Does Adam Smith’s invisible hand of competition, which supports the greed is good philosophy, justify minimizing the role of government in our economy?
___________________________________________
Too often in teaching and talking about economics, we have a tendency to oversimplify economic problems and focus solely on how the individual, seeking only their own advantage, ends up helping the community by offering better products at lower prices. Government is often seen as just getting in the way of this amazing outcome. As President Reagan said in his inaugural address: “Government is not the solution to our problems. Government is the problem.” But was this actor who became our president oversimplifying economics and overreacting to the brutal, authoritarian communist governments suppressing human initiative and economic growth? Have advocates of the Greed is Good Theory of Economics gone too far?
Adam Smith actually posited two invisible hands, one explicitly and the other implicitly, although only the first one is widely known. The first invisible hand tells us that greed is good because working hard and creatively in the marketplace to beat the competition and maximize your profits will produce better quality products at lower prices for everyone. We are told not to worry, because when this invisible hand dominates, we will all be made better off. Advocates of this greed is good philosophy want us to act individually and not collectively. This invisible hand is called the invisible hand of competition.
But Adam Smith also alerted us to what might be called his second invisible hand when he told us: “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.” This is the invisible hand of collusion.
These two invisible hands are in constant conflict with one another. This puts us in a dilemma. On Sunday morning we are told that greed is bad, but on Monday morning we are told that greed is good. Should we be trying to help the “dear neighbor” or trying to run him off the road?
What about the basketball player who has to decide whether to take the long shot (glory to me) or whether to pass to a teammate much closer to the basket (glory to the team)? If he follows the greed is good philosophy he will take the long shot. But if he is focused on working to make everyone better off and realizes that his teammate has a better chance of getting the ball in the basket, he will pass the ball to his teammate.
In caveman times, men who were bigger could look out for themselves, but women who were pregnant couldn’t run and they couldn’t fight so they looked to others (a strong male or a larger group) for protection. Even today, women tend to be more socially oriented than men. Elderly women are likely to have more social groups than their male counterparts. Are we better off acting individually under the greed is good philosophy or acting collectively?
We are constantly faced with this dilemma in life. Should we be helping ourselves or helping the community? Should we focus on our own needs or the needs of the community?
In the stock market, are we cheering for the good guys (normal profits from competition) or the bad guys (excessive profits from collusion)? Warren Buffett has caught on. He invests in firms that have been able to create a barrier to entry. Are there economies of scale? Is there a first mover advantage? Are there network effects? Is there a natural monopoly? Are there government regulations that restrict entry (prescription drugs, copyrights, patent laws, et cetera)? Do we want to look for, invest in, and encour-age excess profits wherever they might be? Or are we going to restrict ourselves to socially responsible investing? We are often confronted with this sort of dilemma, where what is good for us as individuals may be bad for our community or the country as a whole.
Our industries are much more concentrated than we realize. Denise Hearn and Jonathan Tepper wrote the book: “The Myth of Capitalism,” which perhaps should have been named “The Myth of Competition,” because they show in industry after industry that competition has been minimized.
Reading glasses cost just a few dollars, but prescription glasses, which are primarily supplied by two companies, cost hundreds of dollars even though they use about the same amount of plastic and glass as the reading glasses. Customization should raise the price a bit, but the prices charged are clearly taking advantage of the duopolistic nature of the business.
You may be surprised to learn that the beer industry is also dominated by just two companies, in spite of the many craft breweries.
What about the fossil fuel industry? Should the maximization of profits come first, and the overheating of our planet be ignored until the outside temperature reaches over 120 degrees Fahrenheit and you have to put on an air-conditioned space suit to take a walk outside? What about your dog collapsing from the heat when you try to take your dog for a walk? Cheap fossil fuels now are going to cost us much more later. Perhaps before too long, even older people will begin to have to pay the price of “cheap” fossil fuels, not to mention the burden put on our children and grandchildren. What seems good for us in the short run (cheap gasoline) is certainly going to be bad for all of us in the long run.
Traditional economics focuses so intensely on the interests and behavior of the individual that it ignores very important and productive aspects of our economy. Without interstate highways, air traffic control systems, free (taxpayer funded) vaccinations for highly contagious diseases, and the provision of elementary and secondary education, we would be a lot worse off than we are now.
We all have a limited amount of mental energy, so we naturally want to keep things as simple as possible. Our first economics course (“Principles of Economics”) is designed to do exactly that. We assume a level playing field, where we all have an equal chance in our “land of opportunity.” The most important decision you make in life is your choice of parents. You want to choose wealthy, well-educated parents. Of course, you do not get to choose your parents, which is why there is no naturally occurring level playing field.
To get a level playing field to give everyone an equal chance in life, in state after state and community after community, we voted and promoted the idea of education for all. We all take reading and writing for granted. Almost every one of us can read and write as well as carry out basic mathematics such as addition and subtraction. But who invested money in our education and made sure that we all got a basic education? After all, education is a common property resource that we all benefit from. And not just as individuals; I benefit from living in a country where everyone is well-educated. Education needs to be taxpayer funded, encouraged and supported by the government.
But how much education? Every state in the United States of America has not only made elementary and secondary education available but has required it for all young children. Can you imagine making such a requirement today? The anti-government crowd would go ballistic! Yet state after state from Massachusetts (1865) to Mississippi (1918) required community funded education for all young children. This gave us an essential advantage in the development of our country’s economy over other countries which were slower to implement free education.
But now other countries such as Germany, Norway, Denmark and Finland also provide a free college education. Even offering two years of either college or a vocational education would be a step in the right direction. We cannot get ahead by falling behind in the transformation from physical work in manufacturing and mining (which is being taken over by automation) to higher-skilled careers for our citizens. If we really want America to be the land of opportunity, we need to make college or technical education available to all for free at taxpayer expense.
What about those government created state universities with their agricultural experiment stations? Government-funded agriculture experiments transformed America’s farms to make them the most efficient and most productive in the world! Yes, our farmers worked very hard and very creatively, but the free rider problem, which is too often ignored, discouraged any one farmer from putting in all that time and money to carry out agricultural experiments that may or may not work out. But many of those government-funded agricultural experiments paid off big time in substantially improving American agriculture and making it the most productive in the world.
What about our amazing infrastructure with interstate highways crisscrossing the United States? It was a Republican president who envisioned and promoted the Eisenhower expressways that crisscross America. Government enabled small businesses to grow larger by giving them a way to get their products much more widely distributed throughout the United States of America. Government is not the problem. More often than not, when presented with a common property resource problem, government can be the solution, especially with projects where the free rider problem prevents private businesses from making the necessary investments.
The fundamental problem is in our colleges and universities in our “Principles of Economics” courses where we have for too long been teaching and promoting the greedy pig theory of economics, which ignores community efforts to promote the common good. Ironically, we often get enormous benefits in our individual lives from government investments, especially in our health and wellbeing. The Department of Health and Human Resources and the Centers for Disease Control and Prevention have funded independent researchers whose primary motivation is to gain recognition by publishing their medical research results in professional journals and books as well as an award such as a Nobel prize in their area of specialization.
Devotees of the greedy pig theory of economics want to limit government to the enforcement of contracts and national defense. They consider Social Security and Medicare to be government overreach. To them, government is not the solution, but instead they see government as the problem. We will all be better off when our introductory economics courses do a better job of explaining the very important role that the government plays in making our economy more productive and more efficient.
For more, read the books by Mariana Mazzucato such as: “The Entrepreneurial State: Debunking Private vs. Public Myths” and my book: “Money Flow in a Dynamic Economy,” which introduces the new money flow paradigm, which explains economic inefficiency, instability, inequality, and the role of government.
__________________________________________