All entries for Friday 13 May 2005

May 13, 2005

A comprehensive 5 minute defence of the invisible hand

Writing about web page

OK, I'm not capable of doing what the title implies, but I’ll briefly comment on the ongoing discussion about the EU and proposed 48 hour working weeks. I’ll offer some piecemeal commentary on a post by Leftspace ’s Peter Wolfendale entitled “The invisible hand makes everything better…” They’re just general comments on the ideas raised rather than the mechanics of this specific EU proposal.

His post beings…

It appears that the history of social policy has gone all wrong, and that if we just leave the market alone everything will work out just great! What have we been thinking all these years, trying to protect the poor from people who are willing to exploit them by using the economic power they already to possess to maximise their potential gain?

History has proved many ideas to be incorrect and/or lacking in efficacy. A tendency towards managerialism and paternalistic attitudes towards citizens certainly isn’t a result of free market failure. Rather, overconfidence in our human faculties and ability to engineer more desirable social states (partly bourne of our success in scientific arenas).

When a contract is created between citizens of the state it is most often the caset hat one party benefits more than another party, and in some cases this can be to the detriment of the other. If we accept that the state has no part in the welfare of its citizens and is just a body for the creation and maintainence of rules for the conduct of said citizens, then we must also accept that there is no limit upon how much any given contract can harm either of its parties. This is absurd. To allow that humans make mistakes, that they can be mislead, manipulated, and subject to pressures that can not always be forseen, is to require intervention the intervention of the state.

I’m confused as to the source of this implicit social contract spoken of and its specific terms. What am I obliged to do beyond paying my taxes and abiding by the law? What has the state promised to do beyond protecting my property and defending the country? Are the terms of such a contract unchanging over time? Something tells me I wasn’t the only one not informed of all these things. Due to this ambiguity, I have no qualms in saying the state isn’t and shouldn’t exist to protect us from mistakes; to hold our hands though life, guiding us on a course deemed safe; shielding us from any form of risk, regardless of our preferences.

I fail to see how our capacity for making mistakes as regards our lifestyle, career, purchases etc. renders a free market system useless. Quite apart from punishing such mistakes, flexibility and wealth of opportunity reduces the importance of initial levels of wealth, education and social status.
Being born into society doesn’t render you a slave to any particular person. As an individual, you have skills and knowledge which can be utilised to gain whatever ends you see fit. In an environment which encourages enterprise, no given firm has the power to dictate how you should life your life. A stupid employer can be changed fairly easily. Escaping arbitrary intervention however is far more difficult.

Secondly, market forces do not magically make everything better. Market forces do not work towards any kind of optimum health and happiness of workers. If this was so then there wouldn't be any work-related health problems, which as several other people pointed out are rife within our society. Could it be that the state's emphasis on welfare law creates a climate in which workers suffer from overwork and/or bad working conditions? I rather think not.

It’s quite true that markets are amoral. The agents driving the system however are working to further their own ends. I purchase goods for solely my own benefit, and the person on the other end of the transaction does likewise. The firm employs me to further its ends and the wage I receive can be used for whatever I please. In a world full of voluntary transactions there’s a sense in which the resulting order reflects the preferences of everybody, subject to the preferences of everybody else. I think you’d agree nothing but a market system can allocate resources between people such as to match demand to supply and to utilise individual-specific information about needs, desires and life aims.

That said, isn’t there scope for at least some management? Not even small instances of intervention, such as the limiting of working hours? Perhaps. However, you shouldn’t harbor the illusion that such intervention works for the benefit of everyone or even the majority. Only the individual can make judgments about happiness. Its pursuit by policymakers is futile. It can’t be measured accurately. There’s no real ‘scale’ of happiness. In fact, the very definition of happiness is disputed by many.

How can policymakers be trusted to pursue a goal which is tricky to define and impossible to measure! Something tells me the figure of 48hours wasn’t found by solving some complex happiness optimisation problem.
As such, the next best solution is to allow people to interact freely and accept the resulting state of the world, stepping in only when clear injustice is apparent.

Additionally, you shouldn’t you think will prove effective over time given the dynamic nature of our world. Legislation seemingly beneficial in the short run may prove detrimental as things change, as shown by France’s lower working weeks and the resultant unemployment and downturn in foreign investment.

Businesses are for the most part driven by one thing: PROFIT. There are exceptions to this rule, co-operatives being a big one, and businesses that are run by people with ethical agendas. This means that if there is a situation in which business owners can make more profit by exploiting their workers in some way: cutting wages, forcing longer or shorter hours, banning unions, etc. Then there are only two things holding them back:-

By this logic, it’s hard to understand why we have investment bankers earning £70 000 in the financial services sector, private school teachers earning £30 000, or even temporary workers earning £6.50 per hour working for an agency. Looking at the country as a whole, it becomes clear that the vast majority of people earn more than the minimum wage. Why is that the case? Surely a profit oriented business would pay whatever the legal minimum is? Surely they’d force workers to slave away for 50 hours a week? Similarly, why would such a business offer private healthcare, or holidays/sick leave/compassionate leave over and above legal requirements

We don’t see such behaviour because businesses need workers just as badly as we need jobs. As the poster which spurred this response pointed out, it’s not in the interests of an employer to pay a pittance, forcing employees to work in sweatshops. People respond to incentives. Incentives to become a more productive employee are nice working conditions; holidays; better pay. Of course the extent of such generority depends on the sector in question, but to claim mass exploitation would exist in the absense of government is incorrect. That’s ignoring the issue of whether a voluntary contract between employer and employee can possibly involve exploitation provided the terms laid down initially are being violated.

To simplify this as well: the invisible hand doesn't sort everything out automagically, it just as often masturbates those with existing economic power.

Essentially, you can't both maintain that market forces produce both worker happiness and greatest efficiency (which in the private sector is greatest profit) in all cases.

As I’ve said before on this blog, we’re in a fairly privileged position. Compared to countries whose citizens are unable to afford the basic necessities of life, we’re wealthy enough to consider things such as holidays, sick leave, education and health care to be indisputable human rights. Focus on creating ‘happiness’ and limiting the evil capitalists during our course of development wouldn’t have created the environment of enterprise that has brought us to our current point.

Call it fanaticism, or whatever. I trust these free market forces more than I do the smiling faces of politicians who claim to have my best interests at heart. To see faith in their ability to create ‘efficiency’ and ‘happiness’ taken to an extreme, look no further than the history of socialist states till the present day.

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