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.

Free Enterprise Requires That Everyone Plays

"The Crafts which require the most Time in training or most Ingenuity and Industry must necessarily be the best paid."

Richard Cantillon (1680-1734)

This is a wonderful quote.  It answers many questions.

Sometimes called the "Father of Economics," though that might be disputed by followers of other such "fathers," this is a most useful and applicable quote.

What questions does it answer?  Many!

It answers the question of "what might I do with my future?"  How?

Because it answers the question of, when one's traits and interests and skills are discovered, how one might consider what they do with their life.  How?

Because it answers the question of what one might do with one's education!  How?

The goal of education is to learn to think for oneself.  In school we are taught different subjects; have to read things in those different subjects we might not otherwise read; have to do problem solving in different subjects that we may not enjoy or understand; find via this diverse experience what we would enjoy studying more about.  The purpose of all that is to encourage us to think in different ways, and use our brains in different ways.  And think for ourselves.

Hopefully, through the experience of early education, we become a MORE WELL-ROUNDED INDIVIDUAL.

And, hopefully, as we study a subject, whatever the subject, we learn to think as an expert in that subject might think!  When an astronomer sees something through the Hubble telescope that no one has seen before, he/she can't run to a former teacher to ask what it is.  That teacher wouldn't know!  So, what to do?  That astronomer must think like an astronomer would think!  The astronomer must apply learning in astronomy to the problem/interest at hand, create analyses in experimental ways, and develop hypotheses or theories as regards that new thing.  And, AND, any conclusions reached might change next year anyway with a new discovery!   Which requires more "Ingenuity and Industry" by those in the field to further more learning and provide more understanding.  And the beat goes on!

From that early education, if we follow the Cantillon quote, one might seek further education to acquire more "time in training or most Ingenuity and Industry" as regards what one likes to study the most.  We go to college, select a major, hopefully study and learn diligently so we can apply understanding to principles, and become one that thinks like an expert in that field, maybe even seeking further and further education.  To quote a phrase, piling it higher and deeper later on.  We might not even go to college, choosing instead to develop the skill or service we want to provide.

However, in the end, we would be gainfully employed, or employ ourselves, in our chosen field of endeavor, or service offered to others.

How well are we paid?  We are paid based upon how hard it is to replace us!  We might find a niche that no one has found before.  We might develop a good or service that no one has developed before.  We might become better at our craft than anyone has become before.  And as such we become more and more indispensable.  

AND WE GARNER A BETTER INCOME.

Where does it begin?  In early education.  With stimulus and curiosity.  With support from parents and teachers and friends.  With personal leadership and self awareness that what we are trying to do is important to ourselves and society.  

And we are expected to do this when we are children!

Eventually we begin our individual quest.  Eventually we become a part of the mix.  Eventually we become players.  Or not.  We might choose not to do any of that and be dependent on others.

Free Enterprise Requires That Everyone Plays

Free Enterprise Sees The Forest And The Trees

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.'  But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

Murray Rothbard (1926-1995)

How often do we hear somebody in the news, be it a political leader or news person, who states something so absurd economically as if it is fact, and expects everyone to simply accept it?

These "straw men" are put before us all the time.  "Economists all agree..."  "Soccer moms want..."  "The will of the people is..."  "The ______ community is in agreement..."  "The middle class..."

Any time you hear such talk you can discount it right away as incorrect and irresponsible.  Why?

Because such talk is an economic fallacy and an error - the so-called "fallacy of composition."

That fallacy proposes that if one individual thinks so, all in that individual's group must think so.  It is not only incorrect as a philosophy, but as a way of posturing any argument it is absurd.

Adam Smith, in Part 6 of his book "The Theory of Moral Sentiments," states:  "[The statist] seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse [sic] to impress upon it."

Good economics requires an analysis of the system, the entire system.  Economics is indeed a study of systems!  And the components of that system as well.  And free enterprise helps the system to work more efficiently. 

The fallacy of composition is a fallacy because the truth is that individuals will act as individuals!  They will act in their own self interest.  They don't necessarily act because their "group" does so.  And their actions are ENTIRELY UNPREDICTABLE economically because economics has to look at the whole picture.  An economist has to see the forest and the trees, so to speak, and never one in favor of the other.

Free enterprise does NOT favor one or the other.  It can't.

And when the invisible hand is managing the many, many multiples of human behavior in a free market it does so indiscriminately.  The most efficient means and the most efficient end is the goal.

Free enterprise sees the forest and the trees.

Free Enterprise Creates Market Value From Market Supply

"A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value."

Jean-Baptiste Say (1767 - 1832)

Can it be possible that a market exists before something is created?

This basic principle has been called "Say's Law of Markets."  And it is essentially that.  Markets are created when a product - a good or a service - hits the scene that everyone wants.

Ten years ago there may have been a demand for the small, pad computers.  But none had been invented.  None had been produced.  The demand may have been hiding out there in some latent fashion, but until such a product was introduced there was no supply to service that latent demand.

People did not know they wanted a pad computer!  But they did.  And with nothing to satisfy that demand there was no market.  The supply of pad computers, first brought to market in 2010, created an immediate demand and an immediate market.  And it created all the substitutes, with more companies coming to market with their own versions of the pad computer.  And then the subsequent generations of pad computers came forth with more of this and better of that.

As with all products this one will be superseded.  Remember the big TV-like computers, called "mini-computers," which sat heavily on the desk?  And how they got smaller in time?  And were replaced by a "tower" which sat under the desk, connected to a smaller and thinner screen?  Are they still around?  Yes.  Are they as popular as they were say twenty years ago?  No. But they are cheaper and still available.  And as far as computers go they do it all.

Think of all the computer products that had no market 20 years ago that have happened since!  For instance, I can carry of library of tens of thousands of books in my pocket, and everywhere I go.  I can break it out any time and access any one of those books and begin reading.  It even remembers the last page read for me when I "open" the book.  Some books are "free!"  I can tell you, while I very much enjoy that today, I had no idea 20 years ago that I would like such a thing in my pocket.  Or at my reading chair.  Or in my glove compartment.  I even have a cool leather cover to keep it safe while I carry it around!  Like Say says above, the pocket library created a market for other complementary products - cases and such.

This is the very essence of free market economics.  Boiling off all the water in an economic pot, what is left is the fact that until a good or service that everyone wants is brought to everyone's attention and a demand for it is created, no market exists.  If a given good or service comes to market and becomes popular its supply, and continued supply, spurs market demand enough to encourage more and more popularity via more and more production.

Can there be a glut?  For a short while.  Over time nothing goes to waste as the price will lower and lower until eventually it is all gone.  My little pocket library may one day be given out as a "free gift" by a certain store when people shop on a certain day.  It will be a marketing gimmick, and then forgotten, and finally become the equivalent of a spinning wheel displayed in a museum.  Say's Law says there is no glut forever.  All production will eventually be acquired.

And the best way to acquire that good or service to market is with guidance by an invisible hand that directs the most efficient use of resources toward that end.  Free enterprise makes those resources more used and more valuable.

Free enterprise creates market value from market supply.