a second invisible hand

“The mistake of Greenspan and other supply-side economists was to assume that, even though the free market by itself is no moral enterprise, it would steer society toward a state in which everyone’s interest were optimally served.  Hadn’t their demigod, Milton Friedman, declared that social responsibility conflicts with freedom? And hadn’t an even higher authority, Adam Smith, given them the metaphor of the “invisible hand,” according to which even the most selfish motives will automatically advance the greater good?  The free market knows what is best for us.  The baker needs income, his clients need bread, and voila, both parties stand to gain from their transaction.  Morality has nothing to do with it.

Unfortunately, these references to Smith are selective.  They leave out an essential part of this thinking, which is far more congenial to the position I have taken throughout this book: namely that reliance on greed as the driving force of a society is bound to undermine its very fabric.  Smith saw society as a huge machine, the wheels of which are polished by virtue, whereas vice causes them to grate.  The machine just won’t run smoothly without a strong community sense in every citizen.  Smith frequently mentioned honesty, morality, sympathy, and justice, seeing them as essential companions to the invisible hand of the market”whose work I value!

In effect, society depends on a second invisible hand, one that reaches out to others.  The feeling that one human being cannot be indifferent to another if we wish to build a community true to the meaning of the word is the other force that underlies our dealings with one another.  The evolutionary antiquity of this force makes it all the more surprising just how often it is being ignored.”

De Waal F. (2009) The Age of Empathy, p.  222

what market economics fails to address

“ Most economic models are based on the neo-classical – Keynesian synthesis that frames economics as a constrained global optimization problem: maximize utility subject to the availability of labour and capital. For this formulation to be valid at least two conditions must be met. The first is that individual utility functions must be independent and therefore additive. The second is that the economy is not constrained by the availability of sources and sinks for materials and energy. This formulation has several important implications. Externalities are unimportant and may be ignored. Value is objective and is revealed by market prices, which may be used as weights for aggregation, thereby enabling macro-economics. Employment, insofar as it is the limiting factor, may be relied upon as the main means of distributing income. Technological change may be safely treated as an unexplained residual. The dominant mode of behaviour of economic agents is competition. And the essential role of governance is to assure that all agents play by the rules of the game. This is the worldview articulated by Paul Samuelson in his Foundations.

Judged from within its own frame of reference, the neo-classical – Keynesian synthesis has been successful, at least over the postwar years in North America and Europe. Economic growth has been sufficient to maintain near full employment.

However, when judged from outside of its own frame of reference, there is a growing consensus that the neo-classical – Keynesian synthesis has failed to address the following issues:

1. •ecological limits are impending
   

2. •the goal of long term sustainability conflicts with the objective of growth
   

3. •GDP or GDP per capita is not an adequate indicator of social well being or prosperity
   

4. •the instabilities associated with financial bubbles have deepened
   

5. •there is a growing inequity in the distribution of income.”
   

Robert Hoffman, unpublished paper  2010