THE INVISIBLE HAND
The key to conservative arguments on the free market is
a concept called the "invisible hand." This is one of the most
popular terms in conservative literature, coined by Adam Smith (a Scottish
professor greatly beloved by his students and peers for his delightful
absent-mindedness) in his 1776 classic, The Wealth of Nations:
"It is not from the benevolence of the butcher, the brewer or
the baker that we expect our dinner, but from their regard to their own
self-interest... [Every individual] intends only his own security, only
his own gain. And he is in this led by an invisible hand to promote an
end which was no part of his intention. By pursuing his own interest, he
frequently promotes that of society more effectually than when he really
intends to promote it."
In other words, the "invisible hand" represents all the
social good incidentally caused by individuals pursuing their own self-interest.
And it is true, the social benefits of the invisible hand are clearly seen
in many cases. A businessman who wants to become a millionaire must first
come up with a product that is beneficial, pleasing and desired by thousands
of customers. By pursuing his own greed, the millionaire also benefits
But there are many misconceptions about the invisible hand, starting
with the belief that Smith himself was a absolute believer in it. In fact,
he was not. Smith actually viewed merchants with great suspicion:
"People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the public,
or in some contrivance to raise prices."
Another misconception is that the invisible hand is a form of individualism.
It would be hard to call the actions of a baker who spends all day baking
bread for strangers "individualism." A more accurate word is
exchange, and it represents a balance between individualism and
collectivism, even if that exchange is ultimately self-interested. True
individualism is taking from the group without giving anything back; true
collectivism is giving to the group without getting anything back. Seen
in this light, the exchange inherent in the invisible hand should deserve
the full and enthusiastic endorsement of liberals.
Unfortunately, today's conservatives have corrupted the meaning of
Smith's term. They use it to suggest that the pursuit of self-interest
in the economy will always (or almost always) result in group benefit,
and that individuals should feel free to pursue it. Because this corrupted
definition is the most popular use of this term, this is also the definition of
"invisible hand" that I use throughout this webpage.
There are many problems with the invisible hand, even in principle.
First, it is simply untrue that personal greed will always result in society's
best interest: crime is a devastating counter-example. The very reason we
have police and criminal justice systems is to prevent the harm caused
to society by individuals seeking to enrich themselves at the expense of
the group. As long as conservatives admit that traditional crimes like
rape, murder and robbery legitimize a government response against them,
then it's obvious that extreme positions on the invisible hand are indefensible.
The true debate is relative; it comes down to drawing a line between socially-acceptable
self-interest and socially harmful self-interest. Who should draw that
line? The people should -- this is the raison d'Ítre behind democratic
Conservatives might object: "We're not talking about criminals
who rob banks for a million dollars. We're talking about the market, and
the legitimate business decisions of entrepreneurs." The problem here,
of course, is the word "legitimate." What determines whether
an entrepreneur's actions are legitimate? Clearly, many are illegitimate:
insider-trading, price-gouging, unfair trading practices, union-busting,
monopolization, lobbying for pork, economic intimidation, graft, polluting,
etc. In fact, this entire list of free-market failures highlights examples
of business decisions that were harmful and therefore illegitimate to the
And there can be no distinction between a gun-toting bank robber and
a white-collar bank robber. The greatest "bank robbery" in history
was the Savings & Loan scandal, where S&L owners robbed the taxpayers
of $500 billion. Only a handful went to jail; the rest took cover under
the deregulation laws that made their robbery "legal." Liberals
argue that this failure of the invisible hand should be punished as a formal
crime, just as surely as any other bank-robbery would be.
Another line of argument in favor of the invisible hand is that it
is the most efficient way to organize an economy. That is, a free market
of self-interested individuals is better at producing general prosperity
than a government practicing centralized control. This is true up to a
point. Individuals are indeed the experts of their local situations, and
can respond much more flexibly and quickly to changing demands than centralized
government can. For government to micromanage every little aspect of the
economy, the centralized planners would require the knowledge of God. This
is the main argument against overly-centralized control.
But that does not mean that government should not govern the larger
aspects of the economy, which lend themselves to much easier education.
If you have already read the section entitled "Government Success
Stories," you know that government played an irreplaceable role in
building the basic infrastructure of this country (telephones, roads, electrification,
etc.). Government is more suited for strategic concerns; private enterprise
more suited for tactical concerns.
The following story is an excellent example illustrating the correct
balance between the free market and the role of strategic planners. Conservatives
originally quoted this story as a defense of the invisible hand; but, as
we shall see, they completely ignored one of its lessons:
The Free Market of SPAWN
In 1988, a team of Xerox computer scientists led by Bernardo Huberman
was faced with a problem over its computer network. Each member of the
team frequently ran long computer programs that would take hours crunching
numbers before coming up with a result, and they were eager to cut down
the waiting time. Huberman's team knew that, as with all computer networks,
not all computers are in use at the same time. Therefore, the idle stations
could be used to speed up the process. Huberman's team devised an ingenious
way to divide their long computational tasks into pieces, which then could
be sent to several idle computers on the net for work. Once finished, the
remote computers would return their partial solutions, which could then
be reassembled into a final result. It was an obvious time-saver, but there
was a hitch.
It turned out no one could write a computer program that could efficiently
schedule or allocate tasks to the various idle computers. The workload
kept changing, so no one could figure out in advance where to allocate
the tasks. It was also difficult to tell when an idle computer would become
busy again. Furthermore, some computers sat idle as they waited for the
results delegated to another computer. After almost a year of frustration,
the team abandoned its "command and control" approach to scheduling
computer time and tried a free market approach instead.
This solution, called SPAWN, creates a "free market" among
all the computers on the net. In brief, pieces of computational tasks are
given "computer dollars," and they bid for the use of idle computers
under an open auction. The computers are programmed to maximize profits.
The system works beautifully - less than 10 percent of each station's time
is wasted in the auction process. Market prices fluctuate chaotically,
and no one can predict which computer will receive a certain task. From
this spontaneity and anarchy arises a self-organizing and smooth-flowing
At first, conservatives cited this story as evidence of the "magic
of the market." However, what they ignored was that SPAWN works under
highly controlled, limited, fixed and unevolving conditions. The role of
a strategic planner therefore seems limited. Even so, Huberman and his
programmers played a strategic role in setting up the net's entire system
of a "free market" in the first place. They constructed its paths
of communications and its vehicles of information (called "worms");
they designed all the conditions by which the market worked. Because their
market place was brutally simple (compared to a national economy), they
only had to tinker with it briefly. Except for the addition of new computer
stations, the underlying conditions of the SPAWN market do not change.
But one can easily imagine that events analogous to the economy could
also occur within a computer network, and would require the intervention
of strategic planners. Just as new technology can revolutionize an economy,
a faster and better computer could compel the network's owners to replace
the entire system. Just as a national plague would compel the government
to declare a federal emergency, the net's infection by computer virus would
compel a computer programmer to take defensive measures. Government is
charged with national security; computer programmers are responsible for
the security of their files against hackers. A natural disaster can wipe
out a city's economy; an electrical surge can burn out a computer system.
The economy also has problems that SPAWN's free market does not have to
worry about. Imagine that a computer station, by some miracle of computer
science, could fix bids and engage in unfair market practices, maximizing
its individual store of "computer dollars" while increasing waiting
time on the net. Would Huberman's team intervene in such a case? Of course
they would. If a computer net were as complex as a national economy, you
can be certain the intervention of programmers would be every bit as frequent
as the government's.
In fact, every second of work that Huberman's team put into making
SPAWN -- starting with the very purchase of its computers -- is the work
of strategic planning.
Ultimately, the proper role of government is to support and promote
the free market, and prevent individuals within it from causing harm to
Next Section: The Problems of Privatization
Return to Government/Market Homepage