Regulating Economies: Making the Invisible Hand Visible
What regulates economies in practice, for better or worse? Adam Smith referred to an invisible hand that regulates free markets. But what is this mysterious hand?
Because we the people make economies, whatever regulates us also regulates them. Governments aren’t the regulators (despite regulations), because they’re run by people as well. Rather, economies reflect us. We make them with our day-to-day responses. The question of regulation begins, therefore, with who and what we are.
a) The spectrum of human nature
We’re not saints. But we’re not total scum, either. Our scum-side just makes more sensational headlines. Neither rosy optimism nor dark cynicism captures human nature. Optimism can be naive and invites disillusionment; cynicism sees only darkness and shuts out hope. Moreover, the two polesoptimism and cynicismare related. The first invites the second, as Socrates explained in the Phaedo:
Misanthropy is induced by believing in somebody quite uncritically. You assume that a person is absolutely truthful and sincere and reliable, and a little later you find that he is shoddy and irresponsible. Then the same thing happens again. After repeated disappointments at the hands of the very people who might be supposed to be your nearest and most intimate friends, constant irritation ends by making you dislike everybody and suppose that there is no sincerity to be found anywhere. Have you ever noticed this happening?...
Isn’t it obvious that such a person is trying to form human relationships without any critical understanding of human nature? Otherwise he would surely recognize the truth: there are not many very good or very bad people, but the great majority are something between the two.6
Economies include plenty of soured friends, insofar as we form economic relationships without any critical understanding of human nature. We go into economies hoping for the best but sooner or later encounter the worst. Disillusioned, we assume everyone is rotten, so why should we act differently? As a result, we adopt the very responses that caused our disillusionment. Then we pass these responses along to our children, making them disillusioned as well.
But the uncritical generalization that lies at the root of our disillusionmentnamely, that everyone behaves badly when it comes to economiessimply isn’t so. As Socrates said, human nature covers a spectrum of qualities. We’re creatures in transition, moving from one pole to the other.
At the dark end, we harbor fears that make us suffer and cause us to inflict suffering on others. Buddhists and Hindus describe the dark pole as rooted in ignorance. This ignorance isn’t just personal, though its effects are felt by persons. It’s an impersonal lack of understanding about the real nature of things. What we take ourselves to be isn’t who we really are, they say, and what we take others to be isn’t really them. We don’t know ourselves, and we don’t know reality. This deep, philosophical ignorance gets us in a mess.
According to Buddhist and Hindu thinkers, the mess starts with desires. Because of ignorance, we bind ourselves to wants and define ourselves through them. The more wants we can fulfill, the more powerful a person we are. Wanting more and being able to get more makes us somebody. But wants aren’t kind. They lure us into a state of insatiable thirst. Driven by them, we look for things in the wrong places or struggle to get things we don’t really want.
At the light end, we find, in Hindu terms, the Atman, the true, spiritual self. The true self doesn’t want; it is. The Atman is one with Brahman (God, the whole) and draws its being from this source. Reflecting the whole, the true self embodies wisdom and understanding. It has all it needs from the whole. In Socratic terms, the light end is expressed in the purified soul of the true philosopher.
Not that the true self is off in the clouds. By reflecting the whole, the true self cuts through partial-order ignorance, giving us an alternative to the hungry ego. In psychologist A.H. Almaas’ terms, it empowers us to exchange the false gold of the ego for the true gold of the self. Just as real gold doesn’t need false gold to increase its value, the true self doesn’t need to satisfy desires in order to complete its identity.
Humanity covers the spectrum. At one end is the true self, which draws us forward. It shows us who we are in the light of the whole. This light, though, casts a shadow wherever something blocks it. The shadows formed by confused desires represent the dark end of the spectrum.
Where Do Economies Fit In?
Because they deal with self-interestwhich is then equated with selfishness economies are usually associated with the dark end. Why should we expect anything more from economies than greed incarnate?
To make matters worse, because scarcity-premises dominate modern economies, fears surface whenever the question of money comes up. Will we have enough, or will we land among the losers? Even if we win, can we make enough money to stay on top? The thirst increases, as in Dante’s description of the inhabitants of Hell. Money and the dark pole seem like soul mates.
But appearances don’t tell the whole story. Economies themselves aren’t dark. There’s nothing dark about managing the household. What may be dark is how it’s done. Addictions to desires put shadows over economies that economies of themselves don’t have.
Neither is there anything necessarily wrong with self-interest. Prosperous economies thrive on win-win, not on martyrdom. They respect self-interests and protect them. In fact, economies that compel people to act against their own best interests don’t last long. Sooner or later, their members seek a different arrangement.
Religions agree. Self-interest isn’t the problem. Hinduism, for instance, uses self-interest to spur humanity toward ultimate liberation. Hindu teachings argue that nothing can be more in our interest than to be consciously one with the whole, with God. Given the right context, self-interest can be a positive ally to furthering the Good.
In short, economies are neither necessarily corrupt nor necessarily wonderful. They can be either or somewhere in between. They mirror us. If we live and work at the dark end, our economies will look their worst. But if we move away from this pole, they’ll come along too. We regulate their course not from our heads but from our characterwhere we ourselves are in spiritual growth.
Consequently, discovering what regulates economiesAdam Smith’s notion of an invisible handstarts with the spectrum of human nature. Whichever pole defines our interests also shapes our economies. Economies span the spectrum, because we do.
But there’s more. Wherever we are along the spectrum, we push to better ourselves. Staying fixed is boring, and going backward depressing. The only interesting way is forward. We seek to perfect ourselves by moving away from the dark end. Indian philosopher and statesman Sarvepalli Radhakrishnan writes:
There is a perpetual restlessness with things as they are, an eternal seeking for a better way, a continual progress toward a better world. The greatest gift of life is the dream of a higher life. Each one aspires for a deeper, intenser, and wider self-consciousness and clearer self-understanding.7
Economies reflect this restlessness. They show human nature on the move. As Adam Smith observed, self-betterment is a major economic force. Rather than greed, this forcethe intuitive knowledge that development is possible and that we can always use more of itdrives economies. Whereas greed begins and ends with gratifying egos, the quest for self-improvement reflects the deeper drive for self-transcendence. Self-betterment patterns outwardly the inward desire for growth.
But self-betterment also has teeth. It inspires restraint. Going forward means not falling back to old habits. We measure our desires and redirect them. Motivated by self-betterment, we think twice before reverting to dark methods: the direction is wrong if we want to progress.
In economies, the restraint side of self-betterment checks exploitation. If our lives don’t improve through our labors, we rebelas the colonists did in the American Revolution and as those in oppressive, totalitarian governments are doing today. All over the world, people expect better conditions for themselves, their children, and their fellows. If economies fail to serve this aim, the invisible hand won’t remain invisible for long.
c) Cooperation, Which Competition Serves
The spectrum of human nature and the drive for self betterment combine to regulate economies, making economies first and foremost cooperative efforts. Competition comes later, serving mainly to elevate standards and to introduce new methods. The core of economiesthe reason for them to exist in the first placeis cooperation. Why? Adam Smith begins The Wealth of Nations by explaining how economic exchange grows out of the need for mutual assistance:
Man has almost constant occasion for the help of his brethren. But (given human nature), it is in vain for man to expect help from their benevolence only (the higher end of the spectrum). He will be more likely to prevail if he can interest their self-love in his favour (the lower end of the spectrum), and show them that it is for their own advantage (self betterment) to do for him what he requires of them (cooperation).8
In other words, if we’re not saints and we need others’ help, we can get it by appealing to others’ self-interest and their desire for self-improvement. If it’s in their interest to help us, they’ll cooperate.
The logic works on us, too. The drive to better ourselves makes us help others, because we need their help in return. The ideal of creating a self-sufficient, economic island is neither practical nor progressive. It cuts us off from all the resourcesthe creativity and knowledgethat the rest of the world has to offer. Life becomes easier if we both seek help and give it.
Moreover, cooperation refines us. The discipline of cooperation gradually changes self-love into enlightened self-interest. We have to see what our brethren need before we can help them. Otherwise they won’t be there for us when we need help. In fact, the more perceptive we are about others’ real needs, the more successful our help to them will be. Through this process, we become more sensitive to others and less caught up in our own wants.
We participate in economies, then, because we have something of value to offer the community and because we need the specialized help of the community in return. The relation is symbiotic, like an ecosystem in nature. The individual benefits the system, while the system benefits the individual.
By contrast, interpreting the relation as a war among selfish interests makes exchange unrecognizable. It turns reciprocal benefit into a brawl. Mutual advantage disappears, replaced by mutual bilking.
Nor does a brawl count as true competition, though it’s often advertised as such. Done properly, competition serves cooperation by fine-tuning it and pushing it to new levels. In a sport, the better the opponent, the better the match. Two teams or players, competing to their utmost, reach a level of performance that neither could achieve with lesser competitors.
Similarly, economic competition functions best when it serves the goal of mutual improvement. Two or more entities compete so that something better results. Guided by the invisible hand of cooperation, competition raises standards, lowers prices, increases efficiency, fires creativity, and, all in all, improves products and services.9
The spectrum of human nature, the drive toward self-betterment and the need to cooperate, taken together, regulate economies, making them what they are. But there’s one more factor to consider. We need libertyfreedom in the marketplace. Why? We need freedom to develop our talents, to fine-tune our cooperation and to better our lot.
Adam Smith, the champion of free-market economies, argued that the invisible hand guides economies toward maximum efficiency and mutual benefit only when there’s perfect liberty where every man [is] perfectly free both to choose what occupation he [thinks] proper, and to change it as often as he [thinks] proper.10
Freedom allows us to develop our individual talents to the maximum. If we feel our occupation isn’t right for us, we can change itnot just once but as often as we think proper. In free economies, we don’t have to put up with whatever conditions come our way. We can do something about them.
Freedom is equally important to economies as a whole. It diversifies them. Free markets give all sorts of ventures a chance to prove themselves. They encourage creativity and allow it to blossom. Free markets make industries receptive to invention and innovation. They open the possibilities for problem-solving. They also allow economies to work out the best market structure.
Without freedom, economies become rigid and fixed. Vested interests and established power-structures control knowledge and suppress creativity, leaving more and more problems unsolved. Diversity together with flexibility dwindle, causing stagnation to set in. Economies become locked in their own crises, having squelched the means for resolving them.
We know the problem. Adam Smith’s free market capitalism is the one economic system we don’t have. What we really have are family monopolies, conglomerates, and multinationals that dominate economic exchange. The most polite term used to describe the arrangement is plutocracy, control by a wealthy elite. But when the plutocrats flex their musclesand the public spots them doing itwe hear other terms, such as economic fascism or just plain theft.
In such arrangements, liberty is the first to go. Free-market conditions function only for the few. For the majority, educational and financial limits make it almost impossible to exercise the kind of freedom that Smith described.
Not that we haven’t made progress. We just don’t have a free market. In fact, perfect economic liberty has never existed, except as an ideal. Paul Samuelson, the Nobel Prize winning economist, observed that, We don’t know whether or not pure capitalism would work, becauselike pure Christianityit’s never been tried.11
Freedom in economies remains an ideal. The question is, are we aiming toward it? Are we implementing policies that liberate people and nations to interact with economies more as they choose? Whether we choose to make our economies more or less free depends, of course, on what we think freedom is.
According to spiritual teachings, freedom isn’t a right to pursue wants with abandon. It is no true state of happiness in which the people are given over to idleness and wasteful extravagance, Erasmus wrote, any more than it is true liberty for everyone to be allowed to do as he pleases.12 Quite the reverse. In Hindu, Buddhist, and Christian monastic philosophies, pursuing unlimited desires doesn’t just create bondage; it is bondage. Wants trap us at the dark end. Defining ourselves through wants makes us prisoners to those wants.
In Socrates’ words, tying freedom to want-fulfillment gives us a life of itching and scratching. Feeling itchy, we try to increase freedom by satisfying more desires. We scratch more vigorously. But scratching has the opposite effect. We end up more itchy than before. Satisfying desires as the way to freedom backfires. Is it possible to live life happily, Socrates asked, constantly scratching an itch?13
Nonetheless, the power to get what we want is more or less how we define freedom, at least economically. It’s purchasing power. Freedom is a commodity, namely, the power to fulfill wants. To get it, we have to buy it. Since only a fixed number of material wants can be fulfilled, only a few can be free to fulfill them. One person’s gain in freedom entails loss to another. Freedom is parcelled according to money. Those with more money get more freedom. Right?
Well, it’s not what the Founders had in mind when they wrote the U.S. Constitution. They had a revolution precisely to get rid of money-based definitions of freedom. Building economies on want-notions of freedom, they believed, doesn’t give us free markets, much less free societies. Those most driven by wants end up dominatingthe Monopoly syndromelessening everyone else’s freedom. Freedom as a commodity of want-fulfillment doesn’t work as freedom. More people end up without it than with it.
Instead, as religious reformers have insisted, the kind of freedom that frees everyone operates on a level beyond wants. It’s not tied to money but to the soul. Freedom increases as we move toward the light end. It follows our inward growth.
But how does a spiritual definition of freedom help on a practical level? Simple. It tells us which way to move. If the spectrum of human nature also marks the spectrum of freedom, then we know which direction to go if we want our freedom to increase. Responses that move us toward the true self and its oneness with the whole expand our freedom. Responses that tie freedom to want-fulfillment contract it. We have a choice. The direction we move along the spectrum determines how free we are.
The freedom available to economies, then, comes from us. We supply the liberty that our economies need, since liberty increases with our own spiritual growth. As a result, the invisible hand regulating economies doesn’t depend just on where we are but much more on where we tendon our own spiritual evolution. How truly free can we be?
In short, we’ve met the invisible hand, and it’s us. We regulate economies with our responses.
6. Plato, Phaedo, 89d-90a. Tredennick, 144.
7. Sarvepalli Radhakrishnan, Religion and Society (London: Allen & Unwin, 1947), 137.
8. Smith, Wealth of Nations, 14.
9. When competition isn’t practiced within the framework of cooperation, it means only win-lose. This conflict-model of competition has been challenged in studies conducted by Robert Helmreich and the University of Minnesota’s David and Roger Johnson. It’s also been criticized in works such as Alfie Kohn’s No Contest: The Case Against Competition (Houghton Mifflin, 1986). These studies indicate that competitive situations stifle individual creativity.
For understanding how economies work, however, we’re not sure we can do away with competition altogether. After decades of experimenting with a noncompetitive model, Eastern Europe is now concluding that the free-market system of economic competition works better. A lack of competition leads to domination by one or two powerful factions, as the West has discovered with its own monopolies. True, people will likely evolve other models for noncompetitive economies that might prove more successful. But for now, the remedy for the negative effects of competition may lie simply in finding a context that makes the competitive response constructive. The context of cooperation seems to fit the bill. Cooperation makes room for both parties competing. In such a context, competition serves as a tool for increasing economic diversity and spurring the pursuit of excellence, all of which makes economies better as a result.
10. Smith, Wealth of Nations, 99.
11. Quoted by Charles Sanford, Alumni Viewpoint: Some Suggestions for Planning Your Career, Wharton Alumni Magazine (Fall, 1987): 15.
12. Desiderius Erasmus, The Education of a Christian Prince, Lester K. Born, trans. (New York: Octagon Books, 1987), 212. Erasmus’ work was originally printed in 1516.
13. Plato, Gorgias, 494c., R. E. Allen, The Dialogues of Plato, Vol. I (New Haven and London: Yale University Press, 1984), 281.