Friday prayers, Saturday Sabbath and Sunday morning services are all about helping the dear neighbor. Monday morning is all about running the dear neighbor off the road. Adam Smith’s invisible hand of competition is used to justify this contradiction under what might be called the Greedy Pig Theory of Economics.
In Adam Smith’s book “The Nature and Causes of the Wealth of Nations,” the first invisible hand tells us that by competing to make the most money that we can for ourselves under free enterprise, we are actually making everyone better off. To maximize profits for ourselves, we compete to offer better quality products at lower prices. When this strategy pays off to increase our profits, other people notice our success and jump in to offer even better quality products at even lower prices and drive our profits down until the marginal competitor is just indifferent to staying in the game.
What a wonderful world! Our individual ignorance in not realizing that our hard work and greed to make the most money for ourselves will be undercut by free enterprise to instead benefit the economy as a whole and leave us just marginally better off. Our ignorance and hard work pay off again and again for the community as a whole, but not so much for us as individuals. Free markets magically benefit everyone!
We want the world to be simple. Each of us has a limited amount of mental energy. Why complicate things? The Greedy Pig Theory provides us with a simple explanation of how pursuing our own immediate, individual self-interest benefits everyone. Except for national defense and enforcing contracts, government should be kept as small as possible so as to not interfere with this wonderful world of free enterprise. But what if the real world is very far from this wonderful imaginary world? What damage is done if reality is entirely different from the world described by the Greedy Pig Theory of Economics?
One important assumption underlying the Greedy Pig Theory is that the individual person or business bares the immediate (marginal) costs and benefits of their business operations. This can fail dramatically when costs spill over to the broader community such as when their operations generate air and water pollution as negative externalities. In the 1950s all our neighbors raked their leaves to the edge of the road and set them on fire. In the fall we had to stay inside to avoid all the smoke, which was particularly harmful for people with asthma. Laws were passed to stop this. Conversely, getting vaccinated for a highly contagious disease generates a positive externality by protecting others and not just the person paying for the vaccination. Offering free vaccinations can help. In general, governments frequently have to intervene to counter these types of positive and negative externalities.
The success of the Greedy Pig Theory of Economics in making the economy work efficiently is based on the flawed assumption that we will always each act as an isolated individual or as an owner of an isolated business. We do not see any benefit in working with others voluntarily. We are not willing or able to work with competitors to fix prices and prevent others from entering the market.
In contradiction to the Greedy Pig Theory of Economics, we sometimes see ourselves as more than individuals seeking to only benefit ourselves. A basketball player who is blocked by opponents has to decide to either try to make the long shot or to pass to a teammate who is closer to the basket. If he cares only about glory for himself and the salary increase he can get as the player with the most baskets, he will go for the long shot. But if he cares about helping his team win, he will pass to his teammate who has a better chance of making the shot.
After watching our favorite football team win, we tell our friends and neighbors “We won”. What do you mean “We won”? Did you help the team? You just watched them on tv. But you are part of a community. We fly the American flag to show we are more than ourselves. We are part of a bigger, more prominent group. Group membership and group success matter to us apart from any money we may get as individuals.
The Greedy Pig Theory of Economics is based on the idea is that our primary focus is making money for ourselves. Going around your neighborhood to pick up trash violates the Greedy Pig Theory because “free riders” will benefit at your expense. Others can throw trash out their car windows as long as there are “suckers and losers” who will pick up that trash for them.
“Right-to-work” laws were created to prevent unions from forming by allowing workers to benefit from union contracts without paying union dues. If you can get something for nothing, why pay? Under the Greedy Pig Theory we only care about ourselves and are happy to “free ride” at the expense of others.
The Greedy Pig Theory implies that only a “sucker and loser” would vote in presidential elections because the chance that their one vote will determine the outcome of a national election is zero, so the time and expense in going to vote does not benefit the individual who votes. To be motivated to vote, you must see yourself — not as an individual — but as part of some larger group.
One fundamental flaw in the Greedy Pig Theory of Economics is the belief that we are primarily focused on making money and all else is of little importance. But perhaps we value our reputation and sense of self-worth more than just making money. A researcher determined to find a cure for cancer may be more motivated by their potential success than the little money they get from the National Institutes of Health (NIH) or the National Science Foundation (NSF) to run the lab that they need to carry out their research. A second flaw is in assuming that we care only about ourselves and don’t make sacrifices for the broader community. Spending time and effort as a volunteer to help others, such as Rosalynn and Jimmy Carter did before their deaths, makes no sense under the Greedy Pig Theory of Economics.
But even if the importance of money and focus on self interest were valid, there is another fundamental flaw that the Greedy Pig Theory of Economics ignores. It is the second invisible hand that is implicit in Adam Smith’s book when he says: “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 Adam Smith’s invisible hand of “collusion” that competes with his invisible hand of “competition.” In reality economics is a contest of hand wrestling where these two hands compete for domination. Barriers to entry, which include first-mover advantage, natural monopolies, economies of scale and network effects, along with government rules and regulations, play a key role in determining who wins. Patents, licensing requirements and noncompete clauses in contracts are just some of the many restrictions designed to prevent or severely limit competition.
We would love to believe that the first invisible hand of competition is the dominant invisible hand and that the invisible hand of collusion is just a short-run distraction that is eventually destroyed by the inevitable force of competition. However, when barriers to entry are strong and persistent, that “inevitable” competition may never arrive. As John Maynard Keynes was reported to have said: “In the long run, we are all dead.”
Amazon began as a way of learning about and purchasing books without having to drive to a bookstore. Amazon ran in the red for a while until it became popular. It came to dominate book sales. If your book is not available on Amazon, you are unlikely to sell many copies. Now Amazon sells an amazing array of products that can be delivered to your door rather quickly. Services such as having a cook and a driver were once restricted to the king and the nobility but are now available from online services such as DoorDash and Uber.
Meta (formerly Facebook) with plenty of cash on hand now owns Facebook, Instagram, WhatsApp, Threads and Messenger. Alphabet (formerly Google) has bought up nearly 200 technology businesses including Waze, YouTube, GrandCentral and VoIP, which is now known as Voice. In the old days businesses could advertise their products and services on television with limited targeting of potential customers, but now the internet provides a deep understanding of the interests and tastes of at least millions and potentially billions of potential customers. With more and more dominant internet firms, we are now entering the age of what the former Greek finance minister, Yanis Yaroufakis, calls “Technofeutalism.”
Economists committed to the Austrian paradigm recognize economic cycles but see economic downturns as beneficial using the phrase that Austrian economist (and former Austrian finance minister) Joseph Schumpeter called “creative destruction” that refers to the elimination of inefficient firms to cleanse the economy during economic downturns. However, in reality the firms that are driven out of business are not necessarily the inefficient ones. Very efficient and profitable restaurants can go bankrupt during severe economic recessions and pandemics simply because they don’t have the cash reserves to make it through the bad times. Efficient firms without sufficient cash on hand can get wiped out or bought up by more wealthy competitors during severe economic downturns.
During recessions large inefficient firms with lots of cash on hand can often just ride out the economic slowdown until conditions improve. Schumpeter’s “creative destruction” might be more accurately called Schumpeter’s “competition destruction.” Jonathan Tepper and Denise Hearn have revealed the amazing degree of industrial concentration in the United States in their 2018 book “The Myth of Capitalism.” In reality, a truly competitive industry is almost as rare as Bigfoot, Yeti or the Loch Ness monster.
One of the biggest flaws in the Greedy Pig Theory of Economics is in its explanation of the role of financial markets. In theory the financial markets provide money for creative entrepreneurs to use to create new products and services and generate new and better businesses. Once the children have grown up and left home, a parent who loves to cook for others may want to open their own restaurant. Maybe you have noticed that artificial intelligence (AI) is heavily dependent on pairwise correlations and you want to create a new AI company to introduce tri-wise, quadra-wise and quintic-wise correlations. The financial markets are there to provide the money you need.
But what if the financial markets have become a separate economy that is actually drawing money away from the real economy. What if more money can be earned in the stock market with a long-term annual growth rate of nearly 10 percent while the real economy is growing at less than 3 percent. What if instead of providing money for the real economy, the financial markets are now drawing money out of the real economy in a reverse money flow.
Before 1982 the Securities and Exchange Commission (SEC) did not allow stock share buybacks. The SEC ruled that share buybacks were a form of insider trading and illegal. But CEOs, CFOs and other corporate leaders were being rewarded with stock options and their performance was often being judged on the basis of their company’s stock price. Under pressure from the financial elite and the politicians they supported, the SEC began allowing stock share buybacks in 1982. Corporations began diverting money away from product development and employee compensation to use instead to jack up the company’s share price, which drove up the company’s stock price but did not benefit the company directly in any way. In fact, the long term competitive viability of corporations who engaged in expensive share buybacks was being undercut.
When the stock market is providing a substantially higher return than provided by creating new or better products and services, why would a non-financial firm waste its money rewarding its own creative entrepreneurs and hardworking employees when it can earn a lot more by investing its money in the stock market? This reverse money flow is suppressing productivity and economic growth in the real economy.
Just as wolves formed packs to have greater success by working together, humans realized the importance of the tribe to make everyone better off. But how do you identify members of your tribe? Is it language, religion, skin color or ethnicity? Some gangs use tattoos to identify members. Others use special slogans or passwords.
But humans were able to extend group membership using broader concepts such as being a member of a particular nation or of the world community. We can only hope that the threat of climate change and incoming asteroids will help us see all humans as members of one big family, understand that working together overcomes the “free rider” problem where individuals working alone will inherently fail to solve our most fundamental problems and finally reject the Greedy Pig Theory of Economics before it is too late.
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