Myths and Reality

A Mr Jacob R. Freudenthal of New York writes to the Financial Times HERE

“The iron fist forcing though healthcare reform”

“I am not an economist, but I had always thought that capitalism was supposed to be based oncompetition and freedom of consumer choice. When a politically influential interest group is able to harness the power of the state in order to expand its stranglehold over an industry that is so essential to the health and wellbeing of the entire population, Adam Smith’s invisible hand looks more like an iron fist.”

Comment
A typical ‘popular’ take on the metaphor of the invisible hand used by Adam Smith and by scores of others from classical times, particularly in the 17th-18th centuries, but also right up to modern times (even in a “Tarzan” novel).

I have seen a variation of the “Iron Fist” version in the form of “a middle finger” (I understand this is an allusion to a vulgar “street” sign given out by some incompletely-educated people today).

In this case, it’s about a row over a Health bill going through the US Senate, of which I have no views (I only comment on political issues in the country where I vote – Scotland).

I can comment on the remark about “capitalism was supposed to be based on competition and freedom of consumer choice”. This is a remarkable statement from Mr Jacob R. Freudenthal. On one abstract level he is right, but not in the sense that this view corresponds to any (to my knowledge) modern state-capitalist societies in the 20th-21st centuries. It could even be argued that no such ‘capitalist’ society has ever existed.

Adam Smith wrote a devastating critique of mercantile political economy and it’s state-commercial integration almost from the 16th century onwards.

Think of 18th-century legislation to regulate society, making it less competitive in practice – Statute of Apprentices; Settlement Acts; Navigation Acts; Corporate and Guilds Acts; Protection and Prohibitions; Primogeniture and Entails laws; Chartered Monopolies and Tariff policies.

Smith’s critique was not against all state legislation or even in favour of minimal legislation (another myth dince the 19th century); it was against legislators and those who influenced them who passed laws that perverted the effects of competition.

The point is that much of what was eventually repealed was replaced by new forms of anti-competitive measures. The USA is hardly a bastion of free trade, as can be said of most others. The ultimate case is that of agriculture, a standing disgrace that rich countries discriminate against some poor countries potential exports.

In all of this, of course, the metaphor (and myth) of “an invisible hand” is a diversion. It has no relevance to the issue of health supply. That’s down to politics, finance, and the electoral system.

Adam Smith on Government Roles

By Dr Bharat Jhunjhunwala writing (22 November) in Organiser (HERE):

“Economy Watch - In defence of regulation of markets”

“This veneration of free markets was first propounded by famous economist Adam Smith about 200 years ago. He said that competition in a free market establishes public good as if an invisible hand was guiding the businessmen. There was no need to separately worry about public good. His logic was like this. Competition in the market pushes the businesses to produce goods at a lowest cost. This leads to cheap goods being made available to the people. For example, I had brought an electronic calculator from United States for my father in 1973 for 100 dollars or about Rs 1,000 at that time. Today, a much better calculator is available for Rs 50 because of the improvements brought about by competition. The slum-dwellers today have the pleasure of watching the TV and drinking cold water from the refrigerator because of the steep reduction in the price of these goods. Thus Adam Smith suggested that the government must not interfere in the market.”

Comment
Question to Dr Bharat Jhunjhunwala:

Exactly where does Adam Smith makes the statement: “that competition in a free market establishes public good as if an invisible hand was guiding the businessmen. There was no need to separately worry about public good?”

This is a paraphrase at best and a distortion of Adam Smith.

He never used the words “as if and invisible hand was guiding businessmen”. The addition of “as if” to his use of the metaphor of an invisible hand is fairly common among those who have not read Wealth Of Nations in general and the single paragraph in Book IV (chapter 2, paragraph 9: page 456) in which he uses the metaphor of ‘”an invisible hand”.

He most certainly never linked the metaphor to “competition” (which he discussed in Books I and II). He expressed reservations about leaving all decisions to “merchants and manufacturers” and such personages as bankers and their clients, especially where this “might endanger the security of the whole society” (WN II.ii.94: 324).

Nor did Adam Smith suggest such an extreme view “that the government must not interfere in the market”.

He saw a role for government, or public agencies, in stamping cloth and conducting assay tests on precious metals, to ensure that they been inspected for quality, that it should manage the currency and coinage, run the post office and general supervise markets and contract-making through an independent judiciary, and provide wholly or in part a national education system – and make a start on dealing on palliative care with “obnoxious diseases” like leprosy. All this, plus “facilitating commerce” by public works.