only way I know of to internalize costs is through regulation in various forms. You see the irony? In order for a market to be free – to present prices that reflect costs – it must be regulated. Adam Smith understood this. In fact, his “Invisible Hand” referred to the tendency for local commerce to be regulated by local social mores (he was mostly talking about wheat farmers in small villages, after all).

    But libertarians are not actually interested in the free market – at least not in Adam Smith’s vision – or they would encourage government regulation to internalize costs. Libertarians are interested in absolute freedom, something that is very different from, and actually, opposes, a functioning free market.

    Comment by Tom Margolis — September 23, 2009 @ 5:24 pm

  2. […] I just came across this quote from John Maynard Keynes, the hot economist-du-jour. I loved it because it ties in so nicely – and thus validates – my February posting about the Market and Invisible Hand. […]

    Pingback by Endless Curiosity — July 3, 2009 @ 10:52 am

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