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The classical model of capitalism is that profits are a side effect of some socially beneficial activity No, the "invisible hand" as stated by Adam Smith, whic

The classical model of capitalism is that profits are a side effect of some socially beneficial activity No, the "invisible hand" as stated by Adam Smith, which is presumably what you mean, states the EXACT opposite causality order.

ue_ 10y ago
What is meant by the invisible hand, and what did Smith say about it? I see this a lot, but I'm not sure what it means when I see it. There are others with different views of capitalism, such as Marxian economists, Proudhon, neo-Ricardians, post-Keynesians etc. Marxian economists in particular with interesting things to say about the origin of profit, alienation, commodity fetishism and classes within capitalism.
- lr4444lr 10y ago
  http://econlib.org/library/Topics/Details/invisiblehand.html http://econlib.org/library/Topics/Details/invisiblehand.html Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
- dsacco 10y ago
  "The invisible hand" is a notion that Adam Smith wrote about that essentially captures the idea of social benefits being an emergent consequence of self-interested parties engaging in the markets together. You can read more about it here, including the (exactly three) specific passages in which Smith used the term: https://en.m.wikipedia.org/wiki/Invisible_hand#Other_uses_of_the_phrase_by_Smith https://en.m.wikipedia.org/wiki/Invisible_hand#Other_uses_of... The specific point of the phrase is that the individuals produce a net benefit to society through no intention of their own, it just happens to be a happy side effect of their work. EDIT: Don't shoot the messenger, people.
  - ue_ 10y ago
    How is this any different to "trickle down" on a large scale? If you encourage capitalistic self-interest enough, it will create benefit? Why not just create the benefit directly instead of going the roundabout way of having people act in their own self-interest, fostering mean-spirited relationships between people, competition instead of cooperation and general wastage of resources? But perhaps there are other laws within capitalism. The law of value, for instance, which its recognition by capitalists and relative ignorance of it by wage labourers leads to Marx's theory of surplus value - this is the side effect of this self-interested activity of labour.
    - muninn_ 10y ago
      Trickle down referred to giving tax breaks to rich people so that they would buy expensive things (like Ferraris) and that this spending would spur economic movement because people have to sell, make, and repair Ferraris. The money they receive they would then use to buy groceries or a new TV. This is far different than the notion of the invisible hand, if only we counted government influence (deciding winners and losers). > If you encourage capitalistic self-interest enough, it will create benefit? Yes. Look around. I don't discount the role government has played when it does do good things, but the wonders of the world today are largely driven by the desire to do some work in order to gain some measurable economic benefit. Period. You can't just create "this benefit directly". How would you do that? I also think your general perspective on business is being warped by your obvious bias. Competition in industry does not necessarily lead toward mean-spirited relationships, or destructive competition. It can, but look at the tech industry, if anything, the opposite has happened. Also, the wastage of resources is almost laughable. I say this not to be condescending, but because if there is one entity on the planet that is inefficient, it's government. Businesses go out of business if they don't use resources in the most efficient possible way. A government just prints more money, or if worse comes to worse, passes laws or regulations that distort the economy. There are countries that do better when it comes to private-public cooperation, namely Scandinavian countries, but even those companies are capitalist countries and recognize that government does not have the capacity to guide economic development as a whole compared to the free exchange of goods and services. It's helpful once in awhile to jumpstart an industry, like solar/wind power in the United States, but government should largely stay out of business (aside from obvious regulation and protection).
- hbt 10y ago
  keep in mind this was written prior to behavioral economics or Neuro economics or study of cognition. understanding why people make the decisions they do and how they all fit in a large system remains a work in progress. we certainly know more now to simply call it the invisible hand
TeMPOraL 10y ago
I think even though 'Animats wrote this backwards, it doesn't really change the argument all that much. The way capitalism works may be "self-interested actions lead to socially beneficial outcomes", but as a society, we want to have capitalism precisely because of those socially beneficial outcomes. This "side effect" is the reason to employ capitalism in the first place. Now it turns out (with-hindsight-20/20) that Adam Smith did not fully understand the "mind" behind the "invisible hand". It indeed does arrange for social benefits... except when it doesn't[0]. A good contemporary analysis of this mechanism is the article by Scott Alexander, "Meditations on Moloch". http://slatestarcodex.com/2014/07/30/meditations-on-moloch/ http://slatestarcodex.com/2014/07/30/meditations-on-moloch/ -- [0] - For instance, a lot of those social benefits are in fact signs of market inefficiency, and those eventually get "corrected" as more and more people compete in a given sector and the margins dwindle.
- sharemywin 10y ago
  [0] - For instance, a lot of those social benefits are in fact signs of market inefficiency, and those eventually get "corrected" as more and more people compete in a given sector and the margins dwindle. Except for when you can get the government to step in and grant you rental rights preferable exclusive rights. Land, property, spectrum, licenses, copyright, patents, trademarks.
  - TeMPOraL 10y ago
    Not all interventions are good, but that doesn't mean there are no good interventions.
    - sharemywin 10y ago
      Not sure you can think of it as good or bad. The government takes away rights from someone people and grants them to others. I have the right to own land and make it so you can't use it because "we the people say so." good for me, bad for you. I guess there's a net win now that I think about it. I could have protected with a club. good for me, good for you because I didn't club you in the head.
eli_gottlieb 10y ago
It's worth noting that Adam Smith was imagining an economy in which most market actors were small proprietors, a nontrivial minority were living self-sufficient lives, and very few were wage-laborers. And then Enclosure happened -- precisely to create a landless "working class" who could not participate in the market as free actors! https://newrepublic.com/article/141663/united-states-work https://newrepublic.com/article/141663/united-states-work http://www.nakedcapitalism.com/2012/04/yasha-levine-recovered-economic-history-everyone-but-an-idiot-knows-that-the-lower-classes-must-be-kept-poor-or-they-will-never-be-industrious.html http://www.nakedcapitalism.com/2012/04/yasha-levine-recovere...
- prostoalex 10y ago
  > It's worth noting that Adam Smith was imagining an economy in which most market actors were small proprietors Is that a fair interpretation of Smith's work? The concept of economies of scale (dated back to Adam Smith) combined with laissez-faire approach advocated by Smith seems to imply a large corporate endeavor (Sears catalog, Wal-Mart, Costco, Amazon.com) would inevitably overpower any small-scale operation.
  - kesselvon 10y ago
    Could Smith have imagined huge multinational corporations in a time where economics was strictly mercantilist?
    - existencebox 10y ago
      Just to chime in: the east india company was already a significant force by the mid-late 1700's, so yes, I do believe he had some image of the potential power of multinationals/megacorps.

ue_ 10y ago

What is meant by the invisible hand, and what did Smith say about it? I see this a lot, but I'm not sure what it means when I see it. There are others with different views of capitalism, such as Marxian economists, Proudhon, neo-Ricardians, post-Keynesians etc. Marxian economists in particular with interesting things to say about the origin of profit, alienation, commodity fetishism and classes within capitalism.

lr4444lr 10y ago
http://econlib.org/library/Topics/Details/invisiblehand.html http://econlib.org/library/Topics/Details/invisiblehand.html Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
dsacco 10y ago
"The invisible hand" is a notion that Adam Smith wrote about that essentially captures the idea of social benefits being an emergent consequence of self-interested parties engaging in the markets together. You can read more about it here, including the (exactly three) specific passages in which Smith used the term: https://en.m.wikipedia.org/wiki/Invisible_hand#Other_uses_of_the_phrase_by_Smith https://en.m.wikipedia.org/wiki/Invisible_hand#Other_uses_of... The specific point of the phrase is that the individuals produce a net benefit to society through no intention of their own, it just happens to be a happy side effect of their work. EDIT: Don't shoot the messenger, people.
- ue_ 10y ago
  How is this any different to "trickle down" on a large scale? If you encourage capitalistic self-interest enough, it will create benefit? Why not just create the benefit directly instead of going the roundabout way of having people act in their own self-interest, fostering mean-spirited relationships between people, competition instead of cooperation and general wastage of resources? But perhaps there are other laws within capitalism. The law of value, for instance, which its recognition by capitalists and relative ignorance of it by wage labourers leads to Marx's theory of surplus value - this is the side effect of this self-interested activity of labour.
  - muninn_ 10y ago
    Trickle down referred to giving tax breaks to rich people so that they would buy expensive things (like Ferraris) and that this spending would spur economic movement because people have to sell, make, and repair Ferraris. The money they receive they would then use to buy groceries or a new TV. This is far different than the notion of the invisible hand, if only we counted government influence (deciding winners and losers). > If you encourage capitalistic self-interest enough, it will create benefit? Yes. Look around. I don't discount the role government has played when it does do good things, but the wonders of the world today are largely driven by the desire to do some work in order to gain some measurable economic benefit. Period. You can't just create "this benefit directly". How would you do that? I also think your general perspective on business is being warped by your obvious bias. Competition in industry does not necessarily lead toward mean-spirited relationships, or destructive competition. It can, but look at the tech industry, if anything, the opposite has happened. Also, the wastage of resources is almost laughable. I say this not to be condescending, but because if there is one entity on the planet that is inefficient, it's government. Businesses go out of business if they don't use resources in the most efficient possible way. A government just prints more money, or if worse comes to worse, passes laws or regulations that distort the economy. There are countries that do better when it comes to private-public cooperation, namely Scandinavian countries, but even those companies are capitalist countries and recognize that government does not have the capacity to guide economic development as a whole compared to the free exchange of goods and services. It's helpful once in awhile to jumpstart an industry, like solar/wind power in the United States, but government should largely stay out of business (aside from obvious regulation and protection).
hbt 10y ago
keep in mind this was written prior to behavioral economics or Neuro economics or study of cognition. understanding why people make the decisions they do and how they all fit in a large system remains a work in progress. we certainly know more now to simply call it the invisible hand

TeMPOraL 10y ago

I think even though 'Animats wrote this backwards, it doesn't really change the argument all that much. The way capitalism works may be "self-interested actions lead to socially beneficial outcomes", but as a society, we want to have capitalism precisely because of those socially beneficial outcomes. This "side effect" is the reason to employ capitalism in the first place. Now it turns out (with-hindsight-20/20) that Adam Smith did not fully understand the "mind" behind the "invisible hand". It indeed does arrange for social benefits... except when it doesn't[0]. A good contemporary analysis of this mechanism is the article by Scott Alexander, "Meditations on Moloch". http://slatestarcodex.com/2014/07/30/meditations-on-moloch/ http://slatestarcodex.com/2014/07/30/meditations-on-moloch/ -- [0] - For instance, a lot of those social benefits are in fact signs of market inefficiency, and those eventually get "corrected" as more and more people compete in a given sector and the margins dwindle.

sharemywin 10y ago
[0] - For instance, a lot of those social benefits are in fact signs of market inefficiency, and those eventually get "corrected" as more and more people compete in a given sector and the margins dwindle. Except for when you can get the government to step in and grant you rental rights preferable exclusive rights. Land, property, spectrum, licenses, copyright, patents, trademarks.
- TeMPOraL 10y ago
  Not all interventions are good, but that doesn't mean there are no good interventions.
  - sharemywin 10y ago
    Not sure you can think of it as good or bad. The government takes away rights from someone people and grants them to others. I have the right to own land and make it so you can't use it because "we the people say so." good for me, bad for you. I guess there's a net win now that I think about it. I could have protected with a club. good for me, good for you because I didn't club you in the head.

eli_gottlieb 10y ago

It's worth noting that Adam Smith was imagining an economy in which most market actors were small proprietors, a nontrivial minority were living self-sufficient lives, and very few were wage-laborers. And then Enclosure happened -- precisely to create a landless "working class" who could not participate in the market as free actors! https://newrepublic.com/article/141663/united-states-work https://newrepublic.com/article/141663/united-states-work http://www.nakedcapitalism.com/2012/04/yasha-levine-recovered-economic-history-everyone-but-an-idiot-knows-that-the-lower-classes-must-be-kept-poor-or-they-will-never-be-industrious.html http://www.nakedcapitalism.com/2012/04/yasha-levine-recovere...

prostoalex 10y ago
> It's worth noting that Adam Smith was imagining an economy in which most market actors were small proprietors Is that a fair interpretation of Smith's work? The concept of economies of scale (dated back to Adam Smith) combined with laissez-faire approach advocated by Smith seems to imply a large corporate endeavor (Sears catalog, Wal-Mart, Costco, Amazon.com) would inevitably overpower any small-scale operation.
- kesselvon 10y ago
  Could Smith have imagined huge multinational corporations in a time where economics was strictly mercantilist?
  - existencebox 10y ago
    Just to chime in: the east india company was already a significant force by the mid-late 1700's, so yes, I do believe he had some image of the potential power of multinationals/megacorps.