In his book, Smith, the father of modern economics and the great guru of the free market concept, argued that although an individual entrepreneur always acts in pursuit of his or her personal interest, reaching for personal gain also ends up working in the interest of the whole community. Smith characterized the phenomena as the “invisible hand,” an unintended consequence.
Since his first elucidation, the invisible hand has been a guiding principle for the free market economy all over the world for more than two centuries.
While most economists accept the basic premises of Smith’s argument of an intervention-free environment for business to operate, they disagree on the degree of freedom businesses must have in order to be profitable and to have enough incentive to be in business. Also, many profoundly disagree over how Smith’s invisible hand theory, which is rooted in individual entrepreneurship, has been stretched to include the Mega Corporation.
Those who argue for sensible regulations believe that Smith, a philosopher by education, knew too well that greed is a double-edged sword. Whereas it may be a reason for an enterprising tenor, it can also become an impediment to the greater good of the society if left unfettered.
Therefore, businesses must be regulated to protect the greater societal interest without destroying the entrepreneurial spirit. Hence, while Smith supported a relatively intervention-free business environment, he was by no mean arguing against all regulation.
Furthermore, Smith couldn’t have generously expanded the invisible hand idea from individual person to corporations because the concept of a corporation was only in its infancy in 1776.
The fact of the matter is that, unlike corporate executives, individual entrepreneurs risk their own personal wealth and put their own necks on the line for their businesses. Second, the whole purpose of a corporation is to shield the stockholders (the business owners) from liability. Therefore, the corporations don’t offer a similar “unintended positive consequence” for the society, as individual businesses do.
To get in the mind of Adam Smith, one must understand 18th-century England and the backdrop under which Smith penned his philosophy.
At that time in England, businesses were dominated by hundreds of slaughterhouses, bakeries, shops, banks and trading houses of similar size and strength. Even those businesses advanced by the agricultural and industrial revolutions, such as textile factories and mills, were mostly local and had a similar competitive edge against each other.
Almost all neighborhood shops of Smith’s world, which inspired him to develop his economic commandments, have been long replaced by a few faceless corporate conglomerates with factories in China and Mexico. The ownership of the business, the real focus behind Smith’s invisible hand argument, is as relevant today as derivatives and credit swaps were in 1876.
These ruthless modern day conglomerates tout a regulation-free business environment for the personal benefit of their officers, but not necessarily for the long-term interest of the true owners (the stockholders) of the company. While they are quick to claim success and reap reward, they are often long gone from the company when it fails.
In another words, for corporate executives, heads they win and tails someone else looses.
Fannie Mae, Freddie Mac, Lehman Brothers, Goldman Sachs, AIG, Citibank and the GM and Chrysler automobile companies are only few of the hundreds of recent examples of such a win-lose story.
Smith couldn’t have envisioned the world that we live in today, which is much more complex and globally interdependent, as businesses operate in different countries with variable sets of rules. The cost to support labor laws, environmental policies and standard of living is different in each country, resulting in a different cumulative cost to each society.
Subsequently, it’s simply imprudent to believe that a completely regulation-free environment in one country can produce an intended outcome — the long-term success of the business enterprise.
If anything is to be learned from the current global economic crisis triggered by American bank failures, it is that despite regulation, no country can protect the larger interest of its people all the time.
It’s not the number of regulations that can protect both the interest of the business as well as that of the people. Only a timely, proactive improvement of the system will help prevent the total collapse of the system or at least minimize the effect of the systemic failure from the next economic meltdown.
• Roger Adhikari is a Tracy resident who is a finance and management consultant in Silicon Valley.
my arse.
And we aint seen nothing for all $787 billion yet.
This letter sounds touchy-feely, but it's sound thin. Like the hollow tin man sound when you tap on it. All empty sounding.
In this case they labeled an empty package with a title "no new regulations".
You can put a ribbon on it, but it's still an empty box. Eleven months later.
Next!!!
My job was not to disprove Smith or the science of mathematics, but to use your analogy, more akin to a theorom. The disagreement among us that business should be regulated, or not, or to what degree, is and has never clearly been one of a mathematical science.
The discussion is as long and convoluted as the above letter. The disappoitment that await us from the government controls you speak of are of future importance. One that you correctly pointed out.
I'm sure MHarlod is not in charge of the country, and I'm just as disappointed in his comments as the above letter. The collapse of a system is not something we should be making excuses over.
It sounds even worse excuse when sprinkled with hate assumptions calling on names of talk show hosts.
I didn't back away from the truth. I just told it like I read it. No more excuses. It's almost been an entire year.
The above letter speaks of winners and losers. We are losing to a teleprompter. And that's disappointing to hear someone say we're winning.
I didn't read it that way. Christmas is coming, but our economy is getting worse. I don't want to read excuses. Why didn't the author bother to bring us any bright ideas?
Think about it. Isn't it either complaints about GWB or excuses for you know who?
Nothing substantial to read here. We've heard it all before.
To suggest that Adam Smith’s theory of the free market is outdated because it’s from another century is like suggesting that mathematics is outdated.
We do not need more government control of the market place. The near financial collapse is proof positive. It was government controls that created the sub-prime loans that created the financial bubble that lead to the near financial collapse. Yes, some regulations are OK. But there is a huge difference between regulations and controls. But even regulations can be abused as they are today.
Government controls over every aspect of our lives has grown far to much. Most government agencies do not protect the citizens interests and that includes the Treasury Dept. Financial collapse will come in spite of their attempts to avert it.
Just follow the money!
I listen to KGO. It's clear we don't get to decide. Don't assume to have all the answers. They tried that when they handed out the prize. Look what a mistake that was. Your attempt to rove otherwise is more rant? Sorry, I think you got the wrong number. My name's not Limbaugh.
I am not sure who are you talking about by saying "We". By "We" if you mean by us Americans, I have news for you, we don't get to decide who gets the prize. The Nobel prize is a Swedish recognition, therefore,they get to decide who gets their prize, we have absolutely no say in the matter. Now, I don't believe Obama has already deserved the prize (he himself admitted it) but that is the decision of the Nobel prize committee, which is appointed by the Swedish parliament. Right wing media don't tell you that, do they? They hardly have time for rant and rave, how could they provide right information to their listener.
There was a day in Germany where they had propaganda like this.
"It’s not the number of regulations that can protect both the interest of the business as well as that of the people. Only a timely, proactive improvement of the system will help prevent the total collapse of the system or at least minimize the effect of the systemic failure from the next economic meltdown.
"
How do you play a shell game with the voters?
By masquerading regulations as a "tiny proactive improvement"?
Ok, so I have a question for smarty pants.
When can we expect to see the "tiny proactive improvement"?
As the economy continues to fail, and we continue to read more and more convoluted excuses like this.
I also had hoped for change.
That's not arrogance that's disappointment.
You missed the point once again.
SactoFlorist,
A Holly wood actor once said that - ignorant people don’t bother him as much as ignorant with arrogance do. That’s how I find your comments. You’re still having problem to comprehend the article, yet, unwilling to accept it. It appears, you can’t see anything beyond left and right. Piece of advice, stop listening to Limbaugh and Beck and go back to School to learn comprehension; especially, if you want to make comment in public domain.
"If anything is to be learned from the current global economic crisis triggered by American bank failures, it is that despite regulation, no country can protect the larger interest of its people all the time."
Perhaps someday you'll come to understand that this is what's known as liberal's damage control?
Sheeps clothing?
You reminded me of someone, who once said that, in democracy one has right to be stupid. Your comment below literally and figuratively proves that point. You have completely missed the point made in this article. While you sounded like you disagreed with the writer, but in reality, you’ve supported the zest of his argument. Which is, 21st century isn’t 18th century? Therefore, you can’t resolve 2009’s problem by looking through 1776’s lenses alone. You commented that the writer is behind eight ball, in reality, he made his point well; it’s you who missed the boat.
So far, we've seen some of those solar companies actually going bankrupt while waiting for their "bailouts".
In 1776, Scottish philosopher Adam Smith couldn't have forseen what would happen to Ford.
The letter is behind the times. And the eight ball.