Amputation of the Invisible Hand

When I was a young university freshman majoring in business administration eons ago, one of my obligatory courses was Principles of Economics. I do not remember a whole lot that was said back then. But there were two themes that we all had to minimally take with us:
· Supply & Demand: the quantity of available supplies would balance and thereby equal the price people were willing to pay for them;
· “Invisible Hand”: Adam Smith’s principle that “if consumers are free to choose what to buy, and producers are free to choose what to sell, an ‘invisible hand’ will cause markets to settle on products and prices beneficial to all. I.e. self-interest will drive everyone to beneficial behavior.”

So why is this mini-Economics 101 lesson relevant to us? Because these days we hear a lot of people complaining about the federal government’s supposed takeover of the American free-market economy. Complaints about: “GM” now means Government Motors; federal ownership of banks and financial institutions; government funded jobs instead of private industry jobs; and out of control deficit spending. The supposition is that, if we could just get government out of the way and let “natural market forces” be free to do their thing, all would be economically right with the world. Adam Smith, Ayn Rand, and innumerable conservative politicians and free-wheeling CEOs would then be vindicated. And we would all become wealthy.

Wealthy is perfectly fine unto itself. How one achieves that wealth should always be a wholly separate discussion. When one achieves business success working within these basic economic principles, that success can be admired. The problem today (and for most of America’s history) is a rigged game. And the rigging is not due to the government intervening to disrupt the marketplace; the rigging is by our Captains of Industry, in many instances with that rigging then reinforced by government law, regulation or program.

The capitalism/free-market system that we aspire to presumes: a) a large population of buying consumers; b) a large number of innovators, producers and suppliers to service these consumers and their needs; c) easy-in penetration of new suppliers and innovation into the marketplace. Within this open framework capitalism can thrive, probably towards the community benefit that Adam Smith envisioned. But that “market openness” is not what is present today.

Instead, supplies of desired or needed goods are being deliberately controlled or withheld, artificially distorting price. The number of suppliers continues to contract into fewer national/international mega-companies capable of dictating market position. Given that product creation and market distribution is so concentrated in huge companies, the high cost of entry into the market is prohibitive to most would-be new suppliers seeking to expand consumer options.

Supplies of home heating oil sit in tankers off the coast of New England, holding back their cargo until the price moves up into a greater profit. When gasoline hit $4/gallon last year, the Saudi Arabian oil minister correctly said, “We are still producing what we have always produced; there is plenty of oil out there.” That $4 came from commodity traders bidding up a barrel of oil from $40 → $140 just because everyone in the production chain could make money along the way – until the market topped and fell back to $40, leaving all those late buyers holding the empty oil can. The Big 3 automakers over the years repeatedly blocked new carmakers or innovations, and ignored consumer desires for their automobiles, in order to protect their status quo. As we have now learned, the financial industry concentrated its wealth into a handful of giant institutions that effectively dictate lending rates, credit card fees, and credit terms while previous competitors disappeared in merger-mania. As various retail outlets dissolve into bankruptcy, 2-3 lenders in each industry at either the low-end or high-end of price effectively dictate price, product, and customer service. (Is there really any difference in the merchandise in Lowe’s or Home Depot?) Corporate agriculture continually tries to block the growth of organic or local foods, while price support payments from the Department of Agriculture primarily underwrite corporate profits versus the small farmer.

Two real exceptions to the marketplace barriers are technology (2 guys in a basement can still make an impact) and home construction, both of which can provide real opportunities to the wanna-be entrepreneur. We like to trumpet America’s small businesspersons as our economic backbone, and that’s the ideal that economic protestors like to point to. The reality is that there are vast numbers of them, but the few national companies and their branches/franchises control product, pricing, and wealth. The small business person tries to survive in the economic alleyways left over, frozen out of the real Main Street. All those pizzas from our corner mom-and-pop pizzerias are still the minority of the pepperoni.

How we can genuinely open the American free market to the entrepreneurs that deserve it, rather than just give more market power to an already small club of players, needs far more discussion. When we clamor for a more free market system, just exactly who are we really helping? Should not today’s protesters of economic socialism also be equally protesting serfdom under the economic barons of this land? This is not a question of class warfare nor a debate of economic philosophies. It is rather a question of enforcing ethics and fairness. In the meantime, does anyone really doubt the return of $3.00/gallon gas soon? Or $4.00 once again?