The Tale of Two Invisible Hands

0:00Matt's talk reminded me of a story that happened about eight years ago in Florida, and this good old boy owned a big piece of land that his family had owned for a couple of generations. It was all swampy, it wasn't really worth very much, but he could go fishing and gatoring and stuff like that. And then he found out that he had some endangered species, a bird that ate insects out of dead trees on his property. And so what he did was he started killing trees, and he started cutting down some things and planting other things to attract other bird species. And what he would do was then charge people, bird watchers, to get them on a boat and bring them into his swampy property to see these very rare species.

0:49And then the government found out about it and said, you can't have people going near those birds because you'll disturb them. And so he ended up selling the property to some developer a couple of years later. And a couple of years after that, all the forest mysteriously burned down. And now there's houses and canals where those endangered birds used to flourish on this good old boy's property. Matt was one of the lucky ones. He's an English major, but he grew up, I know his mother and father. and he grew up with economics just like learning economics just like you would learn how to make a sandwich or how learn how to make use the microwave oven or cut the grass or whatever.

1:38So he's one of the lucky ones and of course Bobby Ames' students have been taught some good economics and hopefully some of you have also been exposed to good economics. But frankly for the rest of America that's simply not the case. Most Americans don't know what the source of our prosperity is. They have no idea why America has become one of the wealthiest countries in the world. They have no idea what the source of economic problems is. It's just a mystery. So they're uninformed about what's the cause of our prosperity, what's the cause of our problems. And that's what my lecture is going to be about today. You can imagine that if you don't know what the source of prosperity is, and you don't know what the cause of problems like this economic crisis is, that it's kind of a scary world to live in, and you naturally gravitate towards accepting whatever big brother has to offer.

2:39So I'm going to talk about the tale of two invisible hands. The invisible hand is a phrase, it's a metaphor, but basically what it means is the idea that Self-interest is the force that regulates the market economy and makes it possible to increase prosperity over time. In other words, people pursuing their self-interest promote the general interest of society. No government regulation or involvement is required whatsoever. The debate about the invisible hand is whether the invisible hand of the marketplace makes everyone better off, if it truly is an automatic thing, and if it is powerful enough to regulate the economy as it grows increasingly complex.

3:31Every problem in society, both small and large, has been used to undermine our confidence and our conviction in the invisible hand, and thus our trust in the free society. What about poverty and unemployment? What about pollution and monopoly? And what about this housing bubble and the economic crisis? Has the invisible hand forsaken us? Is it no longer capable of properly regulating the economy? Don't we really need the hand of government regulation to steady our course? Just yesterday, in a major British newspaper, an article was published discussing how badly The Invisible Hand had performed in creating the economic crisis.

4:21And they actually went back and quoted good old Adam Smith who first used that phrase in economics. And I'm going to quote from the author, quote, it appears that from time to time, the investors also behave in what seems an irrational manner, so that the market misallocates resources rather than allocating them efficiently. Perhaps on a grand scale. So this is an issue that is alive and well. It's a debate that's going on right now, even though Adam Smith used the term centuries ago. My research here at the Institute has established the source of Adam Smith's conception of the invisible hand in the economic theories of a 17th century banker named Richard Cantillon.

5:11And this connection allows us to know the precise meaning of what the invisible hand is and why it is critical as a foundation of the free society. There's a lot of debate about the invisible hand. My research and that of other economists from the Austrian School and even economists from other schools of economic thought have found that the problems in our economy are the result are the result of government intervention in the economy, and that's the other invisible hand, the one that we don't see, government intervention. It turns out that the Austrian economists actually agree with Marxist on this point. The economy is being rigged to the benefit of some at the expense of others.

5:59Now, Adam Smith first used the phrase the invisible hand, he used it three times, in 1749 in a book called An Essay on Philosophy, and here he's criticizing people for believing there are religious reasons for naturally occurring events like lightning and thunder. quote, fire burns and water refreshes. Heavy bodies descend and lighter substances fly upward by the necessity of their own nature. Nor was the invisible hand of Jupiter ever apprehended to be employed in these matters. In other words, for Smith, the god Jupiter does not cause lightning and thunder when he gets angry, as people once thought. Smith Smith wants us to approach our understanding of the world we live in scientifically.

6:53He next used the phrase the invisible hand in a book called The Theory of Moral Sentiments in 1759. Here Smith is explaining that even though wealth is very unevenly distributed in society, that self-interest in the market forces act in such a way as to distribute consumption More evenly, the wealthy people are dependent on the poor people, and the poor people, the working classes, are dependent upon the wealthy. Hence, consumption becomes more and more evenly distributed in the market economy. And I'll quote from The Theory of Settlements here at length. The rich consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own convenience, though the sole end which they propose from the labor of all the thousands whom they employ be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements.

7:59They are led by an invisible hand to make nearly the same distribution of the necessities of life which would have been made had the earth been divided into equal portions amongst all its inhabitants. And thus, without intending it, without knowing it, advance the interests of society and afford means to the multiplication of the species. When providence divided the earth among A few lordly masters neither forgot nor abandoned those who seem to have been left out of the partition. These last two enjoy their share of all that it produces in what constitutes the real happiness of human life. So basically saying, yes, wealth is unevenly divided, but consumption is naturally more equally divided in a market economy.

8:52In other words, he used this model where one person owned everything in the world. The entire world was his estate and yet that estate would produce nothing unless he employed people to work the lands. And if you employ people, you have to feed them, you have to clothe them, you have to house them, you have to provide for the multiplication of the species or there will be no next generation of employees. In other words, imagine if you owned everything in the world. You now own the S&P 500, every company, the entire world, every house, every car, every manufacturing plant, every TV network. What would you do? Well, you would have to hire people and pay them to provide you with food, making your clothing to take care of the repairs of your property.

9:45You would have to pay people to produce gasoline and electricity and movies and candy and deodorant and toilet paper, underwear, etc. Would you want to clean your own house? No. Would you repair your own car? No. Would you like to wash your own laundry? Probably not. As a matter of fact, you'd have to hire people to manage your computer companies, your airlines, your television networks. You would have to pay them good salaries in order to get good results. You'd want the hardest working and most talented people running your most valuable assets. Eventually many of these people that you hired would become rich themselves. The more you wanted to exploit your wealth, remember you own everything, the more you want to exploit that, the more everyone else would earn.

10:34And of course that's an unrealistic example. But it does show that we are all dependent upon everyone else and that self-interest propels the whole system, moving it forward and spreading prosperity in the market economy. Now while that's unrealistic, in the real world we know that there are tons of super wealthy people. Most earn their wealth honestly, although certainly there are probably a few out there who did so through less legitimate means. Most of the multi-billionaires in the world today are self-made, or they simply grew their family fortunes up into the tops of the Fortune 500 of the world's wealthiest people. Most of these people come from the freest countries in the world.

11:23The United States, Switzerland, Singapore, Hong Kong, Canada, Germany and so on. As well as some of the BRIC countries, that's Brazil, Russia, India and China, which have Adopted Free Market Policies and as a result have amassed incredible amounts of new wealth. Their wealth is based on businesses that they have built and investments they have made. So Bill Gates is estimated today to be worth $53 billion. He did that by successfully starting the company Microsoft and making it a very successful company. Microsoft sells us $65 billion worth of stuff every year that we like, that we use, that we enjoy, that makes us productive.

12:15They employ 90,000 people. A huge percentage of the American population of adults and actually teens and children use Use the company's products for work, to enhance their productivity, and for leisure and fun. Bill Gates, a huge percentage of his wealth, $53 billion, is held up in Microsoft stock. If we were to divide that amongst ourselves in here, we would each have $600 million. But it would be of Microsoft stock, which represents the buildings and the patents and and the products that Microsoft is all about. But look what's going on here. Bill Gates and his family do not spend and consume $53 billion a year.

13:07As a matter of fact, they're not going to consume and spend $53 billion in their lifetime or in generations to come. He earns and consumes a few million dollars every year, setting aside extraordinary purchases such as art and the billions that he donates to charity. He has already donated 28 billion dollars to his foundation, which makes 3 billion dollars of charitable grants each year. That's expected to continue over time. So, you know, Adam Smith was saying that there's not as much difference between the wealthy and the regular working class back in his day. Obviously, one person is controlling the wealth, but of the normal things in the market economy, things are pretty much, as far as consumption purposes, very similar.

14:02For example, Bill Gates owns a house. I own a house. Bill Gates owns a gym. I have a gym membership. Bill Gates has a swimming pool with an underground sound system. I have a much smaller swimming pool with an above ground sound system. And an above ground sound system is obviously better than an underground sound system. We We both have multiple computers, we eat three meals a day, and have approximately the same amount of clothing. So it is important to realize, as Adam Smith points out, that Bill Gates' wealth is either held as an investment in Microsoft that employs people who make products that we buy, or he spends a small amount of it, but every amount he spends also is employing people.

15:00So his butler and his maid and the dry cleaner are all making money off of Bill Gates. These wealthy people like Bill Gates have not exploited other people. They have created companies and products which have increased the standard of living for all of us. Adam Smith also used the phrase invisible hand in the wealth of nations to point out that self-interest, again, is what keeps the economy well regulated in the traditional sense. What Smith was saying that adjusting for risk, investors will place their wealth into projects that they think will mean the most profit for them. It is not the intention of investors to make people better off, only to profit themselves.

15:47However, by finding the best investments, they help everyone else out by creating the best jobs and the best products for consumers. Smith adds that business people do not intentionally directly act for the public good. And he warns us against people who claim to be acting in the public good. He goes on to highlight the important role of self-interest in regulating daily life. Smith's invisible hand is therefore a metaphor for the fact that a totally free society is automatically self-regulating. It explains not just stability, but also the importance of self-reliance.

16:45not just fairness, but it also tells us about the nature and causes of wealth and how wealth creation raises the standard of living for everyone, not just the wealthy. Now the other is the invisible hand. What about all the problems in society that I mentioned before? Poverty, pollution, monopoly, unemployment, the housing bubble, the economic crisis. Why wasn't the invisible hand working there? Well, no society is perfect. Even Adam Smith could not explain some of the problems of his day and called for government intervention. However, today we've figured out the cause of our problems. The economists of the Austrian School have investigated all of those problems. And the cause of those problems is the invisible hand of government.

17:33We know that government causes war. We know that government has messed up our educational system and our transportation system. System, but we also know much more than that. We know that government creates monopoly. In healthcare, it's giving monopolies to the drug companies, the doctors and the hospitals. It also protects insurance companies from competition. We know that government creates unemployment and discrimination through things like the minimum wage law. We know that government creates and permits most of our pollution while taking away our right to sue for pollution damages. We know that government caused the housing bubble. The Federal Reserve caused the housing bubble and the economic crisis. And we also know all sorts of problems in our daily lives that we are aware of.

18:20As a matter of fact, our next speaker has written a book where he basically has uncovered both Adam Smith's invisible hand at work as well as the invisible hand at work disrupting things in our daily lives. And today, I'm gonna add just one example to that. Because you can chart the course of human progress in terms of how clean our clothes are. In early times, people used animal skins. They had no change of clothing and no soap. By Adam Smith Day, they had soap of an improved quality, was produced industrial and was available to the common man. In fact, the Industrial Revolution, which is usually discussed in terms of steel and steam and Factories was really about bringing things like soap and underwear, previously only available to the rich, to the common peasants of the day.

19:14Only after World War II did electric automatic clothes washers displace hand-cranked clothes washing machines, and then detergent replaced soap in the washing process, and competition resulted in much more effective products. This isn't going to mean much to you, but maybe the parents and chaperones might remember this. This is an example of a commercial that we'll see eventually of competition at work back in the 1950s, because washing clothes was still kind of a difficult task. The products weren't perfect, but in this case, this ad was about a product now known The problem is whisk, which is still in the marketplace, and there was a problem in washing clothes and that the existing soaps after World War II didn't get white clothes clean, or perfectly clean, and led to a problem called ring around the collar.

20:15So you'd have a yellow ring around your collar, but these problems were ironed out, no pun intended. Between the 1920s and the 1970s, washing clothes had gone from a grueling, full-time task to something that people did once a week, multitasking with other daily chores, and could be accomplished even by young children. Fast forwarding to 1996, Consumer Reports tested 18 models of washing machines. It found that 13 models were rated as excellent, and five models were rated very good. They found that with enough warm water and any decent laundry detergent, any machine would get your clothes clean. In 2007, Consumer Reports tested 21 models and found that none of those rated as excellent and seven models were rated as poor.

21:10The rest of the models were rated as mediocre. The top-loading machines were mediocre or worse. Some reports found that in most cases, the clothes were nearly as dirty after washing as they were before. Are we ready for the 56th? Speaking of improvements, okay, so basically, as we're moving into 2007, laundry machines were poorer than they did in the past. Even the newer front-loading machines were better, but much more expensive, had mold This would seem to be a case of a broken invisible hand from Adam Smith, but the truth is that it was really the government meddlesome hand.

22:00The government had raised energy efficiency standards so much that the manufacturers had to stop making the machines in the previous way. They had to make them so that they used less water, and if you use less water in the machine, it's very difficult, it makes it more energy efficient because there's less water to move around, but of course the clothes don't get clean. So less water in the machines means the machines use less energy to rotate the clothes and the detergent. It also means that less rinsing, which is a vital condition for getting the clothes clean. Ring around the collar, ring around the collar, those dirty rings. You try soaking them out and scrubbing them out, and you can still come out with ring around the collar.

22:51Now try Whisk. Whisk out cleans any other laundry product because it sinks in and starts to clean before you start to wash. Gets even permanent press collars really clean. You won't hear ring around the collar with Whisk. That was a very popular ad and a very successful company and it actually did make washing clothes a lot easier. But today with these new machines with the new energy efficiency standards, they simply just don't work as well. Some people with the new machines have tried to get around this by doing things like adding more soap, which just makes the problem worse, or they use fewer clothes with a larger water setting so that, you know, that actually does get the clothes clean, but it's very energy inefficient.

23:42You're running the machine several times more than you normally would, so it's very inefficient. And also, people are using more soap to actually reduce the durability of the machines, which which is yet another inefficiency and so basically this invisible hand of government regulation has really messed up the whole process which had been slowly improving itself over the progress of human history and we hit the 2007 regulation and we stepped backwards in time to the 1950s. As a matter of fact, I recently had an opportunity to wear my tuxedo to an event, so I get my In conclusion, the invisible hand of the marketplace is the foundation of a free society and the source of prosperity.

24:47The invisible hand of government is the foundation of plunder and the source of our social problems. Thank you very much.