In the previous post, we answered how self-interest leads to increased quality and quantity of beneficial things in the chessboard of society where everyone moves according to his own internal principle, which is part of the phenomenon of the ‘internal’ invisible hand. We will call this the Principle Of Self-Motion or POSM and use it to fill one of the gaps in the understanding of the invisible hand through the graphic below:
In this post, we shall fill the remaining gap, to see how this increased quality and quantity of beneficial things are distributed throughout society, from those who have them to those who do not, in an inclusive way. We do this by looking back at the statements with the Invisible Hand in TMS and WN:
though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to.. advance the interest of the society.. (TMS, Part 4)
The annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry.. By directing that industry to produce the greatest value, he intends only his own gain.. I have never known much good done by those who affected to trade for the public good. (Simple WN, Book 4, Chap. 2)
Employment and Trade Based on Human Communication
These two statements reveal that resources are shared or circulated through employment and trade, and not through charity. Note that there is no mention of profits anywhere in either. ‘Gain’ is not equal to ‘profits’. It is a general term that can stand for anything advantageous to a person, even an abstract gain. Its current interpretation as profits is a sign that the reader’s mind is readily connecting the idea of ‘gain’ with ‘profits’ instead of ‘wages’ or even just better things, without reflection, and this happens most usually with persons who live by profits.
Next, we go into the human principle that causes trade and employment (or what Smith more commonly calls ‘the division of labour), as a new idea in a purple color:
This division of labour is not originally the effect of any human wisdom. It is the necessary, very slow, gradual, consequence of the propensity in human nature to exchange one thing for another. This propensity to trade probably arises from our faculty for reason and speech more than being an original principle of human nature. It is common to all humans and not found in animals who do not know any contracts. (Simple WN, Book 1)
Smith explains that the division of labor and the propensity to trade arises from another inherent principle, of human communication*. Animals cannot trade with each other because, though they can produce sounds, they have less ability to apply reason or intellect. Thus, we will add this inherent principle to our previous natural or inherent principles of the (1) belief in a Supreme Being and the (2) Principle of Self Motion, as forming the phenomenon of the Invisible Hand.
*Here we combine 'reason' and 'speech' into the idea of 'human communication' to separate it from speech with less or no reason as in that of 'animal communication'. This is because Hume explains that animals have some reason too. This important principle is also the main reason why our proposed socioeconomic system will be best implemented through the internet or through information and communications technology (ICT).
Why is there inequality and no inclusiveness Currently?
From our analysis of the invisible hand, we see four important factors that are required for it to work:
- Knowing one’s own interests and passion in life (Principle of Self Motion)
- Acting on one’s interests and passion in life (Principle of Self Motion)
- Exchanging the products of one’s interests and passion with other members of society through trade or employment. If it is done mainly through trade, then the person lives by profits. If it is done by employment, then the person lives by wages. (Human Communication)
- Since exchange is critical, the concept of society must be present among the people. (Sympathy)
We then combine these into a new graphic that represents the Invisible Hand:
These factors are all natural or inherent and common in humans. However, for some reason, the natural invisible hand may fail through:
- One not knowing what to do in life. This can be an effect of an unnatural (unusual) social system such as India’s caste system or in an authoritarian regime that limits people’s choices. It can also be from a bad educational system which might be either be low quality, too rigid, or too limited and does not help the learners explore their potential. These are commonly seen in poor countries.
- One not being able to act on one’s interests. This can happen through the lack of socioeconomic freedom (as opposed to wanton freedom) from oppressive or limiting policies. In the society called a family, this can be seen as a child being banned by his parents from pursuing a career that he really likes. In a larger society, Smith gave many examples of oppressive policies which limit the economic potential of people. In the current society, this is usually caused by rising prices which prevent people from doing what they want (this is why the goal of our socioeconomic system is 0% inflation, as opposed to that of economics which is 2%). Also, the current economic system caters to profit earners through the doctrine of profit maximization, funneling resources to them and stifling the interests of wage earners. All these can be seen both in rich and poor countries.
- One not being able to exchange one’s products and services. This can be seen more in rich countries. In fact, the Great Depression can be attributed to this because of the tariffs that stopped the circulation of goods which were already being overproduced. Again, the doctrine of profit maximization plays a big part in this since it forces goods to be exchanged only at a certain money price at a profitable rate or markup. Note that even JB Say, our ‘proto-capitalist’, advocated barter trade to circulate goods.
- Having no concept of an integrative society or by lacking a fellow-feeling with other people or groups of people. In the ancient times, this manifested as clan sentiments, tribalism, racism, or groupism wherein the other person or group is seen as very different from oneself and one’s own group. In modern times, this manifests as selfishness.
Failures #1 and #2 afflict austere systems as seen in feudal and traditional Asian societies, while Failures #2 and #3 afflict liberal systems such as mercantilism and capitalism, while Failure #4 afflicts all unhappy societies. People in austere systems do not venture towards trade and industry for the fear of losing their security (as seen in ancient China), while people in liberal systems abstain from trade and industry that give low levels of profits or personal pleasure even if it would help their own citizens, as seen in the current stagnation in the US, Japan, and Europe. The effect of both is less trade (GDP) and industry (Production).
The Invisible Hand Vs The Principle of Self-Motion
We have explained how the invisible hand is supposed to naturally work towards an inclusive system of societal advancement, and how it can be non-existent in many so many instances throughout human history when such natural principles are suppressed. However, there seems to be a contradiction because the invisible hand is supposed to be ultimately based on sympathy while its sub-idea of the Principle Of Self-Motion is based on non-sympathy.
In the next post, we will explain the cause of the difference of both phenomena to imply a complementary effect, instead of a contradictory one.