Saturday, November 1, 2014

#004: Invisible Hand

What is gravity? It is the force that attracts smaller objects to larger ones. It is this force that attracts people like you and me to the earth. Without it, we would all float away into space. It’s almost like an “invisible hand” that pulls us to the earth.

The same thing applies to magnetism. This is the force that attracts objects of particular electrical charges to objects of opposing charges. It is the force that allows your refrigerator magnets to stick to your refrigerator. It’s almost like an “invisible hand” that pulls them to the fridge.

By no means does associating either gravity or magnetism to “invisible hands” imply that they are “magical.” Both forces are scientific phenomena that can be empirically observed, tested, and researched. Calling them “invisible hands” simply allows for a metaphor by which people can better understand them.

And yet, when market forces—which can also be scientifically and empirically observed, tested, and researched, specifically through metrics such as GDP and CPI—are referred to as the “Invisible Hand of the Free Market,” they are not considered “scientific.” They are considered “magical.”

The “invisible hand” is often dismissed as a “supernatural” agent such as God, which guides creation through intelligent design, when, in reality, it is more comparable to natural selection, where complexity and design arise in nature from spontaneous order without the assistance of an outside agent.

This is what free-market economists refer to when they use the metaphor of the “invisible hand.” They are referring to how market forces allow individuals within the marketplace to seek their own rational self-interests through voluntary trade and labor. In this sense, the “invisible hand” is a force that organizes society from the “bottom up” through consumer choices rather than the “top down” through government central planning—a method that, ironically, critics of the “invisible hand” support!

The “invisible hand” is hardly an untested hypothesis. Since capitalism was first implemented more than 200 years ago, world GDP per capita has increased significantly, and with it, so have living standards. It’s no surprise that the introduction of capitalism correlates with the Industrial Revolution, which saw the rise of scientific, technological, and medical innovations that have allowed us to live longer and more comfortable lives than our predecessors.

So if you enjoy waking up in your air-conditioned apartment and driving in your Prius down to Starbucks to sip a pumpkin spice latte while watching House of Cards on Netflix with your iPad—and you prefer this to living in a mud hut on an acre of farmland working yourself to the bone from sunrise to sunset just to grow enough food to get your family through the winter and survive until the ripe age of 30, don’t thank magic. Thank the invisible hand!

Oh, and what’s especially ironic is that many people, specifically Keynesian economists, who dismiss the “invisible hand” as “magic” subscribe to the Keynes notion of “animal spirits” guiding the market. If you’re like me, when you think of “animal spirits,” you probably think of a shaman dressed in animal skins and chanting incarnations into a fire. And yet, to Keynesians, “animal spirits” are supposedly “scientific”, while “invisible hands” are magic. Talk about the pot calling the kettle black!

Obvious parody of "Cyanide and Happiness" is obvious.