Wednesday, March 25, 2015

Free Enterprise Maximizes Happiness

 "...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, 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. I have never known much good done by those who affected to trade for the public good."

Adam Smith (1723 - 1790)
from An Inquiry Into the Natures and Causes of the Wealth of Nations

Adam Smith introduced the concept of "the Invisible Hand" into his economic thinking because he was a religious man.  This application of the invisible hand to economics, indeed, in his thinking, into many aspects of human life, was consistent with his understanding of how God oversees the universe.  In his thinking God, a benevolent, loving God, directs the universe in such a way as to maximize happiness for His children.

This must also be how the Invisible Hand of economies interacts with society.  Each individual is striving to improve his condition, to gain in life, and to make more happiness for himself and his family.  And while each must be doing this individually, he finds himself needing to exchange with others.  In the myriads and millions of such exchanges, one to another and to another again, each is offering as much value as possible and hoping for similar value in return.

This is how the standard of living of societies improves and advances.

Smith's thinking has caught on, with his Invisible Hand used as explanations for many things.  People interact!  And so often with one not knowing what another might be doing.  But if each has the freedom, the free enterprise,  to act in his own, individual best interests, what would come of society in general?  Of course - things would get better.  Happiness would be better maximized.

Each individual in the economic society is thus able to operate independently and intertwined.   In Smith's words, each advances "by his own gain."  And THIS is the invisible hand at work.  While each is operating in his own self interest, each, at the same time, and perhaps not intentionally, is operating to benefit the whole.

Utter decentralization reigns!  Contracts are implied in trade and individual interaction.  Goods and services are offered, bought and sold, and each seeks his own.  The self interest of "the butcher, the brewer, or the baker" brings the best it can for sale and exchange.  And expectations arise not because of their "benevolence" ... and profit happens because the entrepreneur acts in regard "not to their humanity but to their self love."  Self interest reigns on both sides - in the seeking and in the offering.

The buyer is seeking, and expecting, the cheapest price and the entrepreneur is seeking, and expecting, the most profit possible.  This was treated in a post just a while ago entitled Free Enterprise Always Goes To Market.

Is Adam Smith's Invisible Hand simplistic?  No.  It is attractive because of its simplicity!

This is the thing that advocates so strongly FOR free enterprise economics!

What can disrupt it?  What Milton Friedman called the "invisible hand and foot."  He said, "when government attempts to substitute its own judgments for the judgments of free people, the results are usually disastrous. In contrast to the free market's invisible hand, which improves the lives of people, the government's invisible foot tramples on people's hopes and destroys their dreams." (emphases mine)

This is the thing that advocates so strongly AGAINST statism!

Free Enterprise Maximizes Happiness.

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