Monday, May 3, 2010
Adam Smith, the Scottish professor of philosophy who published his magnum opus the same year that the American Colonies formally declared their independence from the British monarchy (1776), is generally known as “the father of modern economics.” The Wealth of Nations remains a classic to this day.
A fierce believer in free markets, Adam Smith postulated that a truly free and open market would be by definition a self-regulating enterprise. The rules of the game ought to be developed and enforced, but no government can possibly police every transaction in a booming economy. He believed that the market itself would keep self-interest in check. An “invisible hand,” he said, would both push the economy towards steady growth and keep it from overheating.
Justin Smith, in TIME (March 25, 2010), asked the question – “What would Adam Smith say?” In light of the congressional hearings when Congress went toe to toe with Wall Street’s financial giants, what might be his commentary if Adam Smith were a talking head on the business channel?
Ever since I heard Ronald Reagan’s advisor, Dr. Arthur Laffer (often credited for “supply-side economics” unleashed during the Reagan years) explain the independent power of the marketplace, I have pondered this dynamic: a self-regulating market. On many levels, it appears to hold true – to this day. Dr. Laffer (known for his “Laffer Curve”) made the case: all artificial attempts to control the economy will always fall short of the mark. Things like tax incentives, tariffs, credits, currency manipulation, price controls, regulation and de-regulation and all manner of government intervention will never truly change the course of the mighty economic river. Economies have a life of their own. For example, people complain about outsourcing. But producers of goods and services will always be on the hunt for cost-cutting opportunities – there is no stopping it. The economy will ebb and flow, as it will; in spite of our tireless, creative efforts.
From Adam Smith’s analysis, the concept of “fair market value” (FMV) is a guiding light. When a willing seller and a willing buyer agree on a price, we have fair market value. Throw in the “Golden Rule” (“do unto others what you would have done to you”) and the market takes care of itself. For the Scotsman, integrity and character are essential. Fairness and mutual respect remain at the core of an efficient market.
Of course, it is human nature to tamper with these fundamental principles. But when a buyer or seller manipulates FMV with even what appears to be an imperceptible premium, much less an outrageous one (e.g. price gouging), the “invisible hand” will eventually make its move. Oh, it may go undetected for a season, but the violator will ultimately pay. The Bernie Maddoffs will ultimately be exposed.
When integrity and fairness and character disintegrate, one might expect that the entire economy could well collapse. Well it may. When major investment banks sell investments at anything other than FMV, they have violated a basic principal of free markets. To represent that worthless investments have substantial value and are worthy recommendations, the entire system has been cheated, not just the individual investor.
Eventually, the “invisible hand” moves in.
To call this collapse a “correction” is a vast understatement. And yet, it is a correction. A necessary one. The white-hot growth of housing values and economic expansion was clearly unsustainable. The greatest travesty of all is that the financial wizards and overgrown institutions who gave lip service to fiduciary duty seem the least likely to suffer the consequences of the loss.
But in the end, that invisible hand, identified by Adam Smith more than two hundred years ago, is leveling the playing field again. For the courageous and the pro-active, opportunity is limitless. Integrity, character, fairness will still be mandatory. The Golden Rule remains golden.
Think about it. What is that invisible hand, anyway?
Copyright Kenneth E Kemp 2010
Here here! Well explained and much needed this Monday morning. Thank you!
HI, Ken. When integrity and fairness are trumped by greed, we see Satan rear his ugly head. Unfortunately, while waiting for “the invisible hand,” there is devastating collateral damage strewn across our country. We have the highest unemployment rate since the depression. We have government spending that is out of control, all in the name of taking control. The Golden Rule seems to have been rewritten to mean, “he who has the gold, rules.” Is this what T.S. Elliot meant by “this is the way the world ends, not with a bang but a whimper”? I am praying for that “invisible hand” to rescue us because I have lost faith in the system. In my prayers I am saying, “Come, Jesus Come; we are ready.”
Ken great job. As you say “When integrity and fairness and character disintegrate, one might expect that the entire economy could well collapse”. Our major looming problem is “the invisible hand” is becoming a very visible hand called The State, where there is no monoply on intergrity and fairness. In fact the state now becomes the the sole source of checks and balances (now non-relevant terms).
Yes “Come Jesus Come;we are ready” We are in great need of You, as we are of men and women of faith to help return us to the goverance system that our founding fathers designed for us acknowledging God’s guiding hand in their process.
Our Founding Father’s sought no need for regulation, maybe a possible tariff, but otherwise the market place had no need to be watched by the government. Although, America was different, I think of Tocqueville’s commentary of the character of the union, at the center was the strength of the Christian church. There was no need for government regulation, in fact in The Federalist Papers championed the idea that we were self-regulating beings. Religion’s job was to regulate man, and government was to regulate the nation. As man has walked away from Religion (I mean time a few weeks ago CNN did a poll, which had 27% of the polls participants went to church regularly- my guess a far contrast to the period of Tocqueville’s visit). We have walked away from, and rejected the regulator. Not that God is a list of rules, but within our relationship with him he redeems our evil nature. The self regulation of the character of man seems to have dissolved. Like with many other things, the caring of the widows, the orphans, if the church does not fulfill its role in society, the government then takes it’s place. But how can government regulate corporate greed. After all, can government regulate the inner workings of the evil man? To me the only option, is that our sinful nature must be redeemed, not by our doing, for the perfect sacrifice has already been made.
Ken,
Excellent… and also thanks to those who have responded to your article with thought provoking comments.
I recently had a conversation with a group of people I used to work with. One of the guys who used to work for me stated that he always liked coming to me with day to day business issues he had. His comment “I knew you would always be honest and not %!*# me. In business you don’t see that very often.” I would hope that is not the case but the point is that people are watching even when we may not realize it. It should go without saying that our duty (especially as believers) is to always exhibit integrity, character and fairness as you have reminded us of. Yes, not always easy ideals to take a stand for in our “political” world.
Ken … superb. I especially liked:
From Adam Smith’s analysis, the concept of “fair market value” (FMV) is a guiding light. When a willing seller and a willing buyer agree on a price, we have fair market value. Throw in the “Golden Rule” (“do unto others what you would have done to you”) and the market takes care of itself. For the Scotsman, integrity and character are essential. Fairness and mutual respect remain at the core of an efficient market.
Too often we as humans seeks human solutions by trying to control that which is more than we can control in a world where free will (which I believe is a gift from God) is operable. When Free Will becomes destructive, “the Invisible hand” moves ….