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Freedom's Phoenix

The Invisible Hand of the Market vs. the Middle Finger of the State

September 3, 2010 - 9:26am
Nick Coons by Nick Coons


The term "the invisible hand of the market" was coined by economist Adam Smith, and is used to describe the self-regulating functions of the market. Essentially, it encompasses self-interest, competition, and supply and demand. The term "the middle finger of the state" was coined by me, and represents the opposite of everything a free market stands for.

The flaw in arguing for state intervention in the market is in realizing that you must necessarily create a larger version of the problem you're trying to solve. Take monopolies, for instance. One might argue that the state must intervene in the market in order to ensure that industrial interests don't coalesce and form monopolies. Given that the state is the largest monopoly of all, this position distills to, "we must create a large monopoly so we can be protected from the creation of monopolies."

Human beings are self-interested, in a general sense. If this was not the case, our species would be extinct, since we'd have no desire to stave off hunger and avoid injury. Self-interest, whether instinctive or conscious, is a characteristic of all life that sustains for any period of time. Self-interest is not necessarily a positive attribute nor a flaw of humanity, but rather it simply is. As part of our nature, we will engage in actions that we believe to be in our self-interest. We may pursue short-term self-interest, such as eating a delicious piece of cheesecake; or long-term self-interest, such as frequenting the gym. Any social system put in to place must recognize that individuals will work to maximize whatever they believe to be in their own self-interest if it is to be successful. And this is why communism fails right out of the gate.

In the pursuit of self-interest, people will use whatever means are at their disposal, short of what they recognize to be evil. Most people will not shoot and kill someone for their wallet, even if there were no legal or physical consequences to that action. A small minority will, but they will either do so believing that the action is not evil, or justifying to themselves why it was the least evil of their available choices.

In a purely free market, it takes no more than a nanosecond to realize that your best actions toward your own self-interest are those that are cooperative with others. For instance, in the pursuit of becoming rich, it is more preferable for people to give you money voluntarily than it is to take it by force. The latter has all sorts of risks, including personal injury from someone defending themselves and their property. And the best way to get someone to give money to you is for you to give them something that they believe to be equal in value. Generally, this is a good or service that they desire more than the money, but something that you're able to produce more easily and so you value the money more. When this process is reproduced, not only are you creating wealth for yourself, you are creating desired goods and services for others. These are the general mechanics of a free market; people trading goods and services among each other of their own accord and for their own benefit.

In the IT industry, we recognize some people as having a certain threshold of knowledge. They know, for instance, that the Windows registry exists, but they don't know the damage they can do by fiddling with it. We say that these people "know just enough to be dangerous." Unfortunately, the philosophical world is also full of these people. No doubt there are people reading this right now who are conjuring up images of what they believe to be the free market in the form of government-corporate relationships (which they mistakenly call "capitalism") or quoting Marx's fears of the "robber barons." I won't address those issues here, as I've already done so elsewhere.

On the other end of the spectrum, we have government control over the economy. This is where self-interest takes a wrong turn. If, as in a free market, no one wields power over anyone else, then pursuing one's self-interest means cooperating with others to their own benefit. Once someone has power over others, self-interest now means pursuing one's own benefit at the expense of others. One thing that I'm sure is understood but never stated is that politicians are just people. They are not magical, and they are not immune from the desires of human nature. That is, they too will pursue their own self-interest using whatever means are at their disposal. Unfortunately, the means at their disposal are somewhat brutal. The state can extract wealth from individuals, by threat of force if necessary, and use that wealth in ways contrary to the desires of those that created it. This is not a simple oversight on the part of the voters that can be corrected through the electoral process, because it is not caused by a specific type of person. With very few exceptions, anyone in a position of power will use that power for their own benefit. The adage "power corrupts" is so true that we cannot rest the functioning of a social system on "But we just need to elect the right people!"

The nature of the free market implies competition. When a new venture starts, he has what's known as a "de facto" monopoly, which means he's the only one providing that specific good or service. One of several things may happen. First, he may be so prosperous that others are attracted to his field and try to compete with him, either by improving upon his product or producing it for less. He may not be prosperous at all, which is an indication that people don't care for his product. And in some rare cases, he may produce his product with such efficiency that others are unable to compete with him. In this last case, this is where he maintains his de facto monopoly status. Consumers do not complain about this, since their satisfaction with his product is what's allowing him to maintain his monopoly; only his competition complains.

De facto monopolies are no problem at all, since they exist only by the consent of their customers who continue by choice to pay them for their products. Additionally, such a monopoly can only be called a monopoly in a very narrow sense. If a particular company has a de facto monopoly on the production of, say, white letter-sized paper, do they have a monopoly on the production of paper? Nothing is stopping others from producing the same paper, they've just chosen not to. But are they only competing with other companies that could produce white letter-sized paper, or are they competing with companies that product any type of paper? How about with companies that produce alternative papers, or alternative means of written communication. Having a monopoly on a specific product (and not a legal monopoly, but just by virtue of being the only one that produces that product) doesn't really mean anything.

The term "monopoly" was not used to describe an entity that had 100% of the market share, since virtually every business has 100% of the market share for the specific products they produce (Dell has a 100% market share on the production of Dell PCs). "Monopoly" meant "de jure monopoly", or a monopoly by law. This occurs when the state decrees that only a specific entity may provide a given good or service (think phone service, cable service, mail delivery, education, or perhaps health care in the near future). It doesn't matter whether or not that entity is public or private, since this becomes mere semantics once the state grants them a monopoly on specific production. We know all too well the dangers of de jure monopolies. Since they have no possibility of competition, they have no motivation to seek to improve their services, an effect caused by the possibility of losing customers to a superior competitor.

There is simply no way that the state can protect us from any negative effects that might come from the economy, because it is itself subject to the same laws of nature. A monopoly that is so large, like the state, is far more dangerous to us than any monopoly from which it can supposedly protect us. The state is not made up of supernatural benevolent people, but just people, who are also subject to the same laws of human nature, who will use their power over others for their own benefit. It is foolish to think that they might use it for ours, not only because it's contrary to human nature, but because we have centuries of evidence proving it beyond a shadow of a doubt.

Related Content:

Tariffs and Economic Favoritism - Austin Raynor
Socialized Capitalism is a Failure - Nick Coons
Freedom In Your Lifetime - Nick Coons

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