The Intersection between Markets and Democracy

Adam Smith's "invisible hand" -- real or an hallucination?

I've devised a defining pair of principles of mine that markets are capitalistic and governments socialistic by their very nature. That's a very important matched set, I believe, for us to use as a guiding light. Now let's bring coherence to the way we look at -- and design, if that's our job -- policy for the betterment of the human condition. Of course, it's important, even vital, that one's goal is the betterment of mankind rather than, say, getting over on everyone else so we can, like, be livin' la vida loca. There may be are many people whose goals are centered on exactly that. More about them later.

Adam Smith, whose early 19th-century tome, The Wealth of Nations, put forth what was his sine qua non notion that an "invisible hand" directed members of a market to do what is best for all participants in that market because what's good for the market is a priori what's good for the individual. In other words, everyone knew better than to bring poisoned corn to market because no one would ever buy it again, assuming the buyer wasn't dead and the seller wasn't hanged.

If there's an "invisible hand" causing markets to act rationally -- and there's no larger law for markets to follow, from a conservative point of view, than that a market a priori behaves rationally -- that hand kinda sorta disappeared in 1929 if not before (I assume that rationality wasn't around much in the various market "panics" of the 19th century). Now we've got the rationale, mind you, for regulation, what so-called freshwater economists (conservative, non-Keynesian) dread most.

Let's stop there and take a look at government, especially the democratic type. Assuming a democratic government, we should expect, in fact demand, that government to be socialist in nature. What else? The government should function to better the circumstances of the governed, and the governed being society would suggest anything that would improve the life of that society to be socialistic.

John D. Rockefeller

Back to markets: members of any market would wish to, through profits from the sale of their products, accumulate capital for a number of reasons, not the least of which is to make capital investments in order to earn more profits, and so on. Markets in a free enterprise system -- usually functioning best in a democratically governed society -- do well behaving thus in their capitalistic way.

Okay, we got two sets of beasts -- full of "animal spirits" as Keynes would say -- one working to better society (the broadest view of an economy) and the other working to better oneself or family (the narrowest view of an economy). Here's where conflict arises.

If the capitalists wish their markets to prosper, they wish them unimpeded. If government wishes their governed to prosper, they wish the greater good be for the greater number. The capitalists wish to accumulate wealth, and the government -- if not a tool of the capitalists -- wishes to distribute the wealth.

I may have offered a tell -- for you poker players -- and exposed my predilection, but that's not so important. I simply hope to have presented the validity of my principles, because if they are valid, the policy choices of all the players should be clear, or at least transparent.

It's a whole different matter how those policy choices are made and on which side of these divergent principles they land.

Morning market, Wajima, Japan, 2011