Regulating the "Invisible Hand'
The ‘invisible hand’ has come to imply the idea that the
pursuit of narrow self interest by individuals results in the best social
outcome.
Adam Smith, who first used the
expression, more narrowly applied it to the concept of markets: “specifically
that it is competition between buyers and sellers that channels the profit
motive of individuals on both sides of the transaction such that improved
products are produced and at lower costs.”
http://en.wikipedia.org/wiki/Invisible_hand
The generalized idea is not valid.
In general, action by the members of a society must not only
be self seeking, it must promote the well being and goals of that society. To
put it in economic terms: Society must profit, and the action of individuals
must, in that respect at least, be virtuous. Indeed, every prosperous and stable society has
elevated the idea of virtue among its citizens, and devised means to encourage
it. Those most esteemed were those who
contributed the most to society. They
were those who were held to be the most virtuous, and received the greatest
rewards. Those who were merely self
serving were held in contempt, what ever their material income.
While an individual person may or may not be inclined to
virtue, a corporation, however, cannot be virtuous, unless forced by law and circumstance
of competition. Only the pressures of
competition make a productive corporation stay productive, that and the force
of law required to make the corporation internalize its costs.
For instance, we hear about banks, and other corporations,
‘socializing costs while privatizing profits.'
When this happens, it is no longer certain that the activities of the
corporation are actually of benefit to the economy. These activities may actually harm society,
that is make society poorer, and everyone, on average, worse off. (Though the owners and some of the employees of
the corporation may, of course, be better off.)
Indeed, it is always the case that society is the poorer when the
externalized costs are greater than the profits the corporation makes.
For the act of production requires the internalization of
cost. The very act of production requires the benefits of production outweigh
the costs, and if many of those costs are externalized, their weight is no
longer determined by the market. Thus,
while the corporation may reap a profit, the costs to society may outweigh the
benefits society receives.
This can be seen from the fact that, when all costs are
internalized, the net benefit a company makes to society is equal to that company’s
profit. That is, society comes out ahead by the profits of the company. If, when
all costs are internalized, the company breaks even, then society breaks even. But if costs are externalized and the company
breaks even, then society pays these costs, and loses.
The profits a company makes are what society is willing to
pay the company above the company’s costs. (Note that in a situation with perfect
competition, where there are no profits, there is no growth.) If society is not willing to pay the company
above its costs, its activity is only of use to society to maintain society,
and the company itself, in their current state of economic activity. The
company makes no profits, and does not grow, and society does not grow.
If costs are internalized, and the costs are greater than
society is willing to pay, then society will cut back on that activity. That is the company is operating at a loss,
and it will contract.
If there are any externalized costs, and these are less than
the total profit, then society will grow at a rate less than the company.
If externalized costs are greater than the profit, then the
company will grow, but society will contract.
Now the officers of a
corporation can only pursue that corporation’s narrow profit. In a free but limited market, this may yet be
beneficial to society. However, producing
corporations are at a competitive disadvantage to corporations which do not
produce, but manipulate the economy to enhance their collection of rents from that
economy. Corporations which do not produce need have no real costs, except those they inflict on society for profit.
Given the opportunity, then, the officers of a corporation must
externalize, or socialize, costs, where it increases profits, no matter the harm
inflicted on the larger society. Thus there
is always the pressure on a corporation to change into something which is non-productive,
a rent collecting corporation, and a parasite on society.
And while the producer, constrained by competition, might be
virtuous naturally, the monopolist and the rent seeker will not be. The monopolist, unconstrained, will provide a
service, perhaps essential to that society, at a cost that society may ill
afford, a cost possibly greater than the benefit that service provides. The rent seeking corporation will extract
resources from society without net benefit to that society.
Regulation is necessary, and should be designed to force
corporations to internalize costs, which would otherwise be externalized, and
discourage the collection of rents, or excess profits. (And one might argue
that that is all regulation should be designed to do. One might also argue that the conservation of
stocks of resources is a separate reason for regulation, although this might be
under the cover of internalizing all costs.)
Where these costs cannot be directly internalized, they
should be countered by government activity, supported by corporate tax.
Since regulated industries are less competitive, they should
be protected against unregulated, and subsidized, competition, especially foreign competition, by
tariff, if needed. Indeed, failure to do so results in an economic race to the
bottom. Domestic producers are forced to
externalize costs onto their society, or go out of business. This process is essentially
the taking of resources out of the market, destroying it. It is the exportation
of demand.
A nation should in any case be more concerned with securing
its domestic market for its own industry than securing foreign markets. All countries cannot be net exporters, but
all countries can balance their trade.
The expansion of the idea of markets to other activities of
society is destructive to those activities. And those activities are essential
to the function, and even the identity, of society.
Indeed, the idea of the self-serving ‘invisible hand’ is
inadequate to explain the stability and persistence of societies. Virtuous
behavior, in particular on the part of a society’s leaders, is required for that
society to maintain itself and prosper. Since it may be impossible for the law, even
where not co-opted, to restrain corporate behavior, in particular the
indiscriminate externalization of costs, the corporate state may be unstable,
and incapable of sustaining itself in the long, or even the medium run. The
structure of corporations, and their place in society, far from encouraging
virtue, may even exert a corrupting influence on their officers, who are also many
of society’s leaders. This is especially
true as society’s competitive structure is increasingly replaced by
oligopolistic and monopolistic structures.
These structures naturally seek rent and externalize costs.
Unlike people, corporate persons, except as they are
constrained by law, cannot be good
citizens. Thus, if the law is inadequate
to constrain them, 'Corporate Society' may only exist as a transition state to
a decapitalized future.
Regulation may be inadequate to secure the future, but it is
nonetheless necessary.
