Power & Market

Two Invisible Hands: Politics vs. the State

In 1759, economist and philosopher Adam Smith wrote one of the greatest descriptions of the free market ever produced. Writing about a market economy based on voluntary exchange, Smith likened the process of self-minded producers catering to the consumers’ interests as a process managed by an invisible hand. He states, “Every individual … 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.”

This quote, perhaps the most famous passage from his book The Theory of Moral Sentiments, reveals both the morality and simplicity in which a free economy operates. We, as individuals, are not guided by some altruistic vision for the betterment of others, but rather the fulfillment of our interests and gains. Yet in the free market, pursuing our own self-interest makes all of society better off.

This is because in order to get what we want, we must voluntarily trade. The only way voluntary trade can happen is if each individual likes what the other has more than what they have. Therefore, in the process of obtaining what we want and enjoy, we enable someone else to also obtain what they want and enjoy. Otherwise, the trade wouldn’t happen in the first place, and we wouldn’t be benefiting others.

In a bigger picture, this means that we work jobs, sell products, and own businesses not for the sake of our customers or bosses, but for our own individual interests. Yet in the process of obtaining the money to further our own interests, we contribute a good or service that can benefit many others; whether that be working at a restaurant, owning a store, or running a lemonade stand, we contribute to a larger, common good. Through voluntary exchange, the prerequisite for furthering our own desires is by fulfilling others’.

The invisible hand of the free market, fueled by voluntary exchange, translates the intricate and subjective interests of ourselves into benefitting the interests of others and, when compounded, ultimately caters to the common interest.

Yet, there exists another invisible hand, in the realm of politics; one also predicated on voluntary exchange, yet moving opposite to the motion of the free market’s invisible hand. Understanding it is crucial to deciding just how far we should replace economic activity with political and bureaucratic control.

The Invisible Hand of Politics

Outside of the political process, self-interested individuals exchange and thereby benefit others in the pursuit of their own goals. Yet in the political process, politicians elected on the basis of representing the “general interest” ultimately must cater to much more specific causes. Economist Milton Friedman writes in his coauthored book Free to Choose, “There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith’s invisible hand. Individuals who intend only to promote the general interest are led by the invisible political hand to promote a special interest that they had no intention to promote.”

This is mainly due to the expansive role that the government has usurped over the years, writing and enforcing detailed legislation that directly threatens a small sum of citizens while negligibly affecting the rest. When the state has such a capability of writing specific laws, laws that greatly concern only a few number of individuals, those individuals will be incentivized to lobby government for favorable decisions.

Take Friedman’s example of the US’s policies regarding coastal traffic, which is greatly restricted to American flagships. He estimates the costs of such legislation to be, in 1980 costs, around $600 million a year, yet divided among the populace, costs the average taxpayer just $3 a year. His conclusion:

“Which of us will vote against a candidate for Congress because he imposed that cost on us? How many of us will deem it worth spending money to defeat such measures?”

The ones who will deem it worth spending money on such policies are the ones mostly affected by the legislation, that is, the 40,000 individuals actively involved in the industry, who have much more to win or lose than $3. Indeed, Friedman confirms, “they spend money lavishly for lobbying and political contributions.”

Thus, almost always, the activists and lobbyists that guide the activity of elected officials represent not the common interest, but the special interests that are much more financially contingent on their decisions. Company executives seek to limit foreign competition, farmers seek price floors on their products, and public sector unions seek to protect state monopolies. The incredible costs of these policies are widely dispersed among the people, and so the outcome of Congress doesn’t reflect the general interest, but the special interest that has the most to lose.

Market or State

Between these two invisible hands comes a choice: which one do we want to promote more? Should we promote a free market, where individuals voluntarily exchange and benefit a more general interest? Or should we want to expand the domain of politics, letting more aspects of the economy be dictated by special interests?

Hopefully, the answer is clear. In the market economy, producers will always have greater incentives to work in the people’s interests than do politicians. This is because producers can only obtain money through voluntary exchange, and so they must produce what the consumers want.

Similarly, we may think that politicians have a great incentive to work in our interests. We elect them, and so we think they work in the general interest of their constituents. Yet ultimately, the issues they are most pressed about don’t concern the majority of their constituents, but rather select interest groups that have much more to lose. Such groups are the reason why much of the issues politicians vote on concern special interests. The votes and money from these groups are why they support them.

Furthermore, as we expand either the domain of the free market or the grasp of government, either of the invisible hands become stronger. For example, if we were to privatize the postal service, this means that the agency, although assumed to be self-interested, would have greater incentive to cater to the interests of the people than if it were in government hands. This greater efficiency would put more pressure on politicians to actually work in the general interest.

Alternatively, if the state was expansive, intervening in the economy at will and catering to different interest groups, the more producers will pull away from the free market invisible hand, and lean more towards political handouts. And as the state expands in its role, the more companies will be compelled to look for government assistance, thus extremifying the political invisible hand. This phenomenon is known as crony capitalism.

The choice is ours over which invisible hand to favor, the market’s or the state’s. Will we judge the intentions behind them, or focus on the outcomes? As we build towards a freer society, the choice couldn’t be any more clear.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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