Home > foundations of econ, Morality, teaching > Greed and the Visible Hand

Greed and the Visible Hand

Great article by John Paul Rollert (JPR) over at the Atlantic today–basically a history of the “Greed is Good”-meme.  Go read it.

I want to make a related point, which I’ll call the visible hand.

Adam Smith didn’t believe that greed is good in itself and he didn’t believe that the unregulated market will produce the best outcomes.  What he believed is that (h/t JPR)

…the moral logic of free markets was a law of unintended consequences.

More than that;

We get what we want in a complex commercial society—indeed, we get to have a complex commercial society—not because we seize things outright, but because we pursue them in a way that acknowledges legal and cultural constraints.

An economy is a complex web of trading, with every single trade between at least two consenting people.  Each trade is good for the participants, but why should that trade be good for society?

It is the laws and customs of society which guarantee that each transaction at least does no harm.  A mugging is a transaction, of a sort… a private transaction of safety for money.  Once the victim has a gun pointed at her head, handing over money to have that gun taken away makes her better off, just as the mugger is better off.  But, a law which makes this sort of transaction impossible, or unprofitable, could indeed make her happy; if it would mean that she never has a gun pointed to her head.

That’s the visible hand: the laws, norms and customs–that is, the infrastructure of the economy–which make sure our economic interactions lead to broad prosperity, specialization and free exchange, rather than exploitation and coercion.

It’s a visible hand because someone, somewhere has written those laws and paid the police and courts to enforce them.  Someone has raised the taxes that make that possible.  Someone has put a lot of thought into how the economy works on its deepest levels.

At its deepest levels an economy requires trust.  A commitment to the common good.  Greed will destroy all of our prosperity if we let it.   How do I know that?  Consider the game board below:

Mid_Q5_soln

This game is a simple schematic representing the payoff to each of the two players in the game of trade, when it is possible for them to try and cheat each other (‘v’ is the value of the good to the buyer, ‘c’ the cost of the good and ‘p’ it’s price; assume v>p>c so that trade is optimal).   Notice that the unique Nash equilibrium of this game is that there should be no trade.

Trade happens.  Why?  It’s not because we trade on a turn-table that guarantees that the money changes hands only at the exact instant the good does.  It’s because if I steal your things the police will come and throw me in jail.   If I try to pay the police to let me go, my sentence gets longer instead.   Trade happens because someone somewhere is not acting like homo economicus.

Ayn Rand‘s vision of markets free from interference which glorify and reward the most exceptional is both bad economics and bad morality.  In Rand’s perfect economy the powerful must (figuratively speaking) stab the rest of us in the back for the wealth we hold in our pockets.   There is no other way, since there could be no trade.   All for the glory of the powerful!  The rest of us view greed as a vice because we wisely seek the prosperity that only cooperation can bring.

The invisible hand needs the visible hand to be there, in the background, making sure that markets really do make us better off.

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