THE TRUE MEANING OF ADAM SMITH’S ‘INVISIBLE HAND’


When I still had my company, I thought about that a lot about what would it take to get the economy back to what it was 40 years ago.  One must remember first that it took 170 years to get it to its full flower, and once it got disemboweled it can’t be re-built in any short time at all.

My best guess is that it will need small USA companies need to deal with other small USA companies as much as possible and keep doing it.  The big boys are all about $0.12/hr Chinese labor vs $18.00/hr US labor.  And trust me, the biggest expense for any company BY FAR is labor costs.

Even just with the small companies in the U.S. they constitute a very large market – still one of the largest economies in the world.

There have to be two economies – one for the big corporations and one for the small businesses.  Like their own Chamber of Commerce the small manufacturers need to pull together and help each other, and become – like Adam Smith called it – ‘the domestic society.’

The Republicans like to drag out Adam Smith’s “Invisible Hand,” as the guiding principle behind their greed.  Here it is, the part they quote extensively:

…he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

In other words, by trying to make himself as profitable as possible, the supposedly selfish and greedy person is actually doing his society a great favor – even though the society isn’t part of his thinking.  It sounds great, except notice that ‘the society’ is not mentioned in that incomplete part.  This allows the Republicans slash Conservatives to let greed rule their thinking and be as selfish as possible, following any precept that funnels money into their pockets – even if it is at the expense of the prosperity of their own society.

But now here is the whole thing – with the parts they left out:

[Note: When Smith uses the term “the society” he means the domestic economy – versus trading internationally – and especially regarding going elsewhere because of cheaper labor.]


“But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

[emphasis added by me…sg]

The full context has an entirely different meaning.

The entirety means that the individual realizes it is better to contribute to the industry of his own country – that THAT is where his long term prosperity will lie.  ‘Industry’ means manufacturing to Adam Smith.  There WAS no such thing as a “service economy.”  Industry meant making GOODS.  He said, “If you make goods HERE you do good for your society.”

But the money and corporation manipulators of the 1980s and 1990s didn’t care about their society whatsoever, nor national borders – and especially not for long term prosperity.  They were about having their cake and eating it, too.  And they wanted to eat everybody eles’s cake, too – and eat that, too.  If they could come out with $100 million or more for moving a plant to China, by god what was to stop them?  Not their consciences!

So they created the myth of the superior “service economies” as cover for their selling their own countries out, and propagandized us all into thinking, “Yeah, we don’t want to get our hands dirty – let the Mexicans or the Asians do that for us.”  And Americans – though not I – fell for it.

That was the EXACT OPPOSITE of what Adam Smith was arguing with the Invisible Hand!”

If you look at ANY time the countries that are up-and-coming, and in EVERY instance OVER ALL TIMES it is the countries that tell the world, “YES!  Come here!  We will make that for you!”

And the U.S. was putting its blessings on those who argued the exact opposite.

Until we change BACK to “YES! WE WILL MAKE IT HERE!” we are all fucked.  For the next century or two, however long it takes us to decide that again.

You see, the manufacture of goods IS the economy.  All other countries recognize that and try to attract such industry.  A service economy?  That is merchants and restaurants and amusement parks and travel agencies and greeting card shops.  I don’t have to tell you that the jobs in all of those are the lowest of the low – low status, low paying, and low prosperity, long term or short.  And why are they low paying?  Because across the board the people can be replaced by someone off the street and be functioning as well in a day or a week. 

A service economy is an economy built on entry level jobs.  But the main thing is that it doesn’t create wealth!  A service economy uses up wealth – wealth that someone else created.  It is pure consuming.  But a real, vibrant, healthy economy creates more than it consumes.

A service economy is an appendage on a creating economy.  It needs the manufacture of industry as a skeleton on which to hang itself, just like windows and floors and ceilings are appended onto the steel structure of a skyscraper.  A building made only of ceiling materials and flooring and windows can’t support itself – and neither can a service economy support itself.

The appeal to have only a service economy was a sucker job, a game of Three-card Monty, where we our attention was misdirected while with sight-of-hand we all got taken.  Yes, we can blame ourselves for not being astute.  But any argument that blames the victim for being defrauded or raped or pillaged is an argument straight out of the Hall of Fame of Republican laisse faire carnivorous capitalism – i.e., greed finding ways of devouring other people’s prosperity.  (Isn’t that what all fraud is about, after all?) 

No, we didn’t screw ourselves.  We are only guilty of believing fancy talk and not being on our toes.  Not all the people in a society can be sharp all the time.  We let the free market arguments of Milton Friedman – which were all conceived and written while the U.S. economy was in full flush – sway us into thinking that the world was our oyster and we could improve the best economy in the history of the world even more by just letting go of the regulations and laws that ere holding us all back.  Utopia was just around the corner!  All we had to do was to let the greedy people be even greedier, and we would all bask in the wonderfulness that they would shower upon us all.

Well, notice that from its peak in 1968 the U.S. median per capita income has fallen and fallen.  The citizenry that was the richest in the world has fallen and fallen, down the ranks where even little Denmark and Luxembourg are above us, along with Germany, Malaysia and dozens of other countries.  Following Friedman has not only not improved our prosperity, but it has taken us for a ride in the wrong direction.  And how does that happen?  Because Friedman was wrong.  Setting the greedy free from the fetters of regulation has meant that the greedy have been allowed to finagled ways to put more of our money into their pockets.  And doing that over a long enough period of time makes the citizenry poorer.  Are we all guilty of being Jack of Beanstalk fame?  Pretty much, yes.  But if there are no scam artists, no Ponzis out there, no money managers who embezzle, we don’t need to have finance degrees just to make sure we don’t get taken.  Is a bank to be faulted because it got robbed, simply because its security was not perfect against any and all possible ways of being robbed?  Of course not.  And neither is it our fault that we get robbed by unsrupulous people.  That is, after all, why the put robbers in jail and not their victims.

But Republicans/Conservatives.free-marketeers would have you think otherwise, that “Let the buyer beware!” is one of the Ten Commandments and that God is on the side of the slickest, not the most honest.  All I can say is “Those people are sick in the head

Because of their sickness, America – the America we were born into – is gone.  They perverted the intentions of the Founding Fathers, and taken Adam Smith out of context, and they have turned us into a nation of victims – victims of trickle down theory, unfettered free markets, card shark bankers, and Milton Friedman.

Steve

No, manufacturing will not return here.

When I still had my company, I thought about that a lot – what would it take to get the economy back to that.  You have to remember it took 170 years to get it to its full flower, and once it got disemboweled it can’t be re-built in any short time at all.

My conclusion?

Small USA companies need to deal with small USA companies.  The big boys are all about $0.12/hr Chinese labor vs $18.00/hr US labor.  And trust me, the biggest expense for any company BY FAR is labor costs.

There have to be two economies – one for the big corporations and one for the small businesses.

The Republicans like to drag out Adam Smith’s “Invisible Hand,” as the guiding principle behind their greed.  Here it is, the part they quote extensively:

…he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

In other words, by trying to make himself as profitable as possible, the supposedly selfish and greedy person is actually doing his society a great favor – even though the society isn’t part of his thinking!

Now here is the whole thing – with the part they left out:

[Note: When Smith uses the term “the society” he means the domestic economy – versus trading internationally – and ESPECIALLY going elsewhere because of cheaper labor.]


But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

[emphasis added by me…smg]

The full context has an entirely different meaning.

The entirety means that the individual realizes it is better to contribute to the industry of his own country – that THAT is where his long term prosperity will lie.  Industry means manufacturing to Adam Smith.  There WAS no such thing as a “service economy.”  Industry meant making GOODS.  He said, “If you make goods HERE you do good for your society.”

But the money and corporation manipulators of the 1980s and 1990s didn’t care about their society whatsoever, nor national borders.  If they could come out with $100 million or more for moving a plant to China, by god what was to stop them?  Not their consciences!

So they created the myth of the superior “service economies” as cover for their selling their own countries out.

That was the EXACT OPPOSITE of what Adam Smith was arguing with the Invisible Hand!”

If you look at ANY time the countries that are up-and-coming, and in EVERY instance OVER ALL TIMES it is the countries that tell the world, “YES!  Come here!  We will make that for you!”

And the U.S. was putting its blessings on those who argued the exact opposite.

Until we change BACK to “YES! WE WILL MAKE IT HERE!” we are all fucked.  For the next century or two, however long it takes us to decide that again.

Steve

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