Market Failure: The Back of the Invisible Hand
Ernest Partridge, Co-Editor
The Crisis Papers.
June 19, 2007
The concept of "the invisible hand," cherished by
self-designated "conservatives," has its origin in Adam Smith’s
Wealth of Nations.
[The individual] neither intends to promote the
public interest, nor knows how much he is promoting it... [H]e
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.
An unyielding faith in the infallible beneficence of
"the invisible hand," leads to "market absolutism" – the doctrine
that whatever government attempts, privatization and the free-market can
What market absolutists (unlike Smith) fail to notice,
is that not all workings of "the invisible hand" are beneficial.
Some unintended consequences of market activity are harmful -- "the back
of the invisible hand." Economists call these "market failures."
One cannot enroll in an Introduction to Economics class,
without encountering the concept of “market failure” – the
acknowledgment that a totally unconstrained and unregulated free market
can, at times, have socially undesirable consequences (as I will
exemplify below). It is one of the most obvious and
incontrovertible facts of economics. Almost all of us are aware of
market failures, whether or not we have ever studied economics.
Some students of Econ. 101 choose to major in Economics, and a few of
these earn doctorates in the field. Those scholars who go on to work for
The Heritage Foundation, The American Enterprise Institute, The Cato
Institute, and other such "conservative think-tanks" somehow manage to completely forget about “market
failures.” The free unregulated market, they tell us, always
brings about the socially optimum result. Some examples (with my
“In the free market, the individual would have to
produce a good that the other person desired in order to receive a
good in return. Adam Smith's "invisible hand" of the market guides
all participants in society to promote the best wishes of everyone
else by pursuing his own wants and desires.” (Jacob
“[T]he free market allows more people to
satisfy more of their desires, and ultimately to enjoy a higher
standard of living than any other social system... We need simply to
remember to let the market process work in its apparent magic and
not let the government clumsily intervene in it so deeply that it
grinds to a halt." (David Boaz, Libertarianism, a Primer, p.
"A free market [co-ordinates] the activity of
millions of people, each seeking his own interest, in such a way as
to make everyone better off... Economic order can emerge as the
unintended consequence of the actions of many people, each seeking
his own interest." (Milton and Rose Friedman: Free to Choose,
Accordingly, governments should never interfere with
markets. Furthermore, governments should not own property, which is
better managed by private individuals. So argues the libertarian,
Robert J. Smith: “The problems of environmental degradation,
pollution, overexploitation of natural resources, and depletion of
wildlife all derive from their being treated as common property
resources. Whenever we find an approach to the extension of
private property rights in these areas, we find superior results." (My
italics). "All," "whenever" -- no compromise or
In short: let the free market decide. The mysterious “invisible hand” of
the free market will “promote the best wishes of everyone..,” (Halbrooks),
“[allow] more people to satisfy more of their desires” (Boas), and “make
everyone better off” (Freidman).
Practical experience tells us otherwise:
The unconstrained chemical industry promoted
pesticides and caused extensive damage to the ecosystem, until the
public and then the government, aroused by Rachel Carson’s book,
“Silent Spring,” put a stop to it.
Similarly, the chemical industry strenuously
resisted demands that it cease the manufacture and distribution of
chloro-fluorocarbons (CFCs), when atmospheric scientists discovered
that the CFCs were eroding the stratospheric ozone, which protects
the earth’s inhabitants from ultra-violet radiation. Once again, the
federal government, joined by the governments of other
industrialized nations, enforced a ban on CFCs.
Scientific warnings about global climate change
(“global warming”) were countered by “junk science” sponsored by the
energy industry. Now, at last, as the fact of climate change becomes
undeniable and widely acknowledged, the same industry is
promulgating the “line” that climate change may not be all that bad,
and might even be beneficial. Clearly, mankind can not count on
private enterprise to solve this grave crisis. Only international
agreement among the industrial nations will suffice. Meanwhile, the
Bush administration, on behalf of its “sponsors” the energy
industry, is resisting international action.
Reduced labor costs yield increased profits and
increased dividends to the stockholders of the corporation.
Thus, if workers abroad accept wages that are a fraction of the
wages demanded in the United States, then the "responsible" policy
of the corporation executives is to re-locate jobs abroad. "Outsourcing."
The consequences to the displaced workers,
and eventually to the national economy, is devastating. But
strictly speaking, that is not the concern of the corporation.
Not, that is, unless the government intervenes with tariffs, tax
incentives, regulations, and laws.
Finally, the tobacco industry, whose corporate
responsibility to its stockholders is to maximize profits,
successfully marketed its products to the point where half of the US
population were smokers. As a result, almost a half million
Americans die prematurely each year – nearly twice the total US
casualties in World War II. Today, only a fifth of adult Americans are
smokers. No thanks to the industry. Once again, government
intervention, vigorously and persistently opposed by the tobacco
industry, has curtailed marketing and has publicized the health
hazards of smoking, saving the health and lives of millions.
We are all quite familiar with these “market failures,”
and many more. It is obvious that, in numerous undeniable cases the
unregulated free market fails to “make everyone better off,” as Milton
Friedman would have us believe. So why, if market failures are so
compellingly obvious, should we even bother to mention them? The answer is that our present government is dominated
by individuals who behave as if they don’t recognize these malevolent
consequences of free markets. So one after another, regulations and laws
designed to correct market failures are being dismantled, as government
regulatory agencies are staffed with lobbyists and officers from the
corporations that these agencies are charged to regulate.
But why do markets fail to produce optimal results for society at large? Railroad
tycoon, William Vanderbilt (1856-1938) said it all: “the public be
damned, I work for my stockholders.” Moreover individual entrepreneurs
and workers also want and strive for what is best for themselves.
Indeed, as any neo-classical economist will insist, personal
want-satisfactions (e.g., profits) are what drive an economy.
Implicit in market absolutism and libertarianism is the belief that what
is best for each individual and each corporation is best for all individuals – in other
words, for “society at large.” As President Eisenhower’s Secretary of
Defense, Charles Wilson, put it: “What is good for General Motors, is
good for the country.” (For a refutation, see my
"Good for Each, Bad for All"
"If It's Good for General Motors, Is It Good for the Rest of
Market absolutism, like "young-earth creationism" and
biblical literalism, is a dogma, and thus it is untouched by hard
evidence and practical experience. "Market -- good;
Government -- bad. Period! Now don't confuse
us with the facts."
Those who are not captivated by the dogma of market
absolutism (i.e., most of us), know better. We trust the scientists who
tell us that pesticides damage the ecosystem, that CFCs erode the ozone
in the stratosphere, that the continuing use of fossil fuels is changing
the climate. And we know that smoking causes lung cancer and premature
death – the cigarette packs tell us so, not because the tobacco
companies warn us out of a sense of social responsibility, but because
the government requires them to print the warnings.
Government regulation, and laws restricting commercial activity, arise,
not from dogma, but through accumulated practical experience and
political action. As human institutions they are imperfect, which means,
to be sure, that they are sometimes excessive. The appropriate response
to “insolence of office” is reform, not abolition of the office – reform
through the same processes of practical experience and political action.
As James Galbraith puts it:
“A new spirit of pragmatism surely requires that we
discard the metaphor of market determinism – whole and entire. No
more, let us bow and scrape before that altar. Markets have their
place – they are a reasonably open and orderly way to assure the
distribution of services and goods. They are not a general formula
for the expression of social will and the working out of social
Corporations quite properly work for the stockholders,
and private individuals, in their economic activities, work for
themselves and their families. But when these corporate interests and
private activities cause social harm, who or what is most authorized to act in behalf of
society – of all the people?
The solution is the same in all civilized societies: the law and the
government that enacts and enforces the law. To be sure, law and
government can be despotic and oppressive, and when they are, “it is
[the] right, it is [the] duty” of the people “to throw off such
government.” (The Declaration of Independence). Such
"despotism" surely includes the situation that we face today, as the
corporations that should be regulated by government, instead have
taken control of the government. However, in liberal democratic
countries, law and government, unlike private enterprises, are
authorized to act in behalf of the public at large. This, the
unregulated free market can not do and must not presume to do.
There is nothing new or startling about these political principles. They
are enshrined in our founding documents:
We hold these truths to be self-evident: that all
men are created equal; that they are endowed by their Creator with
certain unalienable Rights; that among these are Life, Liberty, and
the pursuit of Happiness. That, to secure these Rights,
Governments are instituted among Men, deriving their just powers
from the consent of the governed, That, whenever any Form of
Government becomes destructive of these ends, it is the Right of the
People to alter or to abolish it, and to institute new Government...
And note in the Preamble to the Constitution, these
enumerated legitimate functions of government: “... establish Justice,
insure domestic Tranquility, provide for the common defence, promote the
general Welfare, and secure the Blessings of Liberty to ourselves and
And yet, the dogma of the ruling elites would ordain that we put all
these founding principles aside, and in matters of public interest and
social welfare, “let the market decide.”
These individuals have the nerve to call themselves “conservatives.”
Copyright 2007, by Ernest Partridge
Ernest Partridge's Internet Publications
Conscience of a Progressive:
Partridge's Scholarly Publications. (The Online Gadfly)
Dr. Ernest Partridge is a consultant, writer and lecturer in the field
of Environmental Ethics and Public Policy. He has taught Philosophy at
the University of California, and in Utah, Colorado and Wisconsin. He
publishes the website, "The Online
Gadfly" and co-edits the progressive website,
"The Crisis Papers".
His e-mail is: firstname.lastname@example.org .