Slapped by the Invisible Hand

Being someone who's read a lot of history and philosophy, I always find it equal parts amusing and frustrating to look back at what someone wrote in a past age about something that's become much more important since then, and seeing just how wrong they could be about it. Nowhere is this phenomenon more obvious than in economics, and no one is perhaps more guilty of this than the great 18th-century economist/philosopher Adam Smith.

Ah, Adam Smith. Product of the Enlightenment. Advocate of personal freedom. And one of the world's first economists. It must be why, looking back on his work, the concepts he put forth about a free market economy seem so frustratingly naive.

In particular, Adam Smith is remembered for a famous abstract concept, "The Invisible Hand," a phrase he coined in his seminal work The Theory of Moral Sentiments. In economics, this refers to a curious, seemingly unintentional tendency for free markets to just naturally benefit everyone involved. Smith's reasoning runs something like this: a baker produces a loaf of bread, which a customer buys. Both parties get what they want: the baker gets money, and the customer gets to make a sandwich. But what if there's more than one baker in town? Well then, the baker who makes the best bread gets the most customers. So the baker strives to make the best loaf of bread he possibly can, benefiting both himself and the customer, who gets to enjoy a damned fine sandwich. The baker's need to make a better loaf of bread, in turn, affects all the other industries connected to him. He looks for the best raw ingredients he can find, so the farmers who grow the wheat, millers who make the flour, blacksmiths who build the ovens...all do their best to provide the best product they can so that the baker will buy it from them. Meanwhile the end customer, who buys the finished product from the baker, makes out best of all, since their getting the best loaf of bread their money can buy.

Economics 101, really. And it makes a whole lot of sense from one perspective. You can still see it at work today in certain industries, most notably in Information Technology. As technology grows more powerful and more complex, so grows the need for talented IT personnel to maintain it. It's a natural progression: a need arises, and an industry appears to fill that need.

But from a larger perspective, the whole Invisible Hand concept just doesn't seem to work. It's based on the assumption that a free market economy is a naturalistic, self-correcting system. And to be fair, at the time Adam Smith was writing, it probably was. Economics as a concept didn't even exist in 1759. Markets were smaller, more dependent on local resources and local populations. If our hypothetical baker couldn't sell his bread, if he couldn't get the raw materials to make his bread because some other industry somewhere failed or left the area, he too would lose his business. And it all seemed perfectly natural, a readily observable and logical chain of events that led to fewer sandwiches in town.

Two and a half centuries later, capitalism and the free market economy is the driving force behind the modern world. And Smith's concept of an Invisible Hand just seems, like so many other Enlightenment-era ideas, quaint and dangerously naive.

Because so many other factors have arisen since 1759, factors that Smith simply did not - COULD not -anticipate. He never anticipated the rise of marketing and advertising, for example. Sure, advertising has been around as long as writing has, but the DEGREE to which industries depend on it nowadays would boggle Smith's mind. The economies he described in The Theory of Moral Sentiments operate on a simple cause-and-effect principle. Customers have a need, businesses respond to meet a need. Smith never seemed to anticipate a business using advertising to ARTIFICIALLY CREATE a need. How many of us had even heard of "body soil" before laundry detergent companies introduced the concept? Slowly turning us into a nation of obsessive-compulsive germophobes in the process. How many of us have bought a product based on the creativity of their marketing campaign (aw, that cute little gecko wouldn't lie to me about decent auto insurance, would he)? The folk wisdom is, of course, that competing products are all basically the same. All soaps get you clean. All breads make sandwiches. All computers get you on the Internet to read this long-overdue blog post. It's really all a matter of personal preference, and which product catches your eye. That's what advertising is for. The hook, the catchy jingle, the flashy package, that gets you to buy that particular brand of soap, that particular model of cell phone. It's no longer a natural, logical choice of buying whichever product is BETTER.  Because really, if all products are basically the same, then "better" and "worse" are no longer relevant concepts. It's all about customer preference, and it's marketing that drives that.

Marketing DRIVES it. That's the key concept. Traditionally, marketing was just a tool for a business, a way to determine customer wants and needs, and finding the best way to fill them. Nowadays, it's almost as if it's backwards. It's not about what the customer wants; it's about what the customer SHOULD want, according to the company producing the product. Advertising tells us what we need, what we're supposed to have, how we're supposed to look. Look at any TV spot for any Apple product, and tell me you don't automatically want it, no matter what it is. Never mind how it actually works. Hell, do those ads even TELL you how it works? Does ANY advertising tell you that any more? Of course not; they're just showing you how cool it looks. Then you get it home, and find out the RAM isn't nested properly, and you have to...

...I'm distracting myself. Sorry.

Granted, advertising has come a long way from the 19th Century, when there were no truth-in-advertising regulations in place and merchants could just tell outright LIES to their customers about how great their products were and how horrible their competitors' were. But the concept remains the same: it's no longer about the product. It's about selling the product. It's no longer about the customer. It's about getting the customer to buy the product. It's strange how, very unlike Adam Smith ever conceived of, capitalism seems to be the ENEMY of freedom and progress. Progress means change, means spending money, investing in something new that might not pay off as much as the tried and true old stuff; why not just leave well enough alone? And freedom? Well, technically we consumers are free to buy whatever product we want. So long as we agree to the producer's terms. You can buy any item, purchase any service, so long as you pay the price or sign the contract. If you don't want to, fine. Good luck finding something else.

This is why I find myself gravitating politically to socialism, at least in some industries. And this why I find Adam Smith so fretfully naive. His philosophies - and their bastard offspring, Libertarianism and Objectivism - were so well-intentioned when they started out, and have just become painfully irrelevant in the modern world. There is no Invisible Hand guiding the market. If there ever was, it's long since been replaced by very visible hands, who are more interested in making money than making something great. And the large part of us just go along with it, because we cling vainly to Adam Smith's assertions that this the best possible system, that it ensures our economic and political freedom, that we really DO have freedom of choice in a vast global marketplace. Because yeah, corporations have our best interests at heart, right? Clearly they're the best ones to trust with our health and safety. Certainly not the popularly elected government that's been trying to fix this mess.

You would think that the recent economic meltdown would change a few minds about that. You would think we would see the rise of a new era of corporate and government responsibility. But alas, that hasn't happened yet. Maybe we're too far gone. Maybe we'll only see change when it's much too late to save the system. If there is ever to be change, we must, as a people, put aside these ideals we cling to that no longer matter, and see the world for what it really is. Only then can we see what can be done.

In the meantime, I'm going to get a pair of invisible handcuffs.