invisible hand

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Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

"Robert Solow", Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

Smith's References to the Invisible Hand Surprisingly, Adam Smith uses the expression "invisible hand" only three times in his writings. The references are so sparse that economists and political commentators seldom mentioned the invisible hand idea by name in the nineteenth century. No references were made to it during the celebrations of the centenary of The Wealth of Nations in 1876. In fact, in the famed edited volume by Edwin Cannan, published in 1904, the index does not include a separate entry for "invisible hand." The term only became a popular symbol in the twentieth century (Rothschild 2001, 117-18). But this historical fact should not imply that Smith's metaphor is marginal to his philosophy; it is in reality the central element to his philosophy. The first mention of the invisible hand is found in Smith's "History of Astronomy," where he discusses superstitious peoples who ascribed unusual events to the handiwork of unseen gods: Among savages, as well as in the early ages of Heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of their gods.

"His vision of the way in which the voluntary actions of millions of individuals can be coordinated through a price system without central direction . . . is a highly sophisticated and subtle insight" (Friedman 1978, 17; cf. Friedman 1981). Not to be outdone are Keynesian economists. Despite its imperfections, "the invisible hand has an astonishing capacity to handle a coordination problem of truly enormous proportions," declare William Baumol and Alan Blinder (2001, 214). Frank Hahn honors the invisible hand theory as "astonishing" and an appropriate metaphor. "Whatever criticisms I shall level at the theory later, I should like to record that it is a major intellectual achievement. . . . The invisible hand works in harmony [that] leads to the growth in the output of goods which people desire" (Hahn 1982, 1, 4, 8). The First Fundamental Theorem of Welfare Economics The invisible hand theory of the marketplace has become known as the "first fundamental theorem of welfare economics."8 George Stigler calls it the "crown jewel" of The Wealth of Nations and "the most important substantive proposition in all of economics."

[A]nd 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. (Smith 1965 [1776], 423) A Positive or Negative Interpretation? Most observers believe that Adam Smith uses the invisible hand in a positive way, but in her recent book, Economic Sentiments, Cambridge professor Emma Rothschild dissents. Using "indirect" evidence, she concludes, "What I will suggest is that Smith did not especially esteem the invisible hand." According to Rothschild, Smith views the invisible hand imagery as a "mildly ironic joke."


The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank

carbon footprint, carried interest, Cass Sunstein, clean water, congestion charging, corporate governance, deliberate practice, full employment, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Paul Samuelson, plutocrats, Plutocrats, positional goods, profit motive, Ralph Nader, rent control, Richard Thaler, Ronald Coase, Ronald Reagan, sealed-bid auction, smart grid, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, trickle-down economics, ultimatum game, winner-take-all economy

Rewards that depend on relative performance spawn collective action problems that can cause markets to fail. For instance, the same wedge that separates individual and group interests in Darwinian arms races also helps explain why the invisible hand might not automatically lead to the best possible levels of safety in the workplace. The traditional invisible-hand account begins with the observation that, all other factors the same, riskier jobs tend to pay more, for two reasons. Because of the money employers save by not installing additional safety equipment, they can pay more; and because workers like safety, they will choose safer jobs unless riskier jobs do, in fact, pay more. According to the standard invisible-hand narrative, the fact that a 10 CHAPTER ONE worker is willing to accept lower safety for higher wages implies that the extra income was sufficient compensation for the decrement in safety.

They believe regulation is unnecessary because they believe unbridled market forces can take care of things quite nicely on their own. Darwin’s view of the competitive process was fundamentally different. His observations persuaded him that the interests of individual animals were often profoundly in conflict with the broader interests of their own species. In time, I predict, the invisible hand will come to be seen as a special case of Darwin’s more general theory. Many of the libertarians’ most cherished beliefs, which are perfectly plausible within Smith’s framework, don’t survive at all in Darwin’s. Giving the Invisible Hand Its Due Even so, the invisible-hand theory remains a genuinely revolutionary insight, all the more so because in hindsight it seems so obvious. Why does a business owner go to the trouble of designing a new product that consumers are likely to find appealing? Why does he invest such effort to revamp his production process to reduce costs?

People with less extreme preferences on these two dimensions do best by choosing jobs with intermediate values of wages and safety. According to the traditional invisible-hand account, then, workers get as much safety on the job as they’re willing to pay for. Since making jobs safer requires real resources that could be used for other things we value, that’s as it should be. If a worker doesn’t get the extra safety he claims he wanted, that must mean he didn’t value it enough to be willing to pay its cost. Why Skepticism about the Invisible Hand Persists Market skeptics often respond, tellingly, by citing behavior by employers that seems transparently at odds with the invisible hand’s rosy portrayal of market outcomes. Walmart, the nation’s largest retailer, has often been their target. On numerous occasions, for example, the company has locked overnight maintenance workers into stores with no supervisor present to let them out in case of emergency.


pages: 483 words: 134,377

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

"Robert Solow", air freight, Andrei Shleifer, battle of ideas, Bretton Woods, British Empire, business process, business process outsourcing, Carmen Reinhart, clean water, colonial rule, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, Deng Xiaoping, desegregation, discovery of the americas, Edward Glaeser, en.wikipedia.org, European colonialism, Francisco Pizarro, fundamental attribution error, germ theory of disease, greed is good, Gunnar Myrdal, income per capita, invisible hand, James Watt: steam engine, Jane Jacobs, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, M-Pesa, microcredit, Monroe Doctrine, oil shock, place-making, Ponzi scheme, risk/return, road to serfdom, Silicon Valley, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, urban renewal, Washington Consensus, WikiLeaks, World Values Survey, young professional

This system has nobody in charge, yet finds the best solutions for your problems and helps you find your own best role as a problem-solver for others. This is the Invisible Hand. Again, the wonder of Adam Smith’s breakthrough is often lost under a thick layer of ideological abuse of the Invisible Hand by both its proponents and opponents. The Invisible Hand is not utopia; it is not perfect; it is always a work in progress. There are genuine concerns about income distribution, in which the rich get their needs met so much more than the poor. There are still so many things wrong with the private suppliers of our needs that we could also describe the Invisible Hand in reverse: it is the process of driving out of business the incompetent in favor of the mediocre, the mediocre in favor of the good, and the good in favor of the excellent.

The top three six-digit specialties in Lesotho generated only $87 for each and every person in Lesotho. The Invisible Hand helps with scaling up success as well as with finding success in the first place. Once workers get into a virtuous circle of learning by doing and increasing production on your chosen specialty, they still need the Invisible Hand to keep scaling up. They need it to efficiently get them the scale of the inputs, both domestic and imported, that go into producing the increasing scale of specialized output at which they are becoming so good. To free up those inputs, the Invisible Hand has to shut down many other specialties at which they are not so good. One way this happens is probably the most hated and misunderstood part of the Invisible Hand. There is one type of trade in the market that has always seemed sinister: trading money today for money tomorrow.

Finally, Smith understood that not all problems could be solved by the Invisible Hand of the market. Only the government can solve some problems, and government may need to intervene in some malfunctioning markets, such as public goods that do not deliver enough of a private return. Smith said the government should supply, for example, public schools, roads, bridges, and canals.13 Let’s declare a temporary truce in the market-versus-government wars, so that an appreciation of the Invisible Hand does not automatically imply some extreme view that government has no role in anything. All free societies today, from social-democratic Scandinavia to industrial-policy Japan to the more free-market United States, have relied heavily on the Invisible Hand. SMITH’S PROBLEM-SOLVING SYSTEM We can now get to the guts of Smith’s vision of a successful problem-solving system.


pages: 524 words: 146,798

Anarchy State and Utopia by Robert Nozick

distributed generation, invisible hand, Jane Jacobs, Kenneth Arrow, laissez-faire capitalism, Machinery of Freedom by David Friedman, means of production, Menlo Park, moral hazard, night-watchman state, Norman Mailer, Pareto efficiency, price discrimination, prisoner's dilemma, rent control, risk tolerance, Ronald Coase, school vouchers, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Yogi Berra

However, to remind the reader of our slight weakening of the Weberian condition, we occasionally shall refer to the dominant protective agency as “a statelike entity,” instead of simply as “a state.” THE INVISIBLE-HAND EXPLANATION OF THE STATE Have we provided an invisible-hand explanation (see Chapter 2) of the state’s arising within a state of nature; have we given an invisible-hand explanation of the state? The rights possessed by the state are already possessed by each individual in a state of nature. These rights, since they are already contained whole in the explanatory parts, are not provided an invisible-hand explanation. Nor have we provided an invisible-hand explanation of how the state acquires rights unique to it. This is fortunate; for since the state has no special rights, there is nothing of that sort to be explained.

But might does make enforced prohibitions, even if no one thinks the mighty have a special entitlement to have realized in the world their own view of which prohibitions are correctly enforced. Our explanation of this de facto monopoly is an invisible-hand explanation. If the state is an institution (I) that has the right to enforce rights, prohibit dangerous private enforcement of justice, pass upon such private procedures, and so forth, and (2) that effectively is the sole wielder within a geographical territory of the right in (I), then by offering an invisible-hand explanation of (2), though not of (I), we have partially explained in invisible-hand fashion the existence of the state. More precisely, we have partially explained in invisible-hand fashion the existence of the ultraminimal state. What is the explanation of how a minimal state arises? The dominant protective association with the monopoly element is morally required to compensate for the disadvantages it imposes upon those it prohibits from self-help activities against its clients.

They show how some overall pattern or design, which one would have thought had to be produced by an individual’s or group’s successful attempt to realize the pattern, instead was produced and maintained by a process that in no way had the overall pattern or design “in mind.” After Adam Smith, we shall call such explanations invisible-hand explanations. (“Every individual intends only his own gain, and he is in this, as in so many other cases, led by an invisible hand to promote an end which was no part of his intention.”) The specially satisfying quality of invisible-hand explanations (a quality I hope is possessed by this book’s account of the state) is partially explained by its connection with the notion of fundamental explanation adumbrated in Chapter 1. Fundamental explanations of a realm are explanations of the realm in other terms; they make no use of any of the notions of the realm.


Adam Smith: Father of Economics by Jesse Norman

"Robert Solow", active measures, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

Cairns, Enlightenment, Legal Education, and Critique, Edinburgh University Press 2015 Smith’s likely influence on Darwin: see Matt Ridley, ‘The Natural Order of Things’, Spectator, 11 January 2009 ‘The result of human action, but not the execution of any human design’: Adam Ferguson, An Essay on the History of Civil Society, n.p. 1767, III.ii Different readings of the invisible hand:, see William D. Grampp, ‘What Did Smith Mean by the Invisible Hand?’, Journal of Political Economy, 108.3, June 2000; for its history and uses prior to Smith, especially in Calvinist and generally providential theology and in natural science, see Peter Harrison, ‘Adam Smith and the History of the Invisible Hand’, Journal of the History of Ideas, 72.1, January 2011. As Mark Blaug points out, Smith’s idea of competition is ‘a process conception, not an end-state conception’. Blaug, Economic Theory in Retrospect, 5th edn, Cambridge University Press 1997, p. 593 First mention of the invisible hand: in his History of Astronomy essay, Smith says, ‘Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters.

Blaug, Economic Theory in Retrospect, 5th edn, Cambridge University Press 1997, p. 593 First mention of the invisible hand: in his History of Astronomy essay, Smith says, ‘Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. But thunder and lightning, storms and sunshine, those more irregular events, were ascribed to his favour, or his anger… And thus, in the first ages of the world, the lowest and most pusillanimous superstition supplied the place of philosophy’ (EPS III.2). In this case, the invisible hand is being invoked as an external force within a putatively pre-scientific and personalized explanation for individual, often adverse, events. The contrast with modern views of the invisible hand as a scientific, law-like, iterated and collective explanation for benign market phenomena is evident, and reinforces the suggestion that Smith has no overall theory of the invisible hand. See Eugene Heath, ‘Metaphor Made Manifest: Taking Seriously Smith’s “Invisible Hand”’, in David F.

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. The idea of the invisible hand has been celebrated or denounced for many decades. For some, it is nothing less than the fundamental idea that the market is an equilibrating mechanism that transforms individual greed via competition into general welfare. For others, the invisible hand is the symbol of a winner-takes-all economic system that uses an appeal to impersonal market forces to legitimize coercion of those without economic power.


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How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

Between the collapse of communism and the outbreak of the subprime crisis, an understandable and justified respect for market forces mutated into a rigid and unquestioning devotion to a particular, and blatantly unrealistic, adaptation of Adam Smith’s invisible hand. Milton Friedman, who died in 2006, said the test of an economic theory is that it should explain a lot with a little. But the modern theory of the invisible hand that Friedman and others promoted explains too much with too little. At its core, it says simply: self-interest plus competition equals nirvana. There is no mention in this equation of the institutions of modern capitalism, such as multinational corporations, derivatives markets, universal banks, and mutual funds. Information asymmetries, uncertainty, copycat behavior, network effects, and disaster myopia—the invisible hand metaphor abstracts from all of these awkward features of reality, too. Don’t worry, its defenders say, the market will take care of things.

As the historian of economic thought Mark Blaug has commented, “no-one can continue to believe in the spontaneous co-ordination of private and social interests who has digested Pigou’s insistence on the possible interdependence of firms and households.” In introducing the concept of social cost, Pigou pinpointed a central problem with the invisible hand that many free market economists had deliberately obscured or ignored. He also proposed some simple ways of correcting the market’s shortcomings, sometimes through the tax system, but also by the provision of public services and the introduction of regulations. Moreover, he accomplished all this using the same tools of “marginal analysis” that Walras, Pareto, and others had used to extol the virtues of the invisible hand. The defenders of free market orthodoxy could hardly dismiss Pigou’s conclusions as the product of an inappropriate methodology: his method was theirs! Still, as time went on, economic conservatives launched a sustained and partially successful effort to discredit Pigou’s work—a task in which they found an unlikely ally.

eISBN: 978-1-429-99069-1 Date of eBook conversion: 07/17/2010 1. Financial crises. 2. Stock exchanges. 3. Monetary policy. 4. Banks and banking. I. Title. HB3722.C37 2009 381—dc22 2009029529 www.fsgbooks.com To Lucinda, Beatrice, and Cornelia CONTENTS Copyright Dedication Introduction PART ONE: UTOPIAN ECONOMICS 1. Warnings Ignored and the Conventional Wisdom 2. Adam Smith’s Invisible Hand 3. Friedrich Hayek’s Telecommunications System 4. The Perfect Markets of Lausanne 5. The Mathematics of Bliss 6. The Evangelist 7. The Coin-Tossing View of Finance 8. The Triumph of Utopian Economics PART TWO: REALITY-BASED ECONOMICS 9. The Prof and the Polar Bears 10. A Taxonomy of Failure 11. The Prisoner’s Dilemma and Rational Irrationality 12. Hidden Information and the Market for Lemons 13.


pages: 187 words: 62,861

The Penguin and the Leviathan: How Cooperation Triumphs Over Self-Interest by Yochai Benkler

business process, California gold rush, citizen journalism, Daniel Kahneman / Amos Tversky, East Village, Everything should be made as simple as possible, experimental economics, experimental subject, framing effect, informal economy, invisible hand, jimmy wales, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge economy, laissez-faire capitalism, loss aversion, Murray Gell-Mann, Nicholas Carr, peer-to-peer, prediction markets, Richard Stallman, Scientific racism, Silicon Valley, Steven Pinker, telemarketer, Toyota Production System, twin studies, ultimatum game, Washington Consensus, zero-sum game, Zipcar

This does not claim us to be saints; it merely says that we are capable of virtue, and that we need not be robotic slaves to the government’s Leviathan, automatons guided by the Invisible Hand of the market, or parts of the collectivist Hive of fascism to serve the common weal. In honor of Tux, the symbol of Linux, I’ll call this alternative the Penguin. Cycles of Leviathan and the Invisible Hand Modern European and North American history has cycled between social, political, and economic systems that tended toward the Leviathan, and those that were based on the Invisible Hand. Throughout the seventeenth and eighteenth centuries, Europe’s absolute monarchies were more or less inefficient versions of Leviathan (just substitute “monarchy” for “government”). The inefficiency in exercising control provided substantial breathing room for Invisible Hand and the social action, the Penguin, to flourish underneath the Leviathan, more or less informally.

The first is the assumption that inspired philosopher Thomas Hobbes’s Leviathan: that humans are fundamentally and universally selfish, and the only way to deal with people is for governments to step in and control us so that we do not, in our shortsighted pursuit of self-interest, destroy one another (or make one another’s lives too miserable to bear). The second assumption was Adam Smith’s alternative solution to our assumed selfishness—the Invisible Hand. Smith’s Wealth of Nations argued that because humans are inherently self-interested and human decision making is driven by the rational weighing of costs and benefits, our action in a free market would tend to serve the common good. In other words, in our pursuit of self-interest we would work to fulfill one another’s needs, not because we care about one another’s well-being, but because it is mutually advantageous to do so. Though their prescriptions are quite different, both Leviathan and the Invisible Hand have the same fundamental starting point: a belief in the selfishness of mankind. The former tries to curb and control selfish human behavior through monitoring and punishment; the latter imagines markets as places where self-interest will lead people to act in ways that serve the common good.

The inefficiency in exercising control provided substantial breathing room for Invisible Hand and the social action, the Penguin, to flourish underneath the Leviathan, more or less informally. By the nineteenth century the decline of the monarchy, the Industrial Revolution, and the subsequent rise of commerce swept the Invisible Hand into power (nowhere with more painful effects than in Britain, as Friedrich Engels and Charles Dickens portrayed with such excruciating detail). This long reign of the Invisible Hand in both Europe and America was punctuated by panics and crashes throughout the nineteenth century, then, in 1929, came to a swift and abrupt end as the markets crashed, ushering in the Great Depression. Now the pendulum swung violently in the other direction. In Germany, where industrialization had already suffered a major blow from World War I, and in Russia, where it had been passed over altogether, moving straight from the Czar’s lethargic rule to Stalin’s cruelly efficient model, Leviathan reared its ugly head with a viciousness unmatched before or since, in the form of fascism and Soviet communism.


pages: 105 words: 18,832

The Collapse of Western Civilization: A View From the Future by Naomi Oreskes, Erik M. Conway

anti-communist, correlation does not imply causation, creative destruction, en.wikipedia.org, energy transition, Intergovernmental Panel on Climate Change (IPCC), invisible hand, laissez-faire capitalism, market fundamentalism, mass immigration, means of production, oil shale / tar sands, Pierre-Simon Laplace, road to serfdom, Ronald Reagan, stochastic process, the built environment, the market place

L e x i c o n o f A r c h A i c T e r m s 59 invisible hand A form of magical thinking, popularized in the eighteenth century, that economic markets in a capitalist system were “balanced” by the actions of an unseen, immaterial power, which both ensured that markets functioned efficiently and that they would address human needs. Belief in the invisible hand (sometimes also called the invisible hand of the marketplace) formed a kind of quasi-religious foundation for capitalism (see capitalism; external costs; market failure; market fundamentalism). market failure The social, personal, and environmental costs that market economies imposed on individuals and societies were referred to as “market failures.” The concept of market failure was an early recognition of the limits of capitalist theory (see external costs; invisible hand ). market fundamentalism A quasi-religious dogma (see invisible hand) promoting unregulated markets over all other forms of human socioeconomic organization.

Even at the time, some recognized this system as a quasi-religious faith, hence the label market fundamentalism. 38 M a r k e t F a i l u r e Market fundamentalism—and its various strands and interpretations known as free market fundamentalism, neoliberalism, laissez-faire economics, and laissez-faire capitalism—was a two-pronged ideological system. The first prong held that societal needs were served most efficiently in a free market economic system. Guided by the “invisible hand” of the marketplace, individuals would freely respond to each other’s needs, establishing a net balance between solutions (“supply”) and needs (“demand”). The second prong of the philosophy maintained that free markets were not merely a good or even the best manner of satisfying material wants: they were the only manner of doing so that did not threaten personal freedom. The crux of this second point was the belief that marketplaces represented distributed power.

Among other reforms, the federal government introduced antitrust laws to prevent monopolistic practices, established worker protections such as limits on the length of the working day and prohibitions on child labor, and developed a progressive income tax. By the early twentieth century, it was clear that capitalism in its pure, theoretical form did not exist, and few could argue for its desirability: the failures were too obvious. Intellectuals came to see the invisible hand, akin to the hand of God, as the quasi-religious notion that it was. The Great Depression of the 1930s—from which Europe and the United States emerged only through the centralized mobilization of World War II—led scholars and political leaders to view the idea of self-regulating markets as a myth. After WWII, most non-communist states became “mixed” economies with a large degree of both individual and corporate freedom and significant M a r k e t F a i l u r e 41 government involvement in markets, including extensive systems of taxes, tariffs, subsidies, regulation of banks and exchanges, and immigration control.6 Meanwhile communism, which had spread through- out Eurasia and to some parts of Africa and Latin and South America, was revealing even worse failures than capitalism.


Virtual Competition by Ariel Ezrachi, Maurice E. Stucke

Airbnb, Albert Einstein, algorithmic trading, barriers to entry, cloud computing, collaborative economy, commoditize, corporate governance, crony capitalism, crowdsourcing, Daniel Kahneman / Amos Tversky, David Graeber, demand response, disintermediation, disruptive innovation, double helix, Downton Abbey, Erik Brynjolfsson, experimental economics, Firefox, framing effect, Google Chrome, index arbitrage, information asymmetry, interest rate derivative, Internet of things, invisible hand, Jean Tirole, John Markoff, Joseph Schumpeter, Kenneth Arrow, light touch regulation, linked data, loss aversion, Lyft, Mark Zuckerberg, market clearing, market friction, Milgram experiment, multi-sided market, natural language processing, Network effects, new economy, offshore financial centre, pattern recognition, prediction markets, price discrimination, price stability, profit maximization, profit motive, race to the bottom, rent-seeking, Richard Thaler, ride hailing / ride sharing, road to serfdom, Robert Bork, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Skype, smart cities, smart meter, Snapchat, social graph, Steve Jobs, supply-chain management, telemarketer, The Chicago School, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Travis Kalanick, turn-by-turn navigation, two-sided market, Uber and Lyft, Uber for X, uber lyft, Watson beat the top human players on Jeopardy!, women in the workforce, yield management

To Regulate or Not to Regulate 209 Are we close to reaching that stage? With the rise of pricing algorithms in an increasingly digitalized market universe, in which web-aggregators, algorithms, and data pools provide the foundation for possible unilateral, coordinated, and Frenemy behav ior, is the invisible hand still a viable concept? After all, in a market that is in reality controlled by bots and algorithms, what power does the invisible hand possess? One may argue that the invisible hand remains a power ful force. Humans, after all, program and nominally control the algorithms. We still trust the invisible hand in many markets where robots manufacture products or provide ser vices, or where computers help facilitate trade. Moreover, we have seen how computers can enhance competition and our welfare. But we have also seen that, in a digitalized and controlled universe, barriers and market failures often exist, and may even be unavoidably integrated into the landscape.

Also, suppose the payoff would depend on how frequently the phrase appears in English-language books. If you could invest in one of these phrases—price regulation or invisible hand—which one would you pick? Google’s Ngram Viewer shows how often a phrase has occurred in a corpus of Englishlanguage books. As Figure 5 reflects, an investor in price regulation would have profited in the 1940s (see the gray line in Figure 5), but the overall winners are those who picked invisible hand (the dotted line in Figure 5). The result parallels the shift in emphasis in modern times, from regulation to free market philosophy. Price regulation has taken a beating, especially, as Chapter 3 explores, with the rise of neoclassical economic theories associated with the University of Chicago. Granted, the appeal of the invisible hand has diminished in recent years—after the financial crisis, the Great Recession, growing income and wealth inequality in the United States and U.K.,1 reduced social mobility, and the sheer arrogance of crony capitalism.

Surge areas were on and off, sometimes by the second, and being in the surge area did not guarantee requests from within the surge area.17 To Regulate or Not to Regulate 211 Even if surge pricing did not have its intended effect of quickly attracting additional drivers to the road, the invisible hand could still be at work. Arguably, Uber has to price competitively. Other wise users will turn to other ride-sharing apps, taxis, public transportation, or other modes of travel. Thus, in markets with a competitive alternative, the invisible hand ultimately checks Uber. If Uber’s surge price is too frequent, too high, or for too long, its app users would opt for other modes of travel (or simply walk). But as we saw in Chapter 6, as Uber’s platform increases in popularity outside options are limited and switching costs become high.


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The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Shadow banking was only named and identified by the economist Paul McCulley as late as 2007, in a speech at the annual financial symposium hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming.9 Members of the shadow banking ‘blind-eye brigade’ include Alan Greenspan, who in 2004 said that under the deregulated system of credit creation, ‘Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.’10 Credit creation and Goethe’s ‘Sorcerer’s Apprentice’ As argued above, to ensure that the monetary system addresses society’s varied needs, credit (debt) creation must be managed to ensure it is offered at low real rates of interest, and used productively and sustainably to create employment, and with it savings, income and other revenues, part of which can be used to repay the debt. If the system is to remain stable and useful to society as a whole, then publicly accountable authorities must manage and regulate not just the creation of credit, but also the ‘price’ of that credit: the rate of interest. If, instead, the power of credit creation is left to the ‘invisible hand’ of the market, the consequences will be similar to those faced by Goethe’s ‘Sorcerer’s Apprentice’. Readers will recollect that, in the absence of the Sorcerer, the Apprentice misused his master’s magic to conjure up water, brushes and pails that would magically undertake, without supervision, the work of cleaning up his master’s studio. The result was chaos, with a proliferation of brushes and pails, and the flooding of the Sorcerer’s workshop.

The 2006–07 sub-prime mortgage crisis in the US – when impoverished debtors defaulted on large sums of debt charged at high rates of interest – is a textbook example of how a system based on ‘classical’ monetary theory works. Economists reckoned that an excess supply of money (‘the global savings glut’) had, thanks to market forces, lowered the ‘price’ (interest rate) of money. Because of their conviction that bankers as dealers in money were like other intermediaries, simply acting as agents between buyers and sellers, economists thought banking activities could safely be guided by the ‘invisible hand’ of the market. Private commercial bankers could hardly believe their luck. The Sorcerer – in the form of a financial regulator – had vacated a vast amount of monetary space and left them in charge of the magic of credit creation, not just in their own country, but globally; not just within the retail banking system, but outside the purview of regulators, in the ‘shadow’ banking system. Bankers, creditors and financiers did what the Sorcerer’s Apprentice had done: they went crazy.

Too little borrowing leads to a contraction of the money supply, which in turn leads to disinflation (a reduction in the rate of inflation) or even deflation (a decrease in the general level of prices, when the inflation rate falls below 0 percent). Both inflation and deflation pose real threats to the wider economy and to social and political stability. Deflation, if it becomes entrenched, is particularly difficult to reverse (witness Japan’s deflated economy since 1990) as the public authorities have few tools with which to address deflationary pressures. That is why it is vital that credit creation is not left to the ‘invisible hand’ – to players in financial markets. In a democracy, it is the responsibility of ‘the guardians of the nation’s finances’ – central bankers, finance ministers and treasury civil servants – to manage the almost effortless process of both credit creation and the rate of interest – for the benefit of the economy as a whole. Private money’s wealth dependent on public largesse One of the great injustices of a banking system controlled by private wealth is that private money production does not exist in isolation.


pages: 190 words: 56,531

Where We Are: The State of Britain Now by Roger Scruton

bitcoin, blockchain, business cycle, Corn Laws, Donald Trump, Downton Abbey, Fellow of the Royal Society, fixed income, garden city movement, George Akerlof, housing crisis, invention of the printing press, invisible hand, Khartoum Gordon, mass immigration, Naomi Klein, New Journalism, old-boy network, open borders, payday loans, Peace of Westphalia, sceptred isle, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, web of trust

When it is said that nations are artificial communities, however, it should be remembered that there are two kinds of social artefact: those that result from a decision, as when two people form a partnership, and those that arise ‘by an invisible hand’, from decisions that in no way intend them, such as folk songs and folk religions. Institutions that arise by an invisible hand have a spontaneity and naturalness that may be lacking from institutions that are explicitly designed. Nations are spontaneous by-products of social interaction. Even when there is a conscious nation-building decision, the result will depend on the invisible hand: it is the affection, not the decision, that shapes the national identity. This is even true of the United States of America, which is by no means the entity today that the Founding Fathers intended.

There you have a brief summary of American history: people settling together, solving their conflicts by law, making that law for themselves, and in the course of this process defining themselves as a ‘we’, whose shared assets are the land and its law. The ‘invisible hand’ process, which was so illuminatingly discussed by Adam Smith, depends upon, and is secretly guided by, a legal and institutional framework.9 Under a rule of law, for example, the free interaction of individuals will result in a market economy. In the legal vacuum of post-communist Russia, by contrast, this free interaction of individuals has produced a command economy in the hands of gangsters. Likewise the invisible hand that gave rise to the nation was guided at every point by the territorial law. This ‘law of the land’ has been an important shaping force in English history, as F. W. Maitland and others have shown.10 And it is through the process whereby land and law become attached to each other that our specific form of national allegiance has been formed.

Lawrence, London, 1907. 8Ernest Gellner, Nations and Nationalism, Oxford, 1983; Benedict Anderson, Imagined Communities, 2nd edn, London, 1991; Eric Hobsbawm, Nations and Nationalism since 1780, Cambridge, 1990; Elie Kedourie, Nationalism, London, 1960; Kenneth Minogue, Nationalism, London, 1967. 9See Adam Smith, Inquiry into the Nature and the Causes of the Wealth of Nations, 1776, and the discussion of ‘invisible hand’ explanations in Robert Nozick, Anarchy, State and Utopia, Oxford, 1974. The invisible-hand theory was generalized by F. A. Hayek to produce a comprehensive account of legal and institutional development, in Law, Legislation and Liberty, 2 vols, London, 1976. 10F. W. Maitland, The Constitutional History of England, London, 1908. 11A few classic instances: George Eliot, Middlemarch; Adalbert Stifter, Nachsommer; Marcel Proust, À la recherche du temps perdu; Ingmar Bergman, Wild Strawberries; James Joyce, Dubliners.


pages: 272 words: 83,798

A Little History of Economics by Niall Kishtainy

"Robert Solow", Alvin Roth, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, central bank independence, clean water, Corn Laws, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, market clearing, market design, means of production, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

No one – not the government, not anyone – told the shopkeeper what to do. It’s tempting to think of Smith’s idea of the invisible hand as ‘greed is good’. This would be a distortion of it, though. Smith saw that commercial society involved a range of good human qualities. Bakers and butchers are often nice to other people. They feel sad when their friends get ill or lose money. That’s how people develop a sense of right and wrong. Commerce wouldn’t work very well if people were totally selfish all the time: bakers would lie about the weight of their loaves and brewers would water down their beer. Lying and cheating would become normal, and chaos would result. It’s when people are honest and reliable that their acting in their own self-interest benefits society. Smith’s invisible hand works, then, when decent people have the freedom to exchange goods with each other – to buy and sell things.

This way of thinking about unemployment became part of a new interpretation of Keynes followed by many of today’s Keynesian economists. When Akerlof and Stiglitz began their new field of information economics, many economists thought that markets worked pretty well most of the time. They believed in the ‘invisible hand’, Adam Smith’s idea that buying and selling in markets leads to the best use of society’s resources. Breakdowns in the market because of information problems don’t necessarily mean that people are being stupid or irrational. It’s perfectly rational for people to stop buying horses because they suspect that they’re being offered old nags. But the breakdowns mean that the invisible hand no longer works. On receiving his Nobel Prize, Stiglitz suggested that the reason that the hand is invisible is that it’s not there – and if it is, it’s paralysed. CHAPTER 34 Broken Promises People change their minds when it’s better for them not to.

A bias also existed in the way economists think about the world. This is important because how we think about the economy can influence how it actually treats different people. In a sense, the economic theories that we’ve looked at in this book – perfect competition, the law of demand and so on – are stories that economists tell over and over again. A famous one is Adam Smith’s invisible hand. Of course there isn’t really an invisible hand, just lots of people buying and selling things in an ordered way. It’s a story, although a useful one. Diana Strassmann (b. 1955), a pioneer of feminist economics, points out that most of the economic stories were first told by men, often in the nineteenth century. Many of the male economists who told them shared their society’s misgivings about women having an active role in the economy.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Smith was, naturally, a product of his times, which witnessed the advent of industrialization that led to an unprecedented increase in incomes and living standards. His 1776 The Wealth of Nations is the seminal work on the subject. Smith’s legacy is evident in nearly every aspect of economics. We still view the economy through the lens he fashioned. So, Adam Smith is the first Great Economist in the book. His idea of the ‘invisible hand’ of market forces – meaning the innate effects of supply and demand, rather than direct intervention by governments or other institutions – is the foundation of economic theory. As I explored in that Radio 4 programme, the British government is trying to rebalance the economy towards making things once again, after the 2008 crisis revealed the downsides of relying too much on financial services.

A decade later, the services sector has recovered to pre-recession levels, while manufacturing has not. And it’s not just Britain. America, China and other major economies are also seeking to rebalance their economies so that they can grow in a more sustainable fashion. What would Adam Smith say about these attempts? How would he reconcile his affinity for manufacturing with an aversion to governments intervening in the workings of the ‘invisible hand’? An economist inspired by Adam Smith later became the father of international trade. In 1817 David Ricardo formalized the theory of comparative advantage that shows how every country benefits from free trade. This is true even if that country is worse than every other country in the world at producing everything. It should still focus on making what it was relatively less bad at, and specializing and trading would benefit it as well as the rest of the world.

By adopting market-oriented reforms, China has emerged as the world’s second largest economy. Still, China is undergoing perhaps the most challenging part of its marketization process. How would Marx judge the trail that the Chinese economy is blazing? On the opposite side of the planning – market spectrum from Karl Marx was his near contemporary Alfred Marshall. Instead of the government running the economy, Marshall formalized how Smith’s ‘invisible hand’ achieves an equilibrium for the economy through market forces. He showed how supply and demand determine the price and quantity of a good. Marshall’s belief in a self-correcting market that moves towards an equilibrium means that we only need a laissez-faire state. There is no imperative for the government to intervene a great deal in the workings of the market economy, for instance, in the ups and downs of a business cycle.


The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg

Albert Einstein, Arthur Eddington, business cycle, diversified portfolio, first-price auction, German hyperinflation, Golden Gate Park, information asymmetry, invisible hand, Kenneth Arrow, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, Sam Peltzman, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

CHAPTER 8 WHY PRICES ARE GOOD Smith Versus Darwin I recently attended a party where a learned man—a prominent physicist— held forth. His topic was the analogy between Darwinian evolution, advancing the species biologically by allowing only the fittest to survive, and the Invisible Hand of the marketplace, advancing our species economically by eliminating all but the most efficient producers. I suspect that he didn't know much about biology. I'm sure that he didn't know much about economics. And his analogy, though familiar, was profoundly wrong. In biology, there is no equivalent of the Invisible Hand. Survival of the fittest is a different thing altogether. Nothing in evolutionary theory either promises or delivers the spectacular efficiency of the competitive marketplace. Male birds of paradise have ridiculously long tails. Evolution has cursed them with tails far too long for any practical purpose, and in fact long enough to be a substantial hindrance in locomotion.

If rationality cannot save us, what can? Remarkably—incredibly—miraculously—there is an answer. Under quite general conditions, when goods are produced and exchanged in competitive free markets in which people trade at market prices, economic activity leads to efficient outcomes. This fact is what economists have in mind when they talk about the Invisible Hand. In the eighteenth century, Adam Smith described the economic actor who "intends only his own gain" but is nevertheless led "by an invisible hand to promote an end which was no part of his intention," that end being the welfare of society, which economists call efficiency. The metaphor endures, having survived countless misinterpretations. It has been said that Smith was expressing a religious sentiment, a faith that Providence oversees our affairs. It has been said more often—most recently by my physicist friend—that Smith meant something like this: Individual rationality, coupled with the ruthless pressure of natural selection (in the marketplace as in the biosphere) must necessarily serve the social good and the ultimate advancement of the species.

What he did mean was something far more subtle, and far more remarkable: Individual rationality, coupled with competition and prices, leads to efficient outcomes; that is, outcomes in which there remain no unex-ploited opportunities to improve everybody's welfare. This is so even though individual rationality and competition without prices rarely leads to such desirable outcomes. The Invisible Hand Theorem is not at all obvious, but it is true. In the 1950s, the economists Gerard Debreu and Lionel Why Prices Are Good 77 McKenzie, working separately, successfully translated the Theorem into a statement about pure mathematics and rigorously proved that statement. Their accomplishment is one of the triumphs of modern economics. Along with its modern formulation, the Invisible Hand Theorem has acquired a modern name. It is now called the First Fundamental Theorem of Welfare Economics, and it can be stated succinctly: Competitive markets allocate resources efficiently. There is also a Second Fundamental Theorem of Welfare Economics, which deals with the fact that there are many different ways to allocate resources efficiently.


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The Code of Capital: How the Law Creates Wealth and Inequality by Katharina Pistor

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, barriers to entry, Bernie Madoff, bilateral investment treaty, bitcoin, blockchain, Bretton Woods, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, conceptual framework, Corn Laws, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Donald Trump, double helix, Edward Glaeser, Ethereum, ethereum blockchain, facts on the ground, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, full employment, global reserve currency, Hernando de Soto, income inequality, intangible asset, investor state dispute settlement, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, land reform, land tenure, London Interbank Offered Rate, Long Term Capital Management, means of production, money market fund, moral hazard, offshore financial centre, phenotype, Ponzi scheme, price mechanism, price stability, profit maximization, railway mania, regulatory arbitrage, reserve currency, Ronald Coase, Satoshi Nakamoto, secular stagnation, self-driving car, shareholder value, Silicon Valley, smart contracts, software patent, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, trade route, transaction costs, Wolfgang Streeck

It also provides them with a powerful defense against challengers: “But it’s legal.” Law’s Guiding Hand The legal code of capital may be invisible to the casual observer, but that does not make it less real. Some may find it easier to believe in the market’s “invisible hand” immortalized by Adam Smith, than to spend their time decoding capital’s legal structures.16 And yet, changes in the legal structure have fundamentally altered the conditions for Smith’s invisible hand to do its work. As is well known, Smith argued that the pursuit of individual self-interest will inevitably benefit society. Often ignored is the mechanism that powers the invisible hand. “Every individual,” Smith explained, “endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.”17 Why so?

“Every individual,” Smith explained, “endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.”17 Why so? Because “he can know better the character and situation of the persons whom he trusts, and if he e m P i r e o f L aw 7 should happen to be deceived, he knows better the laws of the country from which he must seek redress.”18 Whereas conventional wisdom attributes the operation of the invisible hand to the market, it might just as well be read as a reference to the quality of the rules of the game where business is conducted. The invisible hand does its job under weak institutions; it becomes superfluous once institutions are in place that allow economic agents to enforce their rights and interests anywhere. Today’s entrepreneurs no longer need to seek redress at home, and the fate of their wealth is no longer tied to the communities they left behind. Instead, they can choose among many legal systems the one they prefer, and enjoy its benefits even without physically moving themselves, their business, their goods, or assets to the state that authorized that law.

They are unfamiliar with local practices and political processes, which render local institutions unpredictable in their eyes. Recall that in Adam Smith’s account, the lack of institutional certainty in foreign places was the invisible hand that drove merchants back home, where they would invariably share some of their spoils with their community. For the merchants, this presented itself as a massive institutional failure, which greatly increased their costs of doing business and reduced their private gains. If institutions could be streamlined around the globe, business would become more predictable and the merchants could simply dispense with the invisible hand and keep their spoils for themselves. Building the legal infrastructure for global commerce has taken, for the most part, one of two forms: the harmonization of laws in different states, and the recognition and enforcement of foreign law.


Exploring Everyday Things with R and Ruby by Sau Sheong Chang

Alfred Russel Wallace, bioinformatics, business process, butterfly effect, cloud computing, Craig Reynolds: boids flock, Debian, Edward Lorenz: Chaos theory, Gini coefficient, income inequality, invisible hand, p-value, price stability, Ruby on Rails, Skype, statistical model, stem cell, Stephen Hawking, text mining, The Wealth of Nations by Adam Smith, We are the 99%, web application, wikimedia commons

This is due to the market economy again. Remember that the consumer always buys the cheapest goods first. This means the producer with the higher prices will have unsold goods, which in turn forces the prices to go down. The end results are that the average price goes down until it nears the cost of producing the goods. Finally, we see the invisible hand! The invisible hand of Adam Smith has weighed in on our simulation and pushed the prices down. Now that we have witnessed the invisible hand and charted its effects, let’s get slightly more complicated. Resource Allocation by Price In the previous simulation, every producer creates only one type of goods, which we imaginatively called goods. This, of course, is not realistic (nothing modeled in economics is realistic, but that’s a different point). In our next simulation, we will have producers creating two types of goods.

His book An Inquiry into the Nature and Causes of the Wealth of Nations (excerpted here) is considered the first modern work of economics, while he himself is often regarded as the father of economics: It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Smith coined the metaphor of the “invisible hand” to label this natural inclination, effectively describing what we know today as the market economy. In this chapter, we will simulate a market economy to see if we can observe the invisible hand in action. A Simple Market Economy First, let’s take stock of the different roles and features of an ideal market economy (which are what we want to simulate). Producers The people who produce the goods. Producers create the goods and sell them to the consumers at a price. Consumers The people who consume the goods created by the producers.

: (question mark, colon), in Ruby ternary conditional expression, if and unless > (right angle bracket), The R Console, Variables and Functions -> assignment operator, R, Variables and Functions > R console prompt, The R Console ' ' (single quotes), enclosing Ruby strings, Strings [ ] (square brackets), Vectors, Matrices, Data frames accessing subset of R data frame, Data frames enclosing R matrix indexes, Matrices enclosing R vector indexes, Vectors [[ ]] (square brackets, double), enclosing single R vector index, Vectors A aes() function, R, Aesthetics An Inquiry into the Nature and Causes of the Wealth of Nations (University of Chicago Press), The Invisible Hand apply() function, R, Interpreting the Data Armchair Economist (Free Press), How to Be an Armchair Economist array() function, R, Arrays arrays, R, Arrays–Arrays arrays, Ruby, Arrays and hashes–Arrays and hashes, Arrays and hashes artificial society, Money (see Utopia example) as.Date() function, R, Number of Messages by Day of the Month ascultation, Auscultation assignment operators, R, Variables and Functions at sign, double (@@), preceding Ruby class variables, Class methods and variables attr keyword, Ruby, Classes and objects Audacity audio editor, Homemade Digital Stethoscope average, Interpreting the Data (see mean() function, R) Axtell, Robert (researcher), It’s a Good Life Growing Artificial Societies: Social Science from the Bottom Up (Brookings Institution Press/MIT Press), It’s a Good Life B backticks (` `), enclosing R operators as functions, Variables and Functions bar charts, Plotting charts, Interpreting the Data–Interpreting the Data, The Second Simulation–The Second Simulation, The Third Simulation–The Third Simulation, The Final Simulation–The Final Simulation barplot() function, R, Plotting charts batch mode, R, Sourcing Files and the Command Line Bioconductor repository, Packages birds flocking, Schooling Fish and Flocking Birds (see flocking example) bmp() function, R, Basic Graphs Boids algorithm, Schooling Fish and Flocking Birds–The Origin of Boids Box, George Edward Pelham (statistician), regarding usefulness of models, The Simple Scenario break keyword, R, Conditionals and Loops brew command, Installing Ruby using your platform’s package management tool butterfly effect, The Changes C c() function, R, Vectors CALO Project, The Emailing Habits of Enron Executives camera, pulse oximeter using, Homemade Pulse Oximeter case expression, Ruby, case expression chaos theory, The Changes charts, Charting–Adjustments, Plotting charts, Statistical transformation, Geometric object, Interpreting the Data–Interpreting the Data, Interpreting the Data–Interpreting the Data, Interpreting the Data–Interpreting the Data, The Second Simulation, The Second Simulation–The Second Simulation, The Third Simulation–The Third Simulation, The Third Simulation–The Third Simulation, The Final Simulation–The Final Simulation, The Final Simulation–The Final Simulation, Analyzing the Simulation–Analyzing the Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation, Number of Messages by Day of the Month–Number of Messages by Hour of the Day, Generating the Heart Sounds Waveform–Generating the Heart Sounds Waveform, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate, Money–Money, Money–Money, Implementation bar charts, Plotting charts, Interpreting the Data–Interpreting the Data, The Second Simulation–The Second Simulation, The Third Simulation–The Third Simulation, The Final Simulation–The Final Simulation histograms, Statistical transformation, Geometric object, Money–Money line charts, Interpreting the Data–Interpreting the Data, Analyzing the Simulation–Analyzing the Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation Lorenz curves, Money–Money scatterplots, Interpreting the Data–Interpreting the Data, The Second Simulation, The Third Simulation–The Third Simulation, The Final Simulation–The Final Simulation, Number of Messages by Day of the Month–Number of Messages by Hour of the Day, Implementation waveforms, Generating the Heart Sounds Waveform–Generating the Heart Sounds Waveform, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate class methods, Ruby, Class methods and variables class variables, Ruby, Class methods and variables–Class methods and variables classes, R, Programming R classes, Ruby, Classes and objects–Classes and objects code examples, Using Code Examples (see example applications) colon (:), Symbols, Vectors creating R vectors, Vectors preceding Ruby symbols, Symbols comma-separated value (CSV) files, Importing data from text files (see CSV files) Comprehensive R Archive Network (CRAN), Packages conditionals, R, Conditionals and Loops conditionals, Ruby, Conditionals and loops–case expression contact information for this book, How to Contact Us conventions used in this book, Conventions Used in This Book cor() function, R, The R Console Core library, Ruby, Requiring External Libraries corpus, Text Mining correlation, R, The R Console CRAN (Comprehensive R Archive Network), Packages CSV (comma-separated value) files, Importing data from text files, The First Simulation–The First Simulation, The First Simulation, Interpreting the Data, The Simulation, Extracting Data from Sound–Extracting Data from Sound, Extracting Data from Video extracting video data to, Extracting Data from Video extracting WAV data to, Extracting Data from Sound–Extracting Data from Sound reading data from, Interpreting the Data writing data to, The First Simulation–The First Simulation, The Simulation csv library, Ruby, The First Simulation, The Simulation, Grab and Parse curl utility, Ruby Version Manager (RVM) D data, Data, Data, Everywhere–Data, Data, Everywhere, Bringing the World to Us, Importing Data–Importing data from a database, Importing data from text files, The First Simulation–The First Simulation, Interpreting the Data, How to Be an Armchair Economist, The Simulation, Grab and Parse–Grab and Parse, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives, Homemade Digital Stethoscope–Extracting Data from Sound, Extracting Data from Sound–Extracting Data from Sound, Homemade Pulse Oximeter–Extracting Data from Video, Extracting Data from Video analyzing, Data, Data, Everywhere–Data, Data, Everywhere, Bringing the World to Us, How to Be an Armchair Economist charts for, How to Be an Armchair Economist (see charts) obstacles to, Data, Data, Everywhere–Data, Data, Everywhere simulations for, Bringing the World to Us (see simulations) audio, from stethoscope, Homemade Digital Stethoscope–Extracting Data from Sound CSV files for, Importing data from text files, The First Simulation–The First Simulation, Interpreting the Data, The Simulation, Extracting Data from Sound–Extracting Data from Sound, Extracting Data from Video from Enron, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives from Gmail, Grab and Parse–Grab and Parse importing, R, Importing Data–Importing data from a database video, from pulse oximeter, Homemade Pulse Oximeter–Extracting Data from Video data frames, R, Data frames–Data frames data mining, The Idea data.frame() function, R, Data frames database, importing data from, Importing data from a database–Importing data from a database dbConnect() function, R, Importing data from a database dbGet() function, R, Importing data from a database DBI packages, R, Importing data from a database–Importing data from a database Debian system, installing Ruby on, Installing Ruby using your platform’s package management tool def keyword, Ruby, Classes and objects dimnames() function, R, Matrices distribution, normal, Money dollar sign ($), preceding R list item names, Lists doodling example, Shoes doodler–Shoes doodler double quotes (" "), enclosing Ruby strings, Strings duck typing, Ruby, Code like a duck–Code like a duck dynamic typing, Ruby, Code like a duck–Code like a duck E economics example, A Simple Market Economy–A Simple Market Economy, The Producer–The Producer, The Consumer–The Consumer, Some Convenience Methods–Some Convenience Methods, The Simulation–The Simulation, Analyzing the Simulation–Analyzing the Simulation, The Producer–The Producer, The Consumer–The Consumer, Market–Market, The Simulation–The Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation, Price Controls–Price Controls charts for, Analyzing the Simulation–Analyzing the Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation Consumer class for, The Consumer–The Consumer, The Consumer–The Consumer Market class for, Some Convenience Methods–Some Convenience Methods, Market–Market modeling, A Simple Market Economy–A Simple Market Economy price controls analysis, Price Controls–Price Controls Producer class for, The Producer–The Producer, The Producer–The Producer simulations for, The Simulation–The Simulation, The Simulation–The Simulation email example, Grab and Parse–Grab and Parse, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives, Number of Messages by Day of the Month–Number of Messages by Day of the Month, Number of Messages by Day of the Month–Number of Messages by Hour of the Day, MailMiner–MailMiner, Number of Messages by Day of Week–Number of Messages by Hour of the Day, Interactions–Comparative Interactions, Text Mining–Text Mining charts for, Number of Messages by Day of the Month–Number of Messages by Hour of the Day content of messages, analyzing, Text Mining–Text Mining data for, Grab and Parse–Grab and Parse Enron data for, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives interactions in email, analyzing, Interactions–Comparative Interactions number of messages, analyzing, Number of Messages by Day of the Month–Number of Messages by Day of the Month, Number of Messages by Day of Week–Number of Messages by Hour of the Day R package for, creating, MailMiner–MailMiner emergent behavior, The Origin of Boids (see also flocking example) Enron Corporation scandal, The Emailing Habits of Enron Executives Epstein, Joshua (researcher), It’s a Good Life Growing Artificial Societies: Social Science from the Bottom Up (Brookings Institution Press/MIT Press), It’s a Good Life equal sign (=), assignment operator, R, Variables and Functions Euclidean distance, Roids evolution, Evolution example applications, Using Code Examples, Shoes stopwatch–Shoes stopwatch, Shoes doodler–Shoes doodler, The R Console–Sourcing Files and the Command Line, Data frames–Introducing ggplot2, qplot–qplot, Statistical transformation–Geometric object, Adjustments–Adjustments, Offices and Restrooms, A Simple Market Economy, Grab and Parse, My Beating Heart, Schooling Fish and Flocking Birds, Money artificial utopian society, Money (see Utopia example) birds flocking, Schooling Fish and Flocking Birds (see flocking example) doodling, Shoes doodler–Shoes doodler economics, A Simple Market Economy (see economics example) email, Grab and Parse (see email example) fuel economy, qplot–qplot, Adjustments–Adjustments heartbeat, My Beating Heart (see heartbeat example) height and weight, The R Console–Sourcing Files and the Command Line league table, Data frames–Introducing ggplot2 movie database, Statistical transformation–Geometric object permission to use, Using Code Examples restrooms, Offices and Restrooms (see restrooms example) stopwatch, Shoes stopwatch–Shoes stopwatch expressions, R, Programming R external libraries, Ruby, Requiring External Libraries–Requiring External Libraries F factor() function, R, Factors, Text Mining factors, R, Factors–Factors FFmpeg library, Extracting Data from Video, Extracting Data from Video field of vision (FOV), Roids fish, schools of, Schooling Fish and Flocking Birds (see flocking example) flocking example, Schooling Fish and Flocking Birds–The Origin of Boids, The Origin of Boids, Simulation–Simulation, Roids–Roids, The Boid Flocking Rules–Putting in Obstacles, The Boid Flocking Rules–The Boid Flocking Rules, A Variation on the Rules–A Variation on the Rules, Going Round and Round–Going Round and Round, Putting in Obstacles–Putting in Obstacles Boids algorithm for, Schooling Fish and Flocking Birds–The Origin of Boids centering path for, Going Round and Round–Going Round and Round obstacles in path for, Putting in Obstacles–Putting in Obstacles research regarding, A Variation on the Rules–A Variation on the Rules Roid class for, Roids–Roids rules for, The Origin of Boids, The Boid Flocking Rules–The Boid Flocking Rules simulations for, Simulation–Simulation, The Boid Flocking Rules–Putting in Obstacles flows, Shoes, Shoes stopwatch fonts used in this book, Conventions Used in This Book–Conventions Used in This Book for loop, R, Conditionals and Loops format() function, R, Number of Messages by Day of the Month FOV (field of vision), Roids fuel economy example, qplot–qplot, Adjustments–Adjustments function class, R, Programming R functions, R, Variables and Functions–Variables and Functions G GAM (generalized addictive model), The Changes gem command, Ruby, Requiring External Libraries .gem file extension, Requiring External Libraries generalized addictive model (GAM), The Changes Gentleman, Robert (creator of R), Introducing R geom_bar() function, R, Interpreting the Data, The Second Simulation, The Final Simulation geom_histogram() function, R, Geometric object geom_line() function, R, Analyzing the Simulation geom_point() function, R, Plot, Interpreting the Data, Generating the Heart Sounds Waveform geom_smooth() function, R, Interpreting the Data ggplot() function, R, Plot ggplot2 package, R, Introducing ggplot2–Adjustments Gini coefficient, Money Git utility, Ruby Version Manager (RVM) Gmail, retrieving message data from, Grab and Parse–Grab and Parse graphics device, opening, Basic Graphs graphics package, R, Basic Graphs graphs, Charting (see charts) Growing Artificial Societies: Social Science from the Bottom Up (Brookings Institution Press/MIT Press), It’s a Good Life H hash mark, curly brackets (#{ }), enclosing Ruby string escape sequences, Strings hashes, Ruby, Arrays and hashes–Arrays and hashes heart, diagram of, Generating the Heart Sounds Waveform heartbeat example, My Beating Heart, My Beating Heart, My Beating Heart, Homemade Digital Stethoscope, Homemade Digital Stethoscope, Homemade Digital Stethoscope–Extracting Data from Sound, Generating the Heart Sounds Waveform–Generating the Heart Sounds Waveform, Generating the Heart Sounds Waveform, Finding the Heart Rate–Finding the Heart Rate, Homemade Pulse Oximeter–Homemade Pulse Oximeter, Homemade Pulse Oximeter–Extracting Data from Video, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate charts for, Generating the Heart Sounds Waveform–Generating the Heart Sounds Waveform, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate data for, Homemade Digital Stethoscope–Extracting Data from Sound, Homemade Pulse Oximeter–Extracting Data from Video audio from stethoscope, Homemade Digital Stethoscope–Extracting Data from Sound video from pulse oximeter, Homemade Pulse Oximeter–Extracting Data from Video heart rate, My Beating Heart, Finding the Heart Rate–Finding the Heart Rate, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate finding from video file, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate finding from WAV file, Finding the Heart Rate–Finding the Heart Rate health parameters for, My Beating Heart heart sounds, My Beating Heart, My Beating Heart, Homemade Digital Stethoscope, Generating the Heart Sounds Waveform health parameters for, My Beating Heart recording, Homemade Digital Stethoscope types of, My Beating Heart, Generating the Heart Sounds Waveform homemade pulse oximeter for, Homemade Pulse Oximeter–Homemade Pulse Oximeter homemade stethoscope for, Homemade Digital Stethoscope height and weight example, The R Console–Sourcing Files and the Command Line here-documents, Ruby, Strings hex editor, Extracting Data from Sound histograms, Statistical transformation, Geometric object, Money–Money Homebrew tool, Installing Ruby using your platform’s package management tool hyphen (-), Variables and Functions, Variables and Functions -> assignment operator, R, Variables and Functions <- assignment operator, R, Variables and Functions I icons used in this book, Conventions Used in This Book if expression, R, Conditionals and Loops if expression, Ruby, if and unless–if and unless Ihaka, Ross (creator of R), Introducing R ImageMagick library, Extracting Data from Video IMAP (Internet Message Access Protocol), Grab and Parse importing data, R, Importing Data–Importing data from a database inheritance, Ruby, Inheritance–Inheritance initialize method, Ruby, Classes and objects inner product, Roids–Roids installation, Installing Ruby–Installing Ruby using your platform’s package management tool, Installing Shoes–Installing Shoes, Introducing R, Installing packages–Installing packages R, Introducing R R packages, Installing packages–Installing packages Ruby, Installing Ruby–Installing Ruby using your platform’s package management tool Shoes, Installing Shoes–Installing Shoes Internet Message Access Protocol (IMAP), Grab and Parse Internet Message Format, The Emailing Habits of Enron Executives invisible hand metaphor, The Invisible Hand irb application, Running Ruby–Running Ruby J jittering, Adjustments jpeg() function, R, Basic Graphs L Landsburg, Stephen E. (author), How to Be an Armchair Economist Armchair Economist (Free Press), How to Be an Armchair Economist layer() function, R, Plot league table example, Data frames–Introducing ggplot2 left angle bracket (<), Strings, Variables and Functions <- assignment operator, R, Variables and Functions << preceding Ruby string here-document delimiter, Strings length() function, R, Vectors libraries, Requiring External Libraries, Requiring External Libraries–Requiring External Libraries, The First Simulation (see also specific libraries) for Ruby, The First Simulation for Ruby, Requiring External Libraries–Requiring External Libraries library() function, R, Importing Data line charts, Interpreting the Data–Interpreting the Data, Analyzing the Simulation–Analyzing the Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation linear PCM (pulse-code modulation) format, Extracting Data from Sound Linux, Installing Ruby using third-party tools, Installing Shoes, Introducing R, Using R, Basic Graphs installing R on, Introducing R installing Ruby on, Installing Ruby using third-party tools installing Shoes on, Installing Shoes opening graphics device, Basic Graphs R user interface for, Using R list() function, R, Lists lists, R, Lists–Lists Loess algorithm, The Changes loops, R, Conditionals and Loops–Conditionals and Loops loops, Ruby, Loops Lorenz curve, Money, Money–Money Lorenz, Edward (coined "butterfly effect"), The Changes M Mac, Installing Ruby using third-party tools, Installing Ruby using your platform’s package management tool, Installing Shoes, Using R, Basic Graphs installing Ruby on, Installing Ruby using third-party tools, Installing Ruby using your platform’s package management tool installing Shoes on, Installing Shoes opening graphics device, Basic Graphs R user interface for, Using R mail library, Ruby, Grab and Parse Manhattan Project, The Simple Scenario matrices, R, Matrices–Matrices matrix library, Ruby, Roids matrix() function, R, Matrices Matsumoto, Yukihiro (creator of Ruby), Why Ruby max() function, R, Interpreting the Data mean() function, R, The R Console, Interpreting the Data–Interpreting the Data median() function, R, Interpreting the Data–Interpreting the Data merge() function, R, Data frames methods, Ruby, Methods mgcv library, The Changes mixin mechanism, Ruby, Inheritance modules, Ruby, Inheritance Monte Carlo simulation method, The Simple Scenario–The First Simulation movie database example, Statistical transformation–Geometric object N natural selection, Evolution normal distribution, Money O objects, R, Programming R objects, Ruby, Classes and objects–Classes and objects "Occupy Wall Street" movement, Money open classes, Ruby, Roids order() function, R, Data frames output formats, R, Basic Graphs overplotting, Adjustments oximetry, Oximetry–Homemade Pulse Oximeter P package management tool, Installing Ruby using your platform’s package management tool packages, R, Packages–Using packages, MailMiner–MailMiner par() function, R, Plotting charts pdf() function, R, Basic Graphs peppered moth, natural selection of, Evolution plot characters, Interpreting the Data plot() function, R, The R Console, Plotting charts–Plotting charts png() function, R, Basic Graphs Poisson process, The Simple Scenario pulse oximeter, Homemade Pulse Oximeter–Homemade Pulse Oximeter puts statement, Ruby, Running Ruby Pythagoras's theorem, Roids Q %q, preceding Ruby strings, Strings %Q, preceding Ruby strings, Strings qplot() function, R, qplot–qplot quartz() function, R, Basic Graphs question mark (?)


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, business cycle, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

It is not at all evident, on its face, that millions of consumers, workers, firms, savers, investors, banks, and speculators, each of them pursuing strictly their own personal advantage, would collectively arrive at anything other than economic chaos. Yet the model says the outcome is actually efficient. The First Fundamental Theorem of Welfare Economics is colloquially known among economists as the Invisible Hand Theorem. It was Adam Smith, perhaps the father of economics, who first stated it in broad terms. Though he did not use the term “invisible hand” in quite this context, Smith argued that decentralized decision making by individual consumers and producers in a market would nonetheless provide collective benefit. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,” he famously wrote, “but from their regard to their own interest.”2 Smith’s point that price incentives turn markets into a stupendously effective coordination machine running on autopilot was brought home powerfully by Milton Friedman in his popular TV series Free to Choose in 1980, on the eve of a wave of market reforms under the Reagan and Thatcher governments.

It was first formulated fully in the early 1950s by Kenneth Arrow and Gerard Debreu, using mathematics that was then unfamiliar to most economists.4 The first sentence of Debreu’s 1951 article gives a sense of the nature of the exercise: “The activity of the economic system we study can be viewed as the transformation by n production units and the consumption by m consumption units of l commodities (the quantities of which may or may not be perfectly divisible).”† Even though the Arrow and Debreu articles are foundational, having earned each economist a Nobel Prize, they are rarely read. (I confess I looked at them for the first time as I was writing this.) Economists study them instead from textbooks and other secondhand treatments. The First Fundamental Theorem is a big deal because it actually proves the Invisible Hand hypothesis. That is, it shows that under certain assumptions, the efficiency of a market economy is not just conjecture or possibility; it follows logically from the premises. The payoff from all the mathematics is that we actually have a precise statement. The model shows us exactly how the result is produced. It reveals, in particular, the specific assumptions that we have to make to be sure efficiency is achieved.

Information has to be complete—meaning, for example, that consumers are knowledgeable about all attributes of a good even before purchasing and experiencing it. We need to rule out monopolistic behavior on the part of producers, increasing returns to scale, and “externalities” (such as pollution or learning spillovers from R&D). Economists from Adam Smith on knew, of course, that such complications might interfere with the invisible hand. But Arrow and Debreu put it all together and made it all explicit and precise. The First Fundamental Theorem is about a purely hypothetical world; it does not claim to describe any actual markets. Taking it to the real world requires judgment, evidence, and further theorizing. How one interprets its relevance for economic policy is a Rorschach test of sorts. For economic liberals and political conservatives, the theorem establishes the superiority of a market-based society.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

"Robert Solow", Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, business cycle, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

Part IV: THE TRUTH ABOUT MARKETS Chapter 17: Neoclassical Economics and After ••••••••••••••••••••••••••••••••••••• 1. For example, for James Tobinn the invisible hand is "one of the great ideas of history and one of the most influential." Tobin (1992), 117. 2. Yergin and Stanislaw (1998), 398. More or less the same phrase is found at the beginning of the book, page 24. 3. Leacock (1936). These are not Leacock's own views. 4. Smith (1759), 184-85 For a discussion of the role of the "invisible hand" metaphor in Smith's work, see Rothschild (2001), chapter 5. The original "invisible hand" seems to be found in Shakespeare: { 378} Notes Come seeling night Scarf up the tender eye of pitiful day And with thy bloody and invisible hand Cancel and tear to pieces that great bond Which keeps me pale. -Macbeth) act 3) sc. 2) l. 119. 5. See the discussion of DIY economics in chapter 15. 6.

The importance of Darwin's theory outside biology is that it demonstrates the extraordinary potential of spontaneous order. No one who has fully understood it ever thinks the same way again. Coordination in Market Economies Adam Smith was the great economist of the Scottish Enlightenment. And his metaphor of the invisible hand is the most famous expression of order without design. Smith had described how the division of labor had fueled economic growth, "the natural progress of opulence." But how was that division of labor organized and coordinated? The answer was the invisible hand. As I shall discuss in chapter 17, I am not sure this interpretation of Smith is right. But whether or not it was Smith's answer, it is a good question. We can imagine Khrushchev in the supermarket posing his own version: "Who is in charge of the supply of groceries to California?"

The widely quoted passage is: "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 not part of his intention." Yet on careful reading Smith does not say that selfish behavior is praiseworthy, is bound to pay, or necessarily promotes the best interests of society. When we join the shortest queue at the supermarket, we intend only our own gain and promote an end that is not part of our intention. It does not follow that our behavior is governed by self-regarding materialism, or that such behavior leads, cumulatively or otherwise, to the overall betterment of society. The passage containing the invisible hand metaphor is not about general equilibrium theory: its purpose is to explain why merchants would continue to buy British products even if tariffs were removed.


Stacy Mitchell by Big-Box Swindle The True Cost of Mega-Retailers, the Fight for America's Independent Businesses (2006)

big-box store, business climate, business cycle, clean water, collective bargaining, corporate personhood, European colonialism, Haight Ashbury, income inequality, inventory management, invisible hand, Jane Jacobs, low skilled workers, Maui Hawaii, Menlo Park, new economy, New Urbanism, price discrimination, race to the bottom, Ray Oldenburg, RFID, Ronald Reagan, The Chicago School, The Death and Life of Great American Cities, The Great Good Place, union organizing, urban planning, women in the workforce, zero-sum game

Chain stores—United States. 2. Retail trade—United States. 3. Small business—United States. I. Title. HF5468.M58 2006 381.120973—dc22 2006013818 For Jacob CONTENTS PART ONE PART TWO INTRODUCTION ix ONE CHAIN STORE WORLD 3 TWO FADING PROSPERITY 33 THREE COMMUNITY LIFE 73 FOUR BLIGHTED LANDSCAPE 101 FIVE SOMETIMES LOW PRICES 127 SIX MONOPOLIZED CONSUMERS 138 SEVEN UNCLE SAM’S INVISIBLE HAND 163 EIGHT COMMUNITIES UNCHAINED 192 NINE DECLARATION OF INDEPENDENTS 223 ACKNOWLEDGMENTS 259 NOTES 260 INDEX 299 INTRODUCTION Kepler’s, a fifty-year-old independent bookstore in Menlo Park, California, abruptly shut down. Owner Clark Kepler explained that bookstore chains and Amazon.com had displaced so much of the store’s sales that he could no longer pay the bills. But before Kepler could file for bankruptcy, the business was swept up in an outpouring of community grief.

As locally owned retail businesses disappear, what we are losing as consumers are people who are, in many cases, enthusiasts for whatever it is that they sell. This enthusiasm influences their decisions about what products to stock and the quality standards they expect from manufacturers. It means they often possess a valuable level of expertise and provide a variety of extras—from family game nights to lessons on managing diabetes—that cannot be found at the chains. PART TWO SEVEN UNCLE SAM’S INVISIBLE HAND IT WAS EARLY 2005 WHEN KEVIN OHM, who owns the thirty-three-year-old Ohm’s Appliance store in Brookings, South Dakota, first learned that city o‰cials were planning to grant Lowe’s nearly $3 million in public subsidies to build a superstore in town. “Surprise would be an understatement,” he recalled. “I was aghast.” Ohm was not alone. Brookings, a community of just under twenty thousand people on the eastern edge of the state, contains a remarkable number of independent businesses selling the same kinds of products Lowe’s oƒers, including hardware stores, carpet dealers, lighting shops, plumbing-supply stores, lumberyards, and, by Ohm’s count, half a dozen other appliance dealers.

But it also flows from a double standard pervasive among policymakers, who insist that small businesses be subject to the rigors of the free market, while granting their biggest competitors a leg up in the name of the public good. GOVERNMENT HANDOUTS Many of the big-box stores and shopping centers that open each year are built with the help of public subsidies. These giveaways take many forms: free or reduced-price land (as in Brookings); property tax breaks; sales tax rebates; free infrastructure and other site improvements; low-interest, tax- UNCLE SAM’S INVISIBLE HAND 165 free loans; and job training credits, to name a few. Most of these subsidies are provided locally by cities and towns, and occasionally counties, though state and even federal tax dollars may be involved. Together they constitute one of the most substantial, and certainly the most overt, means by which government policy fuels corporate retail expansion. Recent examples include over $7 million in sales and property tax breaks provided to a Target store in Fort Worth, Texas; $2 million in tax incentives given to Home Depot by the town of Mokena, Illinois; and $9.5 million for a shopping center anchored by a Lowe’s in Maplewood, Missouri.


pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

"Robert Solow", Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, business cycle, buy and hold, centralized clearinghouse, Chuck Templeton: OpenTable:, clean water, conceptual framework, constrained optimization, continuous double auction, creative destruction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uber lyft, uranium enrichment, Vickrey auction, Vilfredo Pareto, winner-take-all economy

“For much of the post–World War II period,” Fourcade writes, “flexing one’s mathematical and statistical muscles and stripping down one’s argument to a formal and parsimonious set of equations was indeed the main path to establishing scientific purity in economics.”3 Radford, writing after the war, found himself in deep conversation with the classical economists of the nineteenth and earlier centuries—even as the profession was on the cusp of its mathematical transformation. Radford’s larger message about the efficiency of markets was, after all, one of the main points of Adam Smith’s metaphor of the invisible hand, an idea that first appeared in Book IV of his epic Wealth of Nations in 1776. To Smith, the power of the market was clear, requiring no formal proof of its veracity or elucidation of the precise circumstances where it would be truer than others. Smith largely asserted that individuals can pursue their own self-interest and make society as a whole better off.4 It was a revelation. Generations of economists that followed—collectively referred to by economic historian Heilbroner as “the worldly philosophers”—extended Smith’s ideas.

Building from his calculation that the richest 20 percent of Italians owned 80 percent of the country’s land, Pareto posited that incomes in an economy tend to be distributed according to a “power law.” (Power law distributions will often generate extreme inequality, making Pareto an unlikely hero of the Occupy movement.) Most memorably, though, he used his mathematical skills to extend Smith’s invisible hand arguments, introducing a particular criterion by which economists could assess social well-being.5 This welfare principle, named Pareto efficiency by British economist I. M. D. Little, suggests that we may judge an economic system by whether it’s possible, through some series of trades or exchanges, to make at least one individual better off without making anyone worse off. This is a fairly minimalist view on social welfare—for example, if a tax policy brought millions of people out of poverty but in the process left Donald Trump with ten fewer dollars in his bank account, it would fail to be a Pareto improvement because someone—even someone as rich and odious as Trump—is made worse off.

The models are absurd caricatures of the true skyscraper-to-be, but look enough like the real thing to help figure out whether it’ll get knocked over in a hurricane. In a sense, Arrow and Debreu’s model was a stress test of the market, an attempt to understand the conditions that would guarantee that a market would arrive at that happy state where society’s means and wants exactly coincide. This may seem an esoteric point. And in a way it is. But think back to Smith’s timeless description of the magic of the invisible hand: in a well-functioning market, each individual acts only in self-interest but nonetheless ends up promoting the public good. He’s describing, essentially, the glories of market equilibrium: there’s no way that the economy’s resources could be put to use so that any one individual is better off without making someone else worse off (that is, market equilibrium is a Pareto optimum). There’s no waste, no mixed-up allocations where you and I might barter my bread for your eggs to make us both happier, no company that could be more profitable by altering what it chose to produce.


The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics by Rod Hill, Anthony Myatt

American ideology, Andrei Shleifer, Asian financial crisis, bank run, barriers to entry, Bernie Madoff, business cycle, cognitive dissonance, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, different worldview, endogenous growth, equal pay for equal work, Eugene Fama: efficient market hypothesis, experimental economics, failed state, financial innovation, full employment, gender pay gap, Gini coefficient, Gunnar Myrdal, happiness index / gross national happiness, Home mortgage interest deduction, Howard Zinn, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, liberal capitalism, low skilled workers, market bubble, market clearing, market fundamentalism, Martin Wolf, medical malpractice, minimum wage unemployment, moral hazard, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, positional goods, prediction markets, price discrimination, principal–agent problem, profit maximization, profit motive, publication bias, purchasing power parity, race to the bottom, Ralph Nader, random walk, rent control, rent-seeking, Richard Thaler, Ronald Reagan, shareholder value, The Myth of the Rational Market, the payments system, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, union organizing, working-age population, World Values Survey, Yogi Berra

The recent global financial meltdown (discussed in the postscript to this book) illustrates – among other things – the importance of the legal and regulatory framework within which markets operate. Imperfect and asymmetric information creates possible conflicts of interest that allow some people to profit at the expense of others. The invisible hand isn’t supposed to work like that; it is supposed to transform everyone’s selfishness into the greater good. Prasch (ibid.) explains that the invisible hand only works to produce an effi­ cient allocation of resources if the economy consists of certain special kinds of markets. There must be no externalities, but additionally the quality of the product must be known, and exchanges must be instantaneously completed in ‘spot’ markets. This describes the proverbial ‘widget’ of the microeconomic textbooks and occupies the upper left-hand cell in Table 11.2.

We agree that the typical text offers a view that ‘idolizes markets’ – usually not in a crude way, but in a subtle way through its choice of themes, and through its emphasis on demand and supply (also called the model of perfect competition) as the central theoretical structure. Most of the standard textbook is spent developing and applying that structure. It describes a world of perfect markets in which given resources are allocated as if by an invisible hand in a way that maximizes the value of total production. The belief that this model approximates how markets operate in the real world is often referred to as ‘market fundamentalism’.3 4 Minimum wage laws, usury laws, truth-in-advertising laws, laws to regulate fraud, health-and-safety codes, anti-discrimination laws, building inspection codes, environmental laws, investor protection rules, and many other rules and regulations have each and severally been breezily, even haughtily, dismissed by market fundamentalists and the many columnists and politicians who invoke their arguments.

Another neglected topic is the problem of externalities. Even when people make their decisions with perfect information, they can still choose not to take into account the effects of their actions on others. Every kind of pollution, from the local to the global, is an example of this. We show in Chapter 7 that externalities are not the afterthought that the textbooks suggest, but are a pervasive problem that render the invisible hand story irrelevant as a description of the world we live in. Questions of power are absent from the texts. Yet in reality sellers try to shape and to influence the preferences of consumers, while consumers may try to exert their power to get producers to produce products in more ethical or environmentally sustainable ways. Managers exert power over workers if business organizations are authoritarian and hierarchical, as is typically the case.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Smith was, naturally, a product of his times, which witnessed the advent of industrialization that led to an unprecedented increase in incomes and living standards. His 1776 The Wealth of Nations is the seminal work on the subject. Smith’s legacy is evident in nearly every aspect of economics. We still view the economy through the lens he fashioned. So, Adam Smith is the first Great Economist in the book. His idea of the ‘invisible hand’ of market forces – meaning the innate effects of supply and demand, rather than direct intervention by governments or other institutions – is the foundation of economic theory. As I explored in that Radio 4 programme, the British government is trying to rebalance the economy towards making things once again, after the 2008 crisis revealed the downsides of relying too much on financial services.

A decade later, the services sector has recovered to pre-recession levels, while manufacturing has not. And it’s not just Britain. America, China and other major economies are also seeking to rebalance their economies so that they can grow in a more sustainable fashion. What would Adam Smith say about these attempts? How would he reconcile his affinity for manufacturing with an aversion to governments intervening in the workings of the ‘invisible hand’? An economist inspired by Adam Smith later became the father of international trade. In 1817 David Ricardo formalized the theory of comparative advantage that shows how every country benefits from free trade. This is true even if that country is worse than every other country in the world at producing everything. It should still focus on making what it was relatively less bad at, and specializing and trading would benefit it as well as the rest of the world.

By adopting market-oriented reforms, China has emerged as the world’s second largest economy. Still, China is undergoing perhaps the most challenging part of its marketization process. How would Marx judge the trail that the Chinese economy is blazing? On the opposite side of the planning – market spectrum from Karl Marx was his near contemporary Alfred Marshall. Instead of the government running the economy, Marshall formalized how Smith’s ‘invisible hand’ achieves an equilibrium for the economy through market forces. He showed how supply and demand determine the price and quantity of a good. Marshall’s belief in a self-correcting market that moves towards an equilibrium means that we only need a laissez-faire state. There is no imperative for the government to intervene a great deal in the workings of the market economy, for instance, in the ups and downs of a business cycle.


pages: 393 words: 115,217

Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries by Safi Bahcall

accounting loophole / creative accounting, Albert Einstein, Apple II, Apple's 1984 Super Bowl advert, Astronomia nova, British Empire, Cass Sunstein, Charles Lindbergh, Clayton Christensen, cognitive bias, creative destruction, disruptive innovation, diversified portfolio, double helix, Douglas Engelbart, Douglas Engelbart, Edmond Halley, Gary Taubes, hypertext link, invisible hand, Isaac Newton, Johannes Kepler, Jony Ive, knowledge economy, lone genius, Louis Pasteur, Mark Zuckerberg, Menlo Park, Mother of all demos, Murray Gell-Mann, PageRank, Peter Thiel, Philip Mirowski, Pierre-Simon Laplace, prediction markets, pre–internet, Ralph Waldo Emerson, RAND corporation, random walk, Richard Feynman, Richard Thaler, side project, Silicon Valley, six sigma, Solar eclipse in 1919, stem cell, Steve Jobs, Steve Wozniak, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tim Cook: Apple, tulip mania, Wall-E, wikimedia commons, yield management

All teams are different. Yet some rules that describe what happens when many people come together to accomplish tasks seem to work pretty well. The rules of efficient markets, invisible hands, and so on. Those have been established and tested beyond any doubt, right? Well, sort of. This is Alan Greenspan, the economist who chaired the US Federal Reserve for nineteen years, writing in the Financial Times in 2011: Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates. Here’s the problem: analyzing markets except for the “notably rare exceptions” of bubbles and crashes is like analyzing the weather except for storms and droughts.

Not all economists, to be fair, agreed with Greenspan. One extended his logic to the analysis of diplomacy: “With notably rare exceptions, Germany remained largely at peace with its neighbors during the 20th century.” Greenspan’s view, however, that efficient markets and invisible hands are fundamental laws that are rarely, if ever, violated is widespread. But it’s a fallacy. That fallacy is a common cause of policy disasters (or investment opportunities, if you are a trader). Neither efficient markets nor invisible hands are fundamental laws. They are both emergent properties. Emergent properties are collective behaviors: dynamics of the whole that don’t depend on the details of the parts, the macro that rises above the micro. Molecules will flow at high temperatures and freeze at low temperatures regardless of the differences in their details.

But in the aggregate, as Sherlock Holmes might say, the likelihood that any group will experience a phase transition becomes a mathematical certainty. The terrific thing about the science of emergence is that once we understand a phase transition, we can begin to manage it. We can design stronger materials, build better highways, create safer forests—and engineer more innovative teams and companies. * * * So what does all of this tell us about Mr. Greenspan and the widespread belief in the almighty invisible hand? The confidence in the infallibility of the invisible hand is a consequence, to come back to our Newton-Jobs theme from the prior chapter, of false idolatry. For two hundred years we have been bowing down to the wrong seventeenth-century physicist. To see what I mean, let’s travel back to a summer day in Britain two centuries ago. On Sunday, July 11, 1790, as he lay dying in his home in Edinburgh, a revered Scottish philosopher, who would become famous for ideas he did not believe and a phrase he did not invent, sent for two friends.


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The Greed Merchants: How the Investment Banks Exploited the System by Philip Augar

Andy Kessler, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, business cycle, buttonwood tree, buy and hold, capital asset pricing model, commoditize, corporate governance, corporate raider, crony capitalism, cross-subsidies, financial deregulation, financial innovation, fixed income, Gordon Gekko, high net worth, information retrieval, interest rate derivative, invisible hand, John Meriwether, Long Term Capital Management, Martin Wolf, new economy, Nick Leeson, offshore financial centre, pensions crisis, regulatory arbitrage, Sand Hill Road, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, Telecommunications Act of 1996, The Chicago School, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, tulip mania, value at risk, yield curve

The markets culture demands short term results and sees buying and selling as the way to get them. Enron is an extreme case, but its journey from being an energy supplier into an energy trader symbolizes the change in corporate values. It remains to be seen whether the markets culture can produce long term companies. Whatever Happened to the Invisible Hand? Adam Smith, the eighteenth-century father of modern economic theory, was not perturbed by the likelihood of collusion in free markets. He believed that the businessman is ‘led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest he frequently promotes that of society.’17 Adam Smith’s belief that conspiracy and contrivance would result in the public good is neatly summed up by another British economist called Smith, the journalist David Smith: ‘The point was that the market did not let them get away with it, or at least not for long.

Attempts by groups of firms to fix prices by agreement – forming a cartel – would fail as long as it was possible for new firms to enter the market and undercut them. The invisible hand is the market, and through its operation the best possible or optimum outcome is achieved.’18 Adam Smith’s theories are very popular with the investment banks. They support non-intervention and deregulation, the policies that create the best possible climate for them and justify their prices, profits and place in society. After all, if prices and profits were too high, the market would force them down and if output was poor, the market would drive it up. Supporters have been quick to claim victory for the invisible hand, arguing that the bear market had fundamentally weakened the investment bank’s position.19 This may yet prove to be so, but, given the investment banks’ power and resourcefulness, it would be as well to keep an eye on how they fare compared to other market participants.

Galbraith1 Contents Acknowledgements Foreword to the paperback edition Preface PART 1: Introduction 1. The Trusted Adviser Takes a Fall 2. The Age of Deception PART 2: Is There a Cartel? 3. The Blessing of the Leviathans 4. Heads We Win 5. Tails You Lose 6. The Sound of Silence PART 3: What Really Goes On 7. The Edge 8. Voodoo Management 9. The Big Squeeze PART 4: Whatever Happened to the Invisible Hand? 10. Does It Matter? 11. The Greed Merchants 12. Here’s to the Next Time Notes Index Acknowledgements This book originated in a paper I delivered at a seminar organized by the London School of Economics Financial Markets Group in September 2001. I am grateful to Sir Geoffrey Owen and John Plender for inviting me to speak there, thus getting the ball rolling. I have carried out a large number of interviews with investment bankers and brokers, their corporate and institutional customers and their regulators in the United States and Britain.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

The complex voluntary cooperation which exists beneath the surface of our daily economic life was called the invisible hand by Adam Smith. It is the interdependence of people far-flung and unknown to each other which is the most difficult thing to grasp about economics. It is wondrous that the myriad separate decisions made by millions of individuals about what to buy and what to sell, what to produce, which job to take and where to study ultimately hang together to ensure that when you go to the shops there are things to buy that you want, that there are jobs to go to for most of us and that the same will be the case tomorrow. It is as if, as Adam Smith said, an invisible hand is guiding us. The invisible hand is not always benevolent. It may also work adversely. Why else would the bankruptcy of a New York firm, Lehman’s, cause unemployment in Lancashire?

But if an apple had its own volition, it might well have decided not to come down but to go back up to its perch. The subject matter of economics consists of individuals with volition. unlike the subjects of natural science. The economist’s hope is that while individual agents may have their own reasons for behaving any way they like, as a group their behavior will show some regularity and predictability. Devices such as the invisible hand are ways of coping with this complexity so that we can grasp its working. Adam Smith’s other powerful idea was that in order to generate and guarantee prosperity, there should be minimal restrictions on people’s choices. Governments should stick to providing law and order, guarantee secure property rights, create fair and broad-based taxes, spend prudently on matters such as education and infrastructure, and keep the budget in balance.

The fashionable doctrine in those days was of God as a Clockmaker. God did not intervene in the mundane affairs of the people on earth. He set the universe in motion as if it were a highly sprung and delicate clock which then worked away on its own as the pendulum swung back and forth. This was a non-interfering God who set the rules of the game and then let people play it according to their wishes and ability. The invisible hand was a similar idea of a sort of secular rather than divine mechanism to coordinate the myriad activities of separate individuals, buying and selling, working and saving, investing and exporting. But no one is actually in charge; we all are on our separate ways. The idea of society as a self-organizing entity that Smith and the Scottish Enlightenment gifted to posterity comes from such notions about how the world works.


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Why Government Is the Problem by Milton Friedman

affirmative action, Bretton Woods, floating exchange rates, invisible hand, rent control, urban renewal

Again, let me emphasize, the problem is not that bureaucrats are bad people. The problem, as the Marxists would say, is with the system, not with the people. The self-interest of people in government leads them to behave in a way that is against the self-interest of the rest of us. You remember Adam Smith's famous law of the invisible hand: People who intend only to seek their own benefit are "led by an invisible hand to serve a public interest which was no part of" their intention. I say that there is a reverse invisible hand: People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention. I believe our present predicament exists because we have gradually developed governmental institutions in which the people effectively have no voice. A recent study by James Payne brought this home to me very clearly.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

"Robert Solow", affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, plutocrats, Plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

These stories, embellished by oft told vignettes of newly successful people, and in their mostly justified enthusiasm for expanded free markets, led to too much economic tolerance. Underlying this revolution is the powerful principle of the “invisible hand”—that market forces should be the fundamental framework of resource allocation. Recognition of this principle has produced the surge of economic growth that has defined our age. And yet, today, with the recent economic crisis, unregulated free markets are being questioned. We believe that the unvarnished invisible hand story, although right in a fundamental way, is wrong at the level of detail and approximation that is necessary to explain what we need to know about macroeconomies. The old story about capitalism is correct: it gives us what we think we want.

According to this classical economics, private markets, of their own accord and with no government interference, would, “as if by an invisible hand,” assure full employment. According to the classical logic in its simplest form, if a worker was willing to work for less than she was able to produce, an employer could make a profit by giving her a job. The folks with these views urged the balancing of budgets and insisted on minimal government regulation. On the other end of the spectrum in 1936 were the socialists. They thought that recovery from the joblessness of the 1930s could be accomplished only if the government took over business. It would then eliminate joblessness by doing the hiring itself. But Keynes took a more moderate approach. In his view the economy is not just governed by rational actors, who “as if by an invisible hand” will engage in any transaction that is to their mutual economic benefit, as the classicists believed.

Historians may disagree with us on the details of these changes of story, but since much of history is about such shifts, they are unlikely to argue with us about their existence. Nor are they likely to disagree with us about the most recent such shift, coinciding with the election of Ronald Reagan. At that time the explanation of how the economy worked turned to the conservative image with which we began this book, the “invisible hand.” This shift was, of course, not just an American phenomenon. Britain had elected Margaret Thatcher eighteen months earlier. Other countries, from India to China to Canada, would follow, sometimes zealously so. The story of the “invisible hand” and its consequences gives surprisingly detailed prescriptions regarding the role of government, even pertaining to questions of great specificity. But now people are asking these questions anew. Here is a small sampling: How can we allow people of varying abilities and financial sophistication to express their preferences for investments without making them vulnerable to sales-people selling “snake oil”?


pages: 376 words: 118,542

Free to Choose: A Personal Statement by Milton Friedman, Rose D. Friedman

affirmative action, agricultural Revolution, air freight, back-to-the-land, bank run, banking crisis, business cycle, Corn Laws, Fractional reserve banking, full employment, German hyperinflation, invisible hand, means of production, minimum wage unemployment, oil shale / tar sands, oil shock, price stability, Ralph Nader, RAND corporation, rent control, road to serfdom, Sam Peltzman, school vouchers, Simon Kuznets, The Wealth of Nations by Adam Smith, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration

One government policy after another has been set up to "regulate" our "pursuits of industry and improvement," standing Jefferson's dictum on its head (Chapter 7). These developments have been produced by good intentions with a major assist from self-interest. Even the strongest supporters of the welfare and paternal state agree that the results have been disappointing. In the government sphere, as in the market, there seems to be an invisible hand, but it operates in precisely the opposite direction from Adam Smith's: an individual who intends only to serve the public interest by fostering government intervention is "led by an invisible hand to promote" private interests, "which was no part of his intention." That conclusion is driven home again and again as we examine, in the chapters that follow, the several areas in which government power has been exercised—whether to achieve security (Chapter 4) or equality (Chapter 5), to promote education (Chapter 6), to protect the consumer (Chapter 7) or the worker (Chapter 8), or to avoid inflation and promote employment (Chapter 9).

So far, in Adam Smith's words, "the uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived," has been "powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of governments and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor."3 So far, that is, Adam Smith's invisible hand has been powerful enough to overcome the deadening effects of the invisible hand that operates in the political sphere. The experience of recent years—slowing growth and declining productivity—raises a doubt whether private ingenuity can continue to overcome the deadening effects of government control if we continue to grant ever more power to government, to authorize a "new class" of civil servants to spend ever larger fractions of our income supposedly on our behalf.

The obvious inefficiencies that have resulted from the command system have led to much discussion by planners in socialist countries—Russia, Czechoslovakia, Hungary, China—of the possibility of making greater use of the market in organizing production. At a conference of economists from East and West, we once heard a brilliant talk by a Hungarian Marxist economist. He had rediscovered for himself Adam Smith's invisible hand—a remarkable if somewhat redundant intellectual achievement. He tried, however, to improve on it in order to use the price system to transmit information and organize production efficiently but not to distribute income. Needless to say, he failed in theory, as the communist countries have failed in practice. A BROADER VIEW Adam Smith's "invisible hand" is generally regarded as referring to purchases or sales of goods or services for money. But economic activity is by no means the only area of human life in which a complex and sophisticated structure arises as an unintended consequence of a large number of individuals cooperating while each pursues his own interests.


pages: 565 words: 151,129

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism by Jeremy Rifkin

"Robert Solow", 3D printing, active measures, additive manufacturing, Airbnb, autonomous vehicles, back-to-the-land, big-box store, bioinformatics, bitcoin, business process, Chris Urmson, clean water, cleantech, cloud computing, collaborative consumption, collaborative economy, Community Supported Agriculture, Computer Numeric Control, computer vision, crowdsourcing, demographic transition, distributed generation, en.wikipedia.org, Frederick Winslow Taylor, global supply chain, global village, Hacker Ethic, industrial robot, informal economy, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invisible hand, Isaac Newton, James Watt: steam engine, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Julian Assange, Kickstarter, knowledge worker, longitudinal study, Mahatma Gandhi, manufacturing employment, Mark Zuckerberg, market design, mass immigration, means of production, meta analysis, meta-analysis, natural language processing, new economy, New Urbanism, nuclear winter, Occupy movement, off grid, oil shale / tar sands, pattern recognition, peer-to-peer, peer-to-peer lending, personalized medicine, phenotype, planetary scale, price discrimination, profit motive, QR code, RAND corporation, randomized controlled trial, Ray Kurzweil, RFID, Richard Stallman, risk/return, Ronald Coase, search inside the book, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, smart cities, smart grid, smart meter, social web, software as a service, spectrum auction, Steve Jobs, Stewart Brand, the built environment, The Nature of the Firm, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, transaction costs, urban planning, Watson beat the top human players on Jeopardy!, web application, Whole Earth Catalog, Whole Earth Review, WikiLeaks, working poor, zero-sum game, Zipcar

Nor could he have foreseen that the petrochemicals used to extrude the polyethylene would emit carbon dioxide and play a key role in altering the climate of the planet. Reflecting on my own father’s career, it is clear to me that the invisible hand that Adam Smith alluded to 237 years ago in The Wealth of Nations is really not all that invisible. It’s the entrepreneurial spirit that drove my dad and countless other entrepreneurs to innovate, reduce marginal costs, bring cheaper products and services to the market, and spur economic growth. That entrepreneurial spirit is now taking us to near zero marginal costs and into a new economic era of history where more goods and services will be nearly free and shared on a Collaborative Commons. For those who were long skeptical of the operating assumptions of the invisible hand of supply and demand, the approach of a near zero marginal cost society—the optimum efficient state—is “visible” proof that the system first described by Smith did indeed work, in part, although I would add four caveats.

For those who were long skeptical of the operating assumptions of the invisible hand of supply and demand, the approach of a near zero marginal cost society—the optimum efficient state—is “visible” proof that the system first described by Smith did indeed work, in part, although I would add four caveats. First, the invisible hand was often slowed or blocked altogether for long periods of time by the inevitable concentration of monopoly power that continually thwarted innovation in virtually every commercial sector. Second, the invisible hand did little to ensure that the increase in productivity and profits was shared with the workforce that jointly created the largesse. The workers had to fight management at every step of the journey by organizing themselves into trade unions and political lobbies to ensure a fair return on their labor. Third, while capitalism dramatically improved the lives of everyone inside the system, its track record at the margins of the system, where human resources were, more often than not, ruthlessly exploited to benefit those cocooned inside, was horrendous by any reasonable standard.

Third, while capitalism dramatically improved the lives of everyone inside the system, its track record at the margins of the system, where human resources were, more often than not, ruthlessly exploited to benefit those cocooned inside, was horrendous by any reasonable standard. And fourth, the operating logic of the invisible hand of supply and demand never extended beyond the confines of the market mechanism itself and was, therefore, never able to account for the damage that the capitalist system inflicted on the larger environment from which it drew its raw materials and where it dumped its wastes. Still, Smith’s invisible hand proved to be a formidable social force, but not for the philosophical reasons he put forth. Smith’s theory revolves around the notion that in a market economy each individual pursues his or her own self-interest in the acquisition and exchange of property, without any intention of promoting the public interest, and by doing so, “inadvertently” advances the general well-being of society as a whole.


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Giving the Devil His Due: Reflections of a Scientific Humanist by Michael Shermer

Alfred Russel Wallace, anthropic principle, anti-communist, barriers to entry, Berlin Wall, Boycotts of Israel, Chelsea Manning, clean water, clockwork universe, cognitive dissonance, Colonization of Mars, Columbine, cosmological constant, cosmological principle, creative destruction, dark matter, Donald Trump, Edward Snowden, Elon Musk, Flynn Effect, germ theory of disease, gun show loophole, Hans Rosling, hedonic treadmill, helicopter parent, hindsight bias, illegal immigration, income inequality, invisible hand, Johannes Kepler, Joseph Schumpeter, laissez-faire capitalism, Laplace demon, luminiferous ether, McMansion, means of production, mega-rich, Menlo Park, moral hazard, moral panic, More Guns, Less Crime, Peter Singer: altruism, phenotype, positional goods, race to the bottom, Richard Feynman, Ronald Coase, Silicon Valley, Skype, social intelligence, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, WikiLeaks, working poor, Yogi Berra

Adam Smith, The Wealth of Nations, 1776 It may be said that natural selection is daily and hourly scrutinising, throughout the world, every variation, even the slightest; rejecting that which is bad, preserving and adding up all that is good; silently and insensibly working, whenever and wherever opportunity offers, at the improvement of each organic being in relation to its organic and inorganic conditions of life. Charles Darwin, On the Origin of Species, 1859 These descriptors – invisible hand and natural selection – are so powerful, and so deeply annealed into our thought and culture, that it is difficult not to think of them as forces of nature, such as gravity and electromagnetism, or as mechanical systems, such as gears and pulleys. But they are not forces or mechanisms, because there is nothing acting on the agents in the system in such a causal manner. Instead, Smith’s invisible hand and Darwin’s natural selection are descriptions of processes that naturally occur in the economies of nature and society. The causal mechanisms behind the invisible hand and natural selection lie elsewhere in the system – within the agents themselves – which is why Smith invested so much work on understanding the natural sympathies of people, and Darwin advanced so much effort toward comprehending the natural tendencies of organisms.

Carey, Toni Vogel. 1998. “The Invisible Hand of Natural Selection, and Vice Versa.” Biology & Philosophy, 13:3, 427–442. Ghiselin, Michael T. 1974. The Economy of Nature and the Evolution of Sex. Berkeley: University of California Press. Gould, Stephen Jay. 1980. “Darwin’s Middle Road.” In The Panda’s Thumb. New York: W.W. Norton, 59–68. Gould, Stephen Jay. 1993. “Darwin and Paley Meet the Invisible Hand.” In Eight Little Piggies. New York: W.W. Norton, 138–152. Khalil, Elias L. 1997. “Evolutionary Biology and Evolutionary Economics.” Journal of Interdisciplinary Economics, 8(4), 221–244. Schweber, Silvan S. “Darwin and the Political Economists: Divergence of Character,” Journal of the History of Biology, 13, 195–289. Ahmad, Syed. 1990. “Adam Smith’s Four Invisible Hands.” History of Political Economy, Spring, 22(1), 137–144.

A decade later, upon his return home from the five-year voyage around the world on HMS Beagle, Darwin revisited these works, reconsidering their implications in light of the new theory he was developing.10 Although Darwin does not reference Smith directly, Darwin scholars are largely in agreement that he modeled his theory of natural selection after Smith’s theory of the invisible hand.11 Compare, by example, these two descriptions from Smith and Darwin: Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. 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. Adam Smith, The Wealth of Nations, 1776 It may be said that natural selection is daily and hourly scrutinising, throughout the world, every variation, even the slightest; rejecting that which is bad, preserving and adding up all that is good; silently and insensibly working, whenever and wherever opportunity offers, at the improvement of each organic being in relation to its organic and inorganic conditions of life.


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10% Less Democracy: Why You Should Trust Elites a Little More and the Masses a Little Less by Garett Jones

"Robert Solow", Andrei Shleifer, Asian financial crisis, business cycle, central bank independence, clean water, corporate governance, correlation does not imply causation, creative destruction, Edward Glaeser, financial independence, game design, German hyperinflation, hive mind, invisible hand, Jean Tirole, Kenneth Rogoff, Mark Zuckerberg, mass incarceration, minimum wage unemployment, Mohammed Bouazizi, open economy, Pareto efficiency, Paul Samuelson, price stability, rent control, The Wealth of Nations by Adam Smith, trade liberalization

But it is also just one consequence among many of Gurri’s crises of public authority. A world of ill-informed voters who have a strong desire to filter reality through their chosen lenses is close to a world where Keynes’s law is true: demand creates its own supply. If people want to see certain types of news stories—perhaps where my team is suffering unjustly and the other team isn’t playing fair—then an invisible hand, an act of entrepreneurship, will create such news stories. And when the invisible hand creates—or just reframes—news events, it never feels like fake news; it feels like a truth deeper than mere news, better than mere history. As the Batman says at the end of Christopher Nolan’s The Dark Knight, “Sometimes the truth isn’t good enough. Sometimes people deserve more.”¹⁶ All too often, citizens of rich democracies enter that world of better-than-truth.

And if there’s one great and wise lesson of economic thinking, it’s French economist Frédéric Bastiat’s from 1848: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”² So better economic policy choices are possible if there’s some social mechanism, some invisible hand, that spurs politicians to give real attention to invisible effects, effects that are unseen today but potentially foreseen. This chapter points toward such a mechanism—and it relies on voter forgetfulness. Backloading the Pork: A Sign of Voter Amnesia The theory that voters want to see visible results while, simultaneously, politicians try to provide voters with those visible results has been tested more formally and less anthropologically.

The University of Chicago’s Initiative on Global Markets (IGM) regularly surveys both leading economists around the world, as well as a separate European-focused group of economists on a variety of policy questions. Regardless of how the questions have been phrased in the past decade, both the global IGM panel and the European IGM panel have overwhelmingly agreed that reducing trade barriers is good for the nation that lowers them. Letting foreigners compete in your markets is good for you, partly because you get cheaper goods and partly because the invisible hand will move your nation’s workers over to more productive uses. Here’s a statement from 2016 that the IGM’s economists were asked to disagree or agree with: “Freer movement of goods and services across borders within Europe has made the average western European citizen better off since the 1980s.”⁶ Of the European economists surveyed, 68% strongly agreed and another 24% agreed—just about everybody.


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99%: Mass Impoverishment and How We Can End It by Mark Thomas

"Robert Solow", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, additive manufacturing, Albert Einstein, anti-communist, autonomous vehicles, bank run, banks create money, bitcoin, business cycle, call centre, central bank independence, complexity theory, conceptual framework, creative destruction, credit crunch, declining real wages, distributed ledger, Donald Trump, Erik Brynjolfsson, eurozone crisis, fiat currency, Filter Bubble, full employment, future of work, Gini coefficient, gravity well, income inequality, inflation targeting, Internet of things, invisible hand, Jeff Bezos, jimmy wales, job automation, Kickstarter, labour market flexibility, laissez-faire capitalism, light touch regulation, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, money: store of value / unit of account / medium of exchange, Nelson Mandela, North Sea oil, Occupy movement, offshore financial centre, Own Your Own Home, Peter Thiel, Piper Alpha, plutocrats, Plutocrats, profit maximization, quantitative easing, rent-seeking, Ronald Reagan, Second Machine Age, self-driving car, Silicon Valley, smart cities, Steve Jobs, The Great Moderation, The Wealth of Nations by Adam Smith, wealth creators, working-age population

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 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. The invisible hand of market forces is self-evidently a metaphor – nobody, not even the members of the Adam Smith Society, believes that there is a literal ‘invisible hand’ guiding our economy. Nevertheless, there is a problem: the phrase is so widely used, and so much taken for granted, that it is tempting to assume that the economy does indeed behave as though there were an invisible hand guiding every transaction in such a way as to produce the best possible outcome.

Metaphors are often taken literally There are also phrases that we use as though we are describing reality, when to take these phrases literally would make little sense. Familiarity with these metaphors can mean, however, that we fail to see that they are metaphors. Subconsciously, we feel as if they are describing reality – or at least a desirable future reality. Three widely used metaphors, with particular power to shape our thinking, are: the concept of the invisible hand of market forces; the notion of free markets; and the idea of economic laws. METAPHOR #1: THE INVISIBLE HAND OF MARKET FORCES We owe the concept of the invisible hand of market forces to Adam Smith and his book, An Enquiry into the Nature and Causes of the Wealth of Nations.18 In a much-cited passage, Smith says: As every individual, therefore, endeavours as much as he can, both to employ his capital in support of domestic industry, and so to direct that industry that its produce may be of greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can.

Often the pursuit of self-interest is of great benefit to society – when automotive manufacturers seek to profit from the possibilities of electric vehicles, for example, they simultaneously contribute to the possibility of a significant reduction in damaging atmospheric pollution. But when they programme their engine management software to cheat on emissions testing, they do not. As the discussion on free markets, below, makes clear, pursuit of self-interest can often be to the enormous detriment of society. The notion of an all-powerful invisible hand working for the greater good is hugely attractive. The reality of the world is that it requires a very visible hand to promote the interests of society. METAPHOR #2: FREE MARKETS The idea of free markets is not self-evidently a metaphor. Often when we use the phrase, we think that we are describing a possible, and indeed desirable, reality. But as the Cambridge economist Ha-Joon Chang has pointed out, there is no such thing as a free market: ‘Every market has some rules and boundaries that restrict freedom of choice.’19 The notion of a free market becomes extremely problematic if we attempt to take it literally.


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Fool Me Twice: Fighting the Assault on Science in America by Shawn Lawrence Otto

affirmative action, Albert Einstein, anthropic principle, Berlin Wall, Brownian motion, carbon footprint, Cepheid variable, clean water, Climategate, Climatic Research Unit, cognitive dissonance, Columbine, commoditize, cosmological constant, crowdsourcing, cuban missile crisis, Dean Kamen, desegregation, different worldview, double helix, energy security, Exxon Valdez, fudge factor, ghettoisation, global pandemic, Harlow Shapley and Heber Curtis, Harvard Computers: women astronomers, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Louis Pasteur, mutually assured destruction, Richard Feynman, Ronald Reagan, Saturday Night Live, shareholder value, sharing economy, smart grid, Solar eclipse in 1919, stem cell, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, University of East Anglia, War on Poverty, white flight, Winter of Discontent, working poor, yellow journalism, zero-sum game

—LORD CHRISTOPHER MONCKTON, 20101 HOUSTON, WE HAVE A PROBLEM “Whenever the people are well informed,” Thomas Jefferson wrote, “they can be trusted with their own government.”2 This sentiment lies at the heart of the American-style democracy that has for more than two centuries inspired the world. Much like the “invisible hand”3 that guides Adam Smith’s economic marketplace,* so too does the invisible hand of the people’s will guide the affairs of men and women through the democratic process. But today the invisible hand seems confused and indecisive. Congress seems paralyzed, unable to act on many key issues that increasingly threaten the economic and environmental vitality of the nation and the planet. Ideology and rhetoric increasingly guide policy discussion, often bearing little relationship to factual reality.

Hardin’s paper was remarkable because it offered such a sound rebuttal to the ideas of the Scottish economist Adam Smith, whose collaborator and mentor was David Hume. In 1776 Smith argued in The Wealth of Nations that in a shared economy, an individual, who “intends only his own gain,” was in effect “led by an invisible hand” to promote the greater public interest, since willing buyers and willing sellers will always arrive at a natural price for things, and the highest value and efficiency will be obtained. “Nor is it always the worse for the society that [the individual’s intention to do social good] 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.”2 The argument of the invisible hand was so well made that it has become an axiom of economics: Just get out of the way and let the market work. But, Hardin asked, did the same reasoning still hold true in the economics not of 1768, when the world seemed unlimited, but of 1968?

But we may also slip into decline, sliding day by day, almost without notice, into an environmental and economic morass, resentful and angry with each other over what we are losing, not realizing it is because of our own actions. For health and prosperity to continue, science can no longer be separated from policy making, religion, and economics. In this new age of connectivity, these four great houses of power must learn to work more closely together. But can they? THE SILENCE OF THE INVISIBLE HAND Science provides us with increasingly clear pictures of how to solve our great challenges, but policy makers are increasingly unwilling to pursue many of the remedies science presents. Instead, they take one of two routes: Deny the science, or pretend the problems don’t exist. In fact, political and religious institutions the world over are experiencing a reactionary pull-back from science and reason that is threatening planetary stability and long-term viability at the very time we need science the most, and nowhere in the world is this pullback more pronounced than in the United States.


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Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, tulip mania, wage slave

The two big factors that distinguished Athens from most prior ancient societies were the reliance on maritime trade and the development of a unique governance system. Athens in classical antiquity was quite different from the early Sumerian city-states. Despite its magnificent Acropolis, it was not centered on a temple-based, local, agricultural redistribution system. The overseas grain trade relied in part on the invisible hand to attract risk capital—both wealth and human-risk capital. The invisible hand played an important role in creating an incentive structure to pull grain toward the city to replace the grain it could not produce on its own. That said, Athens was not simply a laissez-faire society. Strict regulatory constraints prevented grain re-exports and the financing of non-Athenian grain trade. The secondary sale and storage of grain were likewise restricted.

To make these audacious economic models work required a novel financial structure. Athens and Rome had to make grain flow toward the center. The economy had to motivate farmers overseas to grow grain for export, to motivate sailors and captains to risk their lives to bring the grain, to motivate investment in ships and trade goods, and to create a system of payment that was robust to uncertainties of international commerce. The solutions involved the invisible hand of the market, financial technologies for dealing with the unpredictability of the sea, and a monetary economy that relied on universally accepted measures of value. Much of what we know about the ancient Athenian financial system comes from surviving judicial orations. The courts themselves were key elements in the financial system. The Athenian court system resolved disputes between plaintiffs and defendants through trial by jury.

No doubt Anytus was well meaning—perhaps he expected that the collusion would give the dealers greater leverage in negotiations with importers—however, the prosecutor in the trial recognized that the cartel would have a long-term detrimental effect. Merchants would no longer ship grain to Athens if they could not obtain a fair market price. As the Greek orator Lysias, the author of the prosecutor’s closing argument, put it: If you condemn them you will do what is just and make corn cheaper; if you acquit them you make it dearer.4 His argument was that the crucial flow of grain would shift elsewhere in response to the invisible hand of the market, making corn (i.e., grain) dearer. Investors in the grain trade would no longer make loans on grain voyages if prices at the dock were too low. Captains would have little incentive to brave the risks of sea if they could not sell their cargo at a profit. The text of the trial is incomplete. We do not know the fate of the grain dealers, but the trial is famous as the earliest evidence of antitrust prosecution.


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Hive Mind: How Your Nation’s IQ Matters So Much More Than Your Own by Garett Jones

centre right, clean water, corporate governance, David Ricardo: comparative advantage, en.wikipedia.org, experimental economics, Flynn Effect, Gordon Gekko, greed is good, hive mind, invisible hand, Kenneth Arrow, law of one price, meta analysis, meta-analysis, prediction markets, Robert Gordon, Ronald Coase, Saturday Night Live, social intelligence, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thorstein Veblen, wikimedia commons, zero-sum game

And that’s true enough, but you have no influence over whether those other nineteen people bring chips or casseroles, so why not do what’s best for yourself: chips it is. This is one example of the famous “prisoner’s dilemma,” in which individual greed leads to an awful group outcome. Prisoner’s dilemmas are everywhere, and they’re the precise opposite of Adam Smith’s famous “invisible hand,” in which individual greed leads to a positive group outcome. Invisible hands and prisoner’s dilemmas are both at work in the world: sometimes, as Gordon Gekko said in the movie Wall Street, “Greed is good,” and sometimes greed creates misery. In this and the next chapter, we’ll see how greed can create misery, and we’ll see how higher-IQ groups are just a bit more likely to find a way to cooperate, a bit more likely to avoid the prisoner’s dilemma.

How do honeybees and ants share information and collaborate to build vast structures and complex economies that no one insect could ever build alone? Indeed, human society in every nation today is a form of collective intelligence, in which the accumulated knowledge of the past makes its members richer today, and in which the many small, daily cognitive contributions of millions of their neighbors—in offices, in factories, in the halls of government, and elsewhere—help to make their lives better as if by Adam Smith’s invisible hand. Those millions of small cognitive contributions are what create each nation’s collective intelligence, each nation’s hive mind. Members of society all draw on that collective intelligence, they all get benefits from the hive mind that they never pay for, benefits that, by my lights at least, they don’t deserve. And it’s typically better to be the less-skilled honeybee in the highly productive hive than to be the highly skilled honeybee in the less-productive hive: your neighbors have an important influence on what you can accomplish.

Kremer notes that a lot of the modern economy works like this vase company: computer chips with tiny errors are worthless and get thrown out; clothes with small mistakes in stitching get sent to discount stores and sell for a fraction of full price. In an O-ring economy, the clichés are true: a chain is only as strong as its weakest link; for want of a nail a battle can be lost. But Kremer goes beyond these obvious points to draw some surprising conclusions. Perhaps the most important one is that business owners will naturally—by an invisible hand—put highly skilled workers together on the most valuable projects and put lower-skilled workers together on the less valuable projects. The lower-skilled workers will earn lower wages, since they are less productive, but they won’t be just a little less productive: they’ll be a lot less productive. And we can go even further: even if the economy were run by a benevolent dictator, one who just wanted to make everyone as productive as possible, she would do the same thing, sorting workers with more skill together in one firm and sorting workers with less skill together in another firm.


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Reinventing the Bazaar: A Natural History of Markets by John McMillan

"Robert Solow", accounting loophole / creative accounting, Albert Einstein, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, corporate raider, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantage.” Guided by prices, people make their choices. Goods get produced and delivered to the people who want and can pay for them. Self-interest is harnessed to the greater good. Intending only his own gain, a producer or a buyer is “led by an invisible hand,” Smith famously concluded, “to promote an end which was no part of his intention.”10 The metaphor of the invisible hand Smith formulated in 1776 is the classic account of what drives a market economy. It was nearly two centuries before Adam Smith’s insight was taken beyond the metaphor of the invisible hand and given a rigorous theoretical foundation. Are competitive markets able to harmonize the actions of millions? Léon Walras took the first big step toward answering this question in the late nineteenth century, formulating a mathematical model of an economy in which, for each good or service in the economy, there was an equation representing the balance of supply and demand.

Glickman, Mark M. 2001 “Beyond Gas Taxes,” Redefining Progress. www.rprogress.org. Goldman, Eitan, and Gorton, Gary. 2000. “The Visible Hand, the Invisible Hand, and Efficiency.” Working paper 7587, National Bureau of Economic Research, Washington, D.C. Grafton, R. Quentin, Squires, Dale, and Fox, Kevin J. 2000. “Private Property and Economic Efficiency: A Study of a Common-Pool Resource.” Journal of Law and Economics 43, 679–714. Grafton, R. Quentin, Squires, Dale, and Kirkley, James E. 1996. “Private Property Rights and Crises in World Fisheries.” Contemporary Economic Policy 14, 89–99. Grampp, William D. 2000. “What Did Smith Really Mean by the Invisible Hand?” Journal of Political Economy 108, 441–465. Green, W. M. 1989. “Early Cuneiform.” Wayne W. Senner, ed., In The Origins of Writing.

The essence of life is infinitely and mysteriously multiform, and therefore it cannot be contained or planned for, in its fullness and variability, by any central intelligence.”6 Some have invoked the supernatural to explain what they find extraordinary: that markets can work with no one in charge. The Reverend Richard Whately, a professor of political economy at Oxford University in the eighteenth century, believed the coherence of the market to be proof that God exists. If no human planner is guiding the market to the optimal outcome, God must be. The invisible hand is the hand of God. A religious fervor characterizes some of today’s fans of the free market. “The true spirit capital of the current capitalist economy is not material. It is moral, intellectual, and spiritual,” declared George Gilder, an evangelist for libertarianism. He also said that entrepreneurship “most deeply springs from religious faith and culture” and that entrepreneurs “embody and fulfill the sweet and mysterious consolations of the Sermon on the Mount.”


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Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

affirmative action, Airbnb, Albert Einstein, Andrei Shleifer, Bernie Sanders, Boeing 737 MAX, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, Donald Trump, en.wikipedia.org, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, income inequality, income per capita, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta analysis, meta-analysis, Milgram experiment, mortgage debt, Network effects, out of africa, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, winner-take-all economy

Chapter 1 First Overdose The Race to the Bottom Two centuries after his death, the Scottish economist Adam Smith might still be the most powerful man in the world. Although he only used the term a few times in his writing, Smith’s “invisible hand” became one of social science’s most well-known metaphors, and the foundational principle of a lot of complex economic systems. Everything from the price you pay for an apple at your local bodega to the machinations of multilateral international trade wars is influenced by a key assumption underlying Smith’s theory. That assumption is that society is merely the sum of individuals—from which we can conclude that if each person acts to maximize his or her own well-being, this will inevitably maximize the overall well-being of society. With that everyone wins. Abracadabra! When the invisible hand casts its magic wand we end up with a competitive “race to the top,” a race that benefits each individual and the community as a whole.

Going beyond this point (to the right) by adding one more variety, Elderflower Gin Liqueur, for example, means that the additional cost to the retailer will exceed the resulting benefit. A canny, competitive retailer knows when the line has been crossed and doesn’t go there. So, in competitive markets we can expect the invisible hand to deliver the optimal level of choices—whether for gin, tonic, retirement plans, or jams. Not too few, not too many. So far so good. We crave choice, competition delivers the right amount of variety, and we pick what best suits our needs. So, where’s the overdose? Well, here it comes . . . Turns out that the invisible hand—and the retailers it presumably guides in their decisions—doesn’t always know when the line has been crossed. Choice Overload—Too Much of a Good Thing . . . In the television show Frasier, Niles questions his brother on whether he needs so many musicians for his concert.

(speech, Cambridge University, Cambridge, England, May 1, 2014), Vital Speeches of the Day, 80, no. 7: 243–246. 16.Sheila Bair, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself (New York: Free Press, 2012); Associated Press, “Greenspan Admits ‘Mistake’ That Helped Crisis,” NBC News, October 23, 2008, http://www.nbcnews.com/id/27335454/ns/business-stocks_and_economy/t/greenspan-admits-mistake-helped-crisis/. 17.Paul Krugman, “Hiding behind the Invisible Hand,” The Conscience of a Liberal (blog), New York Times, March 22, 2008, https://krugman.blogs.nytimes.com/2008/03/22/hiding-behind-the-invisible-hand/. 18.Paul Krugman, “Blindly into the Bubble,” New York Times, December 21, 2007, https://nyti.ms/2N4F1sv. 19.Financial Crisis Inquiry Report, xvii. 20.Associated Press, “Greenspan Admits ‘Mistake.’” 21.Administration of Barack Obama, Weekly Address: Ensuring Our Free Market Works for Everyone, 2016 Daily Comp. Presidential Documents 1 (April 16, 2016), https://obamawhitehouse.archives.gov/the-press-office/2016/04/16/weekly-address-ensuring-our-free-market-works-everyone. 22.President George W.


pages: 75 words: 22,220

Occupy by Noam Chomsky

corporate governance, corporate personhood, deindustrialization, Howard Zinn, income inequality, invisible hand, Martin Wolf, Nate Silver, Occupy movement, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, Ralph Nader, Ronald Reagan, too big to fail, union organizing

Adam Smith considered the possibility that merchants and manufacturers in England might decide to do their business abroad—invest abroad and import from abroad. He said they would profit, but England would be harmed. However, he went on to say that the merchants and manufacturers would prefer to operate in their own country—what’s sometimes called a “home bias.” So, as if by “an invisible hand,” England would be saved from the ravages of what is now called neoliberal globalization. That’s a pretty hard passage to miss. In his classic Wealth of Nations, that’s the only occurrence of the phrase, “invisible hand.” Maybe England would be saved from neoliberal globalization by an “invisible hand.” The other great classical economist, David Ricardo, recognized the same thing and hoped that it wouldn’t happen—kind of a sentimental hope—and it didn’t for a long time. But now it is happening. Over the last thirty years that’s exactly what has been underway.

So yes, it’s a highly democratic conception of a structured, organized society with power at the base. It doesn’t mean that it doesn’t have representatives—it can have, but they should be recallable and under the influence and control of participants. Who’s in favor of a society like that? You can say Adam Smith, for example, who believed—you can question whether his beliefs were accurate, but he believed—that market systems and the “invisible hand” of individual choices would lead to egalitarian societies of common participation. You can question the logic of the argument, but the goals are understandable and they go far back. You can find them in the first serious book of politics that was ever written, Aristotle’s Politics. When Aristotle evaluated various kinds of systems, he felt that democracy was the least bad of them. But he said democracy wouldn’t work unless you could set things up so that they would be relatively egalitarian.


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

4chan, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, blockchain, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, corporate governance, corporate raider, creative destruction, crowdsourcing, Danny Hillis, data acquisition, deskilling, DevOps, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, full employment, future of work, George Akerlof, gig economy, glass ceiling, Google Glasses, Gordon Gekko, gravity well, greed is good, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, move fast and break things, Network effects, new economy, Nicholas Carr, obamacare, Oculus Rift, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, strong AI, TaskRabbit, telepresence, the built environment, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

Uber’s aggressive tactics have earned them many enemies, and they have ignored one of the key rules of the modern connected company: as O’Reilly Media President and Chief Operating Officer Laura Baldwin is fond of saying, “Your customers are your conscience.” THE INVISIBLE HAND Many simplistic apologists for the capitalist system celebrate disruption and assume that while messy, everything will work out for the best if we just let “the invisible hand” of competition do its work. This is true, if we correctly understand the invisible hand. The law of supply and demand is not describing some magical force, but the way that players of the game fight for competitive advantage. As Adam Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

In short, these are systems of collective intelligence that use algorithms to aggregate the collective knowledge and decisions of millions of individual humans. And that, of course, is also the classical conception of “the market”—the system by which, without any central coordination, prices of goods and labor are set, buyers and sellers are found for all of the fruits of the earth and the products of human ingenuity, guided as if, as Adam Smith famously noted, “by an invisible hand.” But is the invisible hand of a market of self-interested human merchants and human consumers the same as a market in which computer algorithms guide and shape those interests? COLLECTIVE INTELLIGENCE GONE WRONG Algorithms not only aggregate the intelligence and decisions of humans; they also influence and amplify them. As George Soros notes, the forces that shape our economy are not true or false; they are reflexive, based on what we collectively come to believe or know.

To be clear, government as a platform most emphatically doesn’t mean outsourcing government programs to the private sector. It does mean strategically identifying what building blocks are essential for government to provide, and providing those services, but not so many that they crowd out opportunity for the marketplace participants. I had read a remarkable paper called “Government Data and the Invisible Hand,” published in the January 2009 issue of the Yale Journal of Law & Technology by David Robinson, Harlan Yu, William P. Zeller, and Edward W. Felten. The paper argues that the government should get out of the business of building websites for citizens. If that call sounds familiar, you’ve probably heard it in the context of critics charging that government is not competent at building technology and would be much better off outsourcing everything to government contractors.


pages: 131 words: 41,052

Why Europe Will Run the 21st Century by Mark Leonard

Berlin Wall, Celtic Tiger, continuous integration, cuban missile crisis, different worldview, European colonialism, facts on the ground, failed state, global reserve currency, invisible hand, knowledge economy, mass immigration, non-tariff barriers, North Sea oil, one-China policy, Panopticon Jeremy Bentham, pension reform, reserve currency, Robert Gordon, shareholder value, South China Sea, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, Washington Consensus

For France, German containment was the key goal, backed up by the prospects for economic growth which access to German markets and productive capacity offered – what Jacques Delors described as the marriage contract on which the EEC was founded.5 All of these were calculations of national interest, and yet the outcome of their filtering through Monnet’s European institutions was a solution to the problem of European conflict.6 In Europe today, war is not simply undesirable – it is inconceivable. The founder of liberal economics, Adam Smith, developed the evocative idea of the ‘invisible hand’ of the market to explain how a system of perfect liberty, operating under the drives and constraint of human nature and intelligently designed institutions, would give rise to an orderly society rather than a ‘war of all against all’.7 In many ways, Monnet’s genius was to develop a ‘European invisible hand’ that allows an orderly European society to emerge from each country’s national interest. 8 And that is possibly the most powerful element of Monnet’s vision: he did not try to abolish the nation-state or nationalism – simply to change its nature by pooling sovereignty.

Why Europe Will Run the 21st Century Mark Leonard For Dick, Irène, Miriam and Gabrielle Table of Contents Cover Page Title Page INTRODUCTION The Power of Weakness and the Weakness of Power: Why Europe Will Run the Twenty-First Century CHAPTER 1 Europe’s Invisible Hand CHAPTER 2 ‘Divided We Stand, United We Fall’ CHAPTER 3 Europe’s Weapon is the Law CHAPTER 4 The Revolutionary Power of Passive Aggression CHAPTER 5 The European Way of War CHAPTER 6 The Stockholm Consensus CHAPTER 7 The European Rescue of National Democracy CHAPTER 8 Europe at 50 CHAPTER 9 Brussels and the Beijing Consensus CHAPTER 10 The End of the American World Order CHAPTER 11 The Regional Domino Effect APPENDIX The 109 Countries of the Eurosphere NOTES Acknowledgements About the Author Copyright About the Publisher INTRODUCTION The Power of Weakness and the Weakness of Power: Why Europe Will Run the Twenty-First Century In the middle of Pennsylvania Avenue in Washington a middle-aged woman with a weather-beaten face and a brown wig sits on a milk crate.

It works in the long term, and is about reshaping the world rather than winning short-term tussles. Europe’s power is a ‘transformative power’.7 And when we stop looking at the world through American eyes, we can see that each element of European ‘weakness’ is in fact a facet of its extraordinary ‘transformative power’. Europe doesn’t flaunt its strength or talk about a ‘single sustainable model of progress’. Instead, like an ‘invisible hand’, it operates through the shell of traditional political structures. The British House of Commons, British law courts, and British civil servants are still there, but they have all become agents of the European Union. This is no accident. By creating common standards that are implemented through national institutions, Europe can spread its influence without becoming a target for hostility. While every US company, embassy, and military base is a terrorist target, Europe’s relative invisibility allows it to extend its global reach without the same provocation.


pages: 278 words: 74,880

A World of Three Zeros: The New Economics of Zero Poverty, Zero Unemployment, and Zero Carbon Emissions by Muhammad Yunus

active measures, Bernie Sanders, Capital in the Twenty-First Century by Thomas Piketty, clean water, conceptual framework, crony capitalism, distributed generation, Donald Trump, financial independence, fixed income, full employment, high net worth, income inequality, Indoor air pollution, Internet of things, invisible hand, Jeff Bezos, job automation, Lean Startup, Mark Zuckerberg, megacity, microcredit, new economy, Occupy movement, profit maximization, Silicon Valley, the market place, The Wealth of Nations by Adam Smith, too big to fail, unbanked and underbanked, underbanked, urban sprawl, young professional

Since the appearance of modern capitalism some 250 years ago, the concept of the free market as a natural regulator of wealth has come to be widely accepted. Many of us have been taught that an “invisible hand” ensures competition in the economy, contributing to equilibrium in the markets and generating social benefits that are automatically shared by everyone. Free markets dedicated solely to profit are supposed to produce improved living standards for all. Capitalism has indeed stimulated innovation and economic growth. But in a world of skyrocketing inequality, more and more people are asking, “Does the invisible hand produce its benefits for everybody in the society?” The answer seems obvious. Somehow the invisible hand must be heavily biased toward the richest—otherwise, how could today’s enormous wealth concentration continue to grow? Many of us were raised to believe in the slogan “Economic growth is a rising tide that lifts all boats.”

Young people are never told that they are all born with two choices, and that they continue to have these two choices throughout their lives: they can be job seekers or job creators—entrepreneurs in their own right rather than relying on the favor of a job from other entrepreneurs. We cannot just sit and watch a whole generation of young people fall through the cracks of economic theory because we are too timid to question the wisdom of our theoreticians. We have to redesign our theory by recognizing the limitless capacity of a human being, instead of relying on the “invisible hand of the market” to solve all our problems. We have to wake up to the fact that the “invisible hand” is invisible because it does not exist—or, if it does exist, it is dedicated to serving the rich, invisibly. In the current economic system, theoreticians have never offered us any better solutions for unemployment than promoting economic growth through investments in infrastructure building or make-work government programs, along with state charity designed to alleviate the suffering of those in need.

In this book, I’ve explained why I think certain fundamental changes in the theoretical and practical framework of capitalism are necessary—changes that will allow individuals to express themselves in multidimensional ways and address the problems left unsolved or even exacerbated by the existing conceptual framework. And although my proposal may be viewed as a significant change in the structure of capitalism, I see no option but to address these basic flaws in the structure. In my view, the theoretical framework of capitalism that is widely accepted today is a half-built structure—one that turns Adam Smith’s “invisible hand” into a heavily biased hand that pushes the activities of the market in favor of the richest. One might almost suspect that the “invisible hand” actually belongs to the richest! As I’ve discussed, the present theory of capitalism holds that the marketplace is reserved for those who are interested in profit only—an interpretation that treats people as one-dimensional beings. But people are multidimensional. While humans have their selfish dimension, they also have their selfless dimension.


Capitalism, Alone: The Future of the System That Rules the World by Branko Milanovic

"Robert Solow", affirmative action, Asian financial crisis, assortative mating, barriers to entry, basic income, Berlin Wall, bilateral investment treaty, Black Swan, Branko Milanovic, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carried interest, colonial rule, corporate governance, creative destruction, crony capitalism, deindustrialization, dematerialisation, Deng Xiaoping, discovery of the americas, European colonialism, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, ghettoisation, gig economy, Gini coefficient, global supply chain, global value chain, high net worth, income inequality, income per capita, invention of the wheel, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, liberal capitalism, low skilled workers, Lyft, means of production, new economy, offshore financial centre, Paul Samuelson, plutocrats, Plutocrats, post-materialism, purchasing power parity, remote working, rent-seeking, ride hailing / ride sharing, Silicon Valley, single-payer health, special economic zone, The Wealth of Nations by Adam Smith, Thorstein Veblen, uber lyft, universal basic income, Vilfredo Pareto, Washington Consensus, women in the workforce, working-age population, Xiaogang Anhui farmers

So we know that capitalism is stronger than ever, but we do not know if this represents its overall peak, or if it is only a local peak, with further expansion of capitalist relations in the future. APPENDIX B HYPERCOMMERCIALIZATION AND ADAM SMITH’S “INVISIBLE HAND” I discussed in Chapter 5 the interaction between hypercommercialized globalization and our values and behaviors. Here I look at how the same type of issue was addressed, at the time of early capitalism, by Adam Smith, and the place of the “invisible hand” in Smith’s argument. The invisible hand type of argument relies on accepting what were thought, in the pre-Enlightenment, to be the destructive and insatiable passions of power, pleasure, and profit (to use David Wootton’s [2018] classification) as long as, when controlled, they are able to result in a social good.

CAPITALISM, ALONE The Future of the System That Rules the World BRANKO MILANOVIC THE BELKNAP PRESS OF HARVARD UNIVERSITY PRESS Cambridge, Massachusetts London, England 2019 Copyright © 2019 by the President and Fellows of Harvard College All rights reserved Jacket art: background: wepix/E+/Getty Images; inset: medobear/DigitalVision Vectors/Getty Images Jacket design: Jill Breitbarth 978-0-674-24286-9 (EPUB) 978-0-674-24287-6 (MOBI) 978-0-674-24285-2 (PDF) Library of Congress Cataloging-in-Publication Data is available from loc.gov ISBN: 978-0-674-98759-3 (alk. paper) CONTENTS 1. The Contours of the Post–Cold War World 2. Liberal Meritocratic Capitalism 3. Political Capitalism 4. The Interaction of Capitalism and Globalization 5. The Future of Global Capitalism Appendix A. The Place of Communism in Global History Appendix B. Hypercommercialization and Adam Smith’s “Invisible Hand” Appendix C. Some Methodological Issues and Definitions Notes References Acknowledgments Index CHAPTER 1 THE CONTOURS OF THE POST–COLD WAR WORLD [The bourgeoisie] compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilization into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.

Comintern’s “eastern turn” and the worldwide diffusion of capitalism And indeed the combining of the two struggles was the crucial decision—the decision that started with the Baku Meetings at the First Congress of the Peoples of the East, and continued with the Second Congress of the Communist International (Comintern), both in 1920; they broke off from the Comintern’s hitherto Eurocentric view, the WPD. But it was not a mistake, as Warren believed. That decision meant that left-wing and communist movements in the Third World could legitimately combine social revolution and national liberation in a unique way that was, as I have argued, the key factor that allowed them to gain power. Where the cunning of history was, it was in not “revealing” to them that they were, as if “led by an invisible hand,” bringing in the conditions for the rise of their national capitalisms rather than, as they thought they were doing, ushering in a classless and internationalist communist society. In this context one can see that Lenin’s and the Comintern’s turn toward the “toilers of the East,” along with the division of the world into the two camps of imperialist and colonized countries that it implied, was absolutely decisive for what happened next: not for bringing about communism, but for bringing about capitalism.4 This interpretation allows us to claim—paradoxically, at first sight—that Lenin was probably the most important “capitalist roader” in history, since his idea to connect the proletarian struggle in the West to the movement for national liberation in Africa and Asia both departed from orthodox Western Marxism and unleashed the forces that some fifty or sixty years later would bring indigenous capitalism to countries as diverse as Vietnam, China, Angola, and Algeria.


pages: 604 words: 161,455

The Moral Animal: Evolutionary Psychology and Everyday Life by Robert Wright

"Robert Solow", agricultural Revolution, Andrei Shleifer, Asian financial crisis, British Empire, centre right, cognitive dissonance, double entry bookkeeping, double helix, fault tolerance, Francis Fukuyama: the end of history, George Gilder, global village, invention of gunpowder, invention of movable type, invention of the telegraph, invention of writing, invisible hand, John Nash: game theory, John von Neumann, Marshall McLuhan, Norbert Wiener, planetary scale, pre–internet, profit motive, Ralph Waldo Emerson, random walk, Richard Thaler, rising living standards, Silicon Valley, social intelligence, social web, Steven Pinker, talking drums, the medium is the message, The Wealth of Nations by Adam Smith, trade route, your tax dollars at work, zero-sum game

ADAM SMITH AMENDED Maybe we should amend Adam Smith’s trademark metaphor of the invisible hand. Smith’s point, of course, was that a bunch of far-flung people pursuing individual gain can, without really trying, collectively orchestrate a large-scale social process. The ingredients of a beautiful robe just seem to magically congregate, assemble themselves, and then find a buyer, as if guided from above. It’s a nice image, and in ome ways apt. After all, a “hand” can do more work if moving goods is easy—if transportation costs are low thanks to the proximity of the players. Still, this metaphor gives short shrift to the other kind of cost that Smith stressed: the cost of processing data and “deciding” where the various resources should go. Hands aren’t very cerebral, after all; guiding any invisible hand there must be an “invisible brain.”

In this regard Polynesian chiefdoms parallel other chiefdoms, such as those in the Cauca Valley of Colombia, where war was “universal, acute, and unending.” War, as we saw in chapter 5, works against social structures that lack certain properties. One property is economic vigor—enough wealth to make weapons and canoes, enough food to let large numbers of men live close together, in formidable density. Thus does war encourage chiefs to do a good job of imitating the invisible hand. And one key to the invisible hand’s success is rewarding people for their labor. That is: return non-zero-sum gains to the workers who produced them, as an incentive to produce more; resist the parasitic temptation. But why worry about the commoners’ incentives? Why not just command them to work harder—since you are, after all, a demigod? That brings us to the second source of chiefly demise: popular discontent.

The costs of finding out what buyer want—and the cost to buyers of finding out what’s available, and at what price—have to be bearable for transaction to ensue. Note that the costs of transport and communication apply not just to the final “purchase” of the robe—at the “retail” level—but to the links in its creation, such as getting cedar bark from the south and copper from the north. At all levels, the movement of Smith’s “invisible hand” gets smoother as information and transportation costs drop. The lower these costs, the more highly non-zero-sum the relationship among the players—the more each can gain via interaction, the more productive, per capita, the web of exchange. How to keep these costs low if your communications and transportation technologies are primitive? One way is to stay near your customers and suppliers.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

However, the financial system had undergone deep and treacherous structural changes, negating the fundamental assumptions held by economists about the way the economy worked. “Economists view the world as being the outcome of the ‘invisible hand,’ that is, a world where private decisions are unknowingly guided by prices to allocate resources efficiently,” Gorton said. He’d described the first thing I had ever learned from my father about laissez-faire—the philosophy cherished by all Fed economists—as first described in Adam Smith’s The Wealth of Nations. “The credit crisis raises the question of how it is that we could get slapped in the face by the invisible hand,” Gorton said. (Gorton’s quotes are taken from an updated paper that developed his ideas more fully.) “What happened? Many private decisions were made, over a long time, which created the shadow banking system.”

“Economists view the world as being the outcome”: FRBA: Gary Gorton, “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007” (paper, Federal Reserve Bank of Atlanta 2009 Financial Markets Conference: Financial Innovation and Crisis, May 11–13, 2009), 2, frbatlanta.org/-/media/Documents/news/conferences/2009/financial-markets-conference/gorton.pdf. He’d described the first thing: Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776. The book by the Scottish economist and moral philosopher was widely influential. I was surprised to learn that he never uses the term “laissez-faire” in the book. “The credit crisis raises”: Gorton, “Slapped in the Face by the Invisible Hand,” 2. “Instead,” Gorton said: Ibid., 10. “A dealer or other holder”: “Money Market: Repos,” Investopedia.com, www.investopedia.com/terms/r/repurchaseagreement.asp?

CONTENTS TITLE PAGE COPYRIGHT DEDICATION CHAPTER 1: “Groupstink” CHAPTER 2: Who Would Buy That Crap? CHAPTER 3: Saint Greenspan CHAPTER 4: Inside the Black Box CHAPTER 5: The First Tremors CHAPTER 6: Front-running the Fed CHAPTER 7: The Maverick CHAPTER 8: The Inner Sanctum CHAPTER 9: “Luddite!” CHAPTER 10: Helpless CHAPTER 11: Slapped in the Face by the Invisible Hand CHAPTER 12: Heads Must Roll CHAPTER 13: Breaking the Buck CHAPTER 14: Breaching the Zero Bound CHAPTER 15: The Walking Dead CHAPTER 16: Dr. Ben Pulls a Bait and Switch CHAPTER 17: A Turning Point CHAPTER 18: Insider Trading? CHAPTER 19: Spinning Fedwire CHAPTER 20: The Taper Tantrum CHAPTER 21: The New Sheriff in Town CHAPTER 22: Culture Shock ACKNOWLEDGMENTS NOTES INDEX CHAPTER 1 “Groupstink” Never in the field of monetary policy was so much gained by so few at the expense of so many.


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The Myth of Capitalism: Monopolies and the Death of Competition by Jonathan Tepper

Affordable Care Act / Obamacare, air freight, Airbnb, airline deregulation, bank run, barriers to entry, Berlin Wall, Bernie Sanders, big-box store, Bob Noyce, business cycle, Capital in the Twenty-First Century by Thomas Piketty, citizen journalism, Clayton Christensen, collapse of Lehman Brothers, collective bargaining, computer age, corporate raider, creative destruction, Credit Default Swap, crony capitalism, diversification, don't be evil, Donald Trump, Double Irish / Dutch Sandwich, Edward Snowden, Elon Musk, en.wikipedia.org, eurozone crisis, Fall of the Berlin Wall, family office, financial innovation, full employment, German hyperinflation, gig economy, Gini coefficient, Goldman Sachs: Vampire Squid, Google bus, Google Chrome, Gordon Gekko, income inequality, index fund, Innovator's Dilemma, intangible asset, invisible hand, Jeff Bezos, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, late capitalism, London Interbank Offered Rate, low skilled workers, Mark Zuckerberg, Martin Wolf, means of production, merger arbitrage, Metcalfe's law, multi-sided market, mutually assured destruction, Nash equilibrium, Network effects, new economy, Northern Rock, offshore financial centre, passive investing, patent troll, Peter Thiel, plutocrats, Plutocrats, prediction markets, prisoner's dilemma, race to the bottom, rent-seeking, road to serfdom, Robert Bork, Ronald Reagan, Sam Peltzman, secular stagnation, shareholder value, Silicon Valley, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, undersea cable, Vanguard fund, very high income, wikimedia commons, William Shockley: the traitorous eight, zero-sum game

Markets have shifted to monopolies and oligopolies when it comes to selling goods, but it is just as bad when you look at the power of companies as buyers. When workers have fewer employers to choose from in their line of work, their bargaining power disappears. Corporate giants can squeeze their suppliers, but the main things companies buy is labor, and they have been squeezing workers. If Adam Smith's invisible hand required many buyers and sellers to find the right price, then the invisible hand has gone missing as we have moved toward oligopolies. Many markets are monopsonies. Monopolies are rare, and so are monopsonies. However, oligopolies are very common across almost all US industries. Consumers can choose from only a very few companies when it comes to buying, and likewise when it comes to finding a job. Likewise, workers are finding they have very few companies in their line of work that they can turn to for employment.

It should be no surprise that a Marketplace and Edison Research poll that found that 70.9 percent of Americans think “the economic system in the U.S. is rigged in favor of certain groups.”80 Given the explosion of spending on lobbying and the vast rewards for doing so, most Americans are entirely right. It is worth remembering that when Adam Smith wrote of “the invisible hand” in The Wealth of Nations, he was not simply praising the free market, but condemning the government acting on the behalf of large merchants who were furthering their own interests. Until lobbying is reformed, there is little hope for reducing barriers to entry for smaller firms to fight it out in the marketplace. There is little chance the invisible hand can work. In the final days of the 2016 election, Donald Trump ran an advertisement showing the face of Goldman Sachs CEO Lloyd Blankfein. The voiceover did not mention him by name, but the narration described “a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth, and put that money into the pockets of a handful of large corporations and political entities.”81 Even when Trump campaigned against Hillary Clinton's ties to Goldman Sachs, he kept the revolving door swinging for Goldman, giving many ex-bankers control over American financial policy.

These examiners granted more patents than their peers, particularly to the companies that eventually hired them.91 Government is not a passive bystander in the increase in inequality. It is an active participant, granting favors to the wealthy and powerful, looking after the interests of the well connected. It has distorted society towards inequality. Rather than encourage competition and innovation, it has stifled growth. The increase in inequality comes not from Adam Smith's invisible hand, but from the hands of government. It is worth remembering the words of Theodore Roosevelt, who opposed monopolies and trusts: “There can be no effective control of corporations while their political activity remains. To put an end to it will be neither a short nor an easy task, but it can be done …”92 While he said these words over 100 years ago, not much has changed. Key Thoughts from the Chapter Monopolies in markets often come from patents and intellectual property.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

The price mechanism, in turn, is a remarkably efficient way of allowing us to make informed choices about scarcity. If something is expensive, its opportunity cost may be high. If something is cheap, its opportunity cost might be correspondingly low. Adam Smith (1723–1790), one of the economic greats and now deservedly immortalized on the Bank of England £20 note, called the price mechanism the ‘invisible hand’.8 Many people have been seduced by Smith’s ideas, sufficiently so as to claim that free markets are the sole reason behind the West’s ongoing prosperity. Yet markets do not always work very well. They are not very good at identifying the environmental consequences of our actions. They do not cope well when there is a lack of well-established property rights. Why invest, for example, if your profits are siphoned off by an avaricious government or by a Mafia-style protection racket?

But if inflation moves away from the target by more than 1 percentage point … I shall expect you to send an open letter to me … setting out … the reasons why inflation has moved away from target … the policy action which you are taking to deal with it … [and] the period within which you expect inflation to return to the target.8 In other words, price stability is, like the UK prime minister, first among equals. Even for those central banks with more than one economic objective, price stability is typically the most important. The central bank’s job is thus to safeguard the value of the currency. Price stability matters because Adam Smith’s invisible hand works best free of distortions. But in both the American and British mandates, there is no explicit recognition that inflation is determined not just by domestic policies but also by developments elsewhere in the world, other than by reference to ‘shocks and disturbances’. The rise of the emerging economies appears to be of no significant consequence. Yet exchange rates, interest rates, commodity prices, manufactured-goods prices and all sorts of other prices are now increasingly under the emerging economies’ spell.

The philosophies of the British East India Company are beginning to return, but, this time, they’re being embraced by the emerging world. This is economics at its most political. *This is unashamedly a paraphrase: the actual language used is not fit to print. CHAPTER SEVEN WHO CONTROLS WHAT? THE RISE OF STATE CAPITALISM OVERRULING THE MARKET Globalization creates winners and losers. The benefits and costs of globalization are randomly distributed by the market’s invisible hand across and within sovereign states. State capitalism, arguably, can be seen as an attempt to overrule this process. It offers a chance to exert government control over resources that might otherwise be lost through market forces to higher bidders elsewhere. State capitalism can be used to ensure resources are either retained for domestic consumption or used as bargaining chips in the exertion of global economic and political power.


The Techno-Human Condition by Braden R. Allenby, Daniel R. Sarewitz

airport security, augmented reality, carbon footprint, clean water, cognitive dissonance, coherent worldview, conceptual framework, creative destruction, Credit Default Swap, decarbonisation, different worldview, facts on the ground, friendly fire, industrial cluster, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, land tenure, life extension, Long Term Capital Management, market fundamentalism, mutually assured destruction, nuclear winter, Peter Singer: altruism, planetary scale, prediction markets, Ralph Waldo Emerson, Ray Kurzweil, Silicon Valley, smart grid, source of truth, stem cell, Stewart Brand, technoutopianism, the built environment, The Wealth of Nations by Adam Smith, transcontinental railway, Whole Earth Catalog

So let us dispose here of a tempting analogy between transhumanist claims (rooted as they are in defense of individual liberty) and Adam Smith's famous "invisible hand." Just as innovation and productivity are optimized as individuals, driven by self-interest, strive for economic benefit, won't society be made better by individuals striving after various enhancements? The analogy would be false. The "invisible hand" is just a recognition of an information-processing mechanism; it integrates decisions made on the basis of individual preference into supply and demand curves that describe the efficient distribution of scarce resources. Unlike central planning, the "invisible hand" is effective with complex adaptive systems (i.e., the economy), in part because it decentralizes decision making across active agents and in part because the only outcome it aims to deliver is efficient allocation of information, prices, and stuff.

A more socially stable and, yes, advanced (if 98 Chapter 5 still highly imperfect) capitalism evolved only when dampers on rampant market freedom, such as unions, anti-monopolistic policies, and unemployment insurance, were adopted-almost always after bruising political battles and occasional paroxysms of civil unrest. There is no invisible hand to guide society toward more justice and tolerance, with or without radical enhancement of human capabilities. But now there is another possible complication to this story. The invisible hand of the economic market works because we can assume that humans generally behave as they always have: selfishly. Might human-enhancement technologies threaten even that fundamental assumption? (Put another way, could we design "selfishness" out of the human?) We doubt it, yet the larger point is this: Even if it seems as if we are simply modifying the constitution of humanness at the individual level, the systems-level effects of tens of millions of such modifications may plausibly begin to manifest in system-wide changes in human values and behaviors that cannot possibly be predicted.

., 93, 94 "Human," as cultural construct, 103 Humanity+, 6, 7 Hutchins, Eo, 95, 96 Hydrologic cycle, 10 IBM, 89, 146 IEEE Spectrum, 82 Immortality, 82, 83 India, 99, 129, 139 Industrial ecology, 168 Industrial time, 71 Infant mortality,S 8, 60 Influenza, 68 Information and communication technology (ICT), 8, 80, 179 Institute of Electrical and Electronics Engineers (IEEE), 179 219 Institutional review boards (IRBs),l77 Integrated Vector Management (IVM), 48ff, 53 Integration of human and machine, 20 Intercollegiate Genetically Engineered Machine competition,68 Intergovernmental Panel on Climate Change, l11ff, 122, 124 Internet, 112, 118, 139, 166 Inuit, 183, 186, 187 "Invisible hand," 97, 98 iPhone,l iPod,l Iraq war, 3, 24, 76, 91ff, 94, 127,135,150-153 Jacobs,]., 168 James, W, 81 Japan, 131,133, 150 Jenner, Eo, 16 John Paul II, 101 Joy, W, 68 Kass, L., 21 Kepler,]., 101, 173 Kondratieff waves, 79ff, 192 Koniggriitz, Battle of, 75, 76 Krishna, 119 Kurzweil, Ro, 8, 18,68 Kyoto Protocol, 67, 109, 111, 193 Land mines, 150 Las Vegas, 152 Lawrence Livermore National Laboratory, 89 Leopold, Ao, 181 Libertarian approach to human enhancement,21ff 220 Index Lindblom, c., 93 Long-Term Capital Management,92 "Long waves" of innovation, 79££ Maginot Line, 135 Malaria, 47££, 53 Malaysia, 139 Maoism, 31, 121 Marlboro Man, 135 Marne, Battle of, 76 Marxism, 110, 114, 121, 172 Marx, K., 64, 70, 173 Maslow, A., 33 McKibben,~.,21, 101 McKinsey & Company, 49 McNeill, ].


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The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer

affirmative action, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, centre right, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, cuban missile crisis, Deng Xiaoping, diversified portfolio, Doha Development Round, Exxon Valdez, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global reserve currency, global supply chain, invisible hand, joint-stock company, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, low skilled workers, mass immigration, means of production, megacity, Mikhail Gorbachev, mutually assured destruction, Naomi Klein, Nelson Mandela, new economy, offshore financial centre, open economy, race to the bottom, reserve currency, risk tolerance, shareholder value, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, trade route, tulip mania, uranium enrichment, Washington Consensus, Yom Kippur War, zero-sum game

Adam Smith, the oft-quoted father of modern capitalism, wrote in The Wealth of Nations (1776) of the unintended benefits that society derived from individual greed: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.1 Some students of Smith’s writings might qualify this point with a reference to his earlier work, The Theory of Moral Sentiments (1759), in which he argues thatthere are evidently some principles in [man’s] nature which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it.2 Advocates of pure capitalism insist that the “invisible hand” must be allowed to work its magic—and that any effort by government to guide its actions can only burden markets and distort their natural operation. Others argue that his writings on morality and natural empathy suggest that Smith would reject much of the libertarian dogma justified in his name.

During their conversation, Wen provided what amounts to a precisely worded definition of Chinese state capitalism: “The complete formulation of our economic policy is to give full play to the basic role of market forces in allocating resources under the macroeconomic guidance and regulation of the government. We have one important piece of experience of the past thirty years, that is to ensure that both the visible hand and invisible hand are given full play in regulating the market forces.”11 Three decades ago, the invisible hand was truly invisible in China. When Mao Zedong died in 1976, he left behind a society in turmoil, an economy in ruins, and a ruling party in real danger of irrelevance. Within two years, paramount leader Deng Xiaoping and his premier, Zhao Ziyang, overcame considerable resistance from senior Communist Party officials to launch a slow but deliberate plan to experiment with capitalism.

South Africa’s ruling party has much less domestic political power and many more checks on its ability to direct investment and growth than China’s Communist Party, and South Africa’s relatively unskilled and poorly educated workforce is a long way from competing with its Chinese counterpart. But these factors haven’t kept some within the ANC from charting a more state-capitalist course. In June 2007, delegates to the ANC national policy conference publicly embraced the idea that the state, not the invisible hand, should play the primary guiding role in the economy. The ANC government, it said, should stimulate economic development, by “directly investing in underdeveloped areas and directing private sector investment.” The resolution also called for construction of an “effective, democratic, and developmental state,” which will “intervene in the interest of the people as a whole.” Central to this plan is continuation of a state-led infrastructure investment program.


pages: 480 words: 123,979

Dawn of the New Everything: Encounters With Reality and Virtual Reality by Jaron Lanier

4chan, augmented reality, back-to-the-land, Buckminster Fuller, Burning Man, carbon footprint, cloud computing, collaborative editing, commoditize, cosmological constant, creative destruction, crowdsourcing, Donald Trump, Douglas Engelbart, Douglas Hofstadter, El Camino Real, Elon Musk, Firefox, game design, general-purpose programming language, gig economy, Google Glasses, Grace Hopper, Gödel, Escher, Bach, Hacker Ethic, Howard Rheingold, impulse control, information asymmetry, invisible hand, Jaron Lanier, John von Neumann, Kevin Kelly, Kickstarter, Kuiper Belt, lifelogging, mandelbrot fractal, Mark Zuckerberg, Marshall McLuhan, Menlo Park, Minecraft, Mitch Kapor, Mother of all demos, Murray Gell-Mann, Netflix Prize, Network effects, new economy, Norbert Wiener, Oculus Rift, pattern recognition, Paul Erdős, profit motive, Ray Kurzweil, recommendation engine, Richard Feynman, Richard Stallman, Ronald Reagan, self-driving car, Silicon Valley, Silicon Valley startup, Skype, Snapchat, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Stewart Brand, technoutopianism, Ted Nelson, telemarketer, telepresence, telepresence robot, Thorstein Veblen, Turing test, Vernor Vinge, Whole Earth Catalog, Whole Earth Review, WikiLeaks, wikimedia commons

Are we choosing a new kind of government by another name, but one that represents us less? The Invisible Hand on a Multitouch Screen There is an even deeper question to consider. The attempts by the tech companies to battle shitposting comprise a fascinating confrontation between the new order of algorithms and the old order of financial incentives. Old and new have a lot in common. The most enthralled proponents perceive each not merely as technologies invented by people, but as superhuman living things. In the case of financial incentives, the elevation occurred in the eighteenth century, when Adam Smith celebrated the “invisible hand.” In the case of algorithms, something similar occurred in the late 1950s, when the term “artificial intelligence” was coined. The prevalence of shitposting and other degradations is fueled by the invisible hand, while the antidote is to be divined by artificial intelligence.

For one thing, we don’t trust the Internet.3 Each tech company and service provider lives in its own universe, and the ragged cracks between those universes provide handholds for hackers. There is nothing intrinsic to computing that makes it sloppy or unserious. The system for online transactions between banks is reliable, for instance, and nobody has ever hacked or leaked the all-important algorithms that run companies like Google and Facebook. But we chose an unserious network. The Invisible Hand Improves When It Is Made Visible as an Avatar Hand The appeal of weightlessness arose out of a desire to make digital networks into an instant permanent solution to an eternally unsolvable problem. Finally, it would be possible for people to connect without the tedium and annoyance that always must attend cooperation between genuinely free, distinct individuals. The dream was to launch a form of democracy unburdened by politics.

The investigative press, which is distinct from the commenting class, used to be large and diverse. But a preponderance of people have fallen for a Netflix-like illusion7 and believe that the main problem is too many news sources to sort through. If there is little remaining investigative reporting, where does all that news, the apparently infinite supply, come from? It is brought to us by the invisible hand, aka old-fashioned financial incentives. The world of viral posts, tweets, and memes is inherently detached from reality. They are catchy like pop tunes. No one fact-checks a pop tune. But that isn’t the point. The point is that the devices on which this material is delivered track who is reading or watching at a given moment, and that’s the truth that matters, not what’s on the screen. Shitposting is more attached to reality than any previous form of communication, but the conveyance of reality flows from reader to server, not from server to reader.


Nuclear War and Environmental Catastrophe by Noam Chomsky, Laray Polk

American Legislative Exchange Council, British Empire, cuban missile crisis, David Ricardo: comparative advantage, energy security, Howard Zinn, interchangeable parts, invisible hand, Malacca Straits, mutually assured destruction, Naomi Klein, Occupy movement, oil shale / tar sands, Ralph Nader, Ronald Reagan, South China Sea, The Wealth of Nations by Adam Smith, trade route, University of East Anglia, uranium enrichment, WikiLeaks

It’s kind of interesting if you look back at the classical economists, Adam Smith and David Ricardo. They were sort of aware of this—they didn’t put it in precisely these terms—but if you take a look at Adam Smith’s The Wealth of Nations, the famous phrase “invisible hand” appears once. It appears essentially in a critique of what’s going on right now. What he pretty much says is that, in England, if merchants and manufacturers preferred to import from abroad and sell abroad, they might make profit, but it would be bad for England. He says they’re going to have what sometimes is called a home bias—they’ll prefer to do business at home, so as if by an invisible hand, England will be saved the ravages of a global market.82 David Ricardo was even stronger. He said that he knows perfectly well that his comparative advantage theories would collapse if English manufacturers, investors, and merchants did their business elsewhere, and he said he hopes very much that this will never happen—that they’ll have, perhaps, a sentimental commitment to the home country—and he hopes this attitude never disappears.

Environmental disasters. I. Polk, Laray. II. Title. QH545.N83C56 2013 363.325’5--dc23 2012046137 Printed in the United States 9 8 7 6 5 4 3 2 1 Contents Preface Abbreviations 1. Environmental Catastrophe 2. Protest and Universities 3. Toxicity of War 4. Nuclear Threats 5. China and the Green Revolution 6. Research and Religion (or, The Invisible Hand) 7. Extraordinary Lives 8. MAD (Mutually Assured Dependence) Appendix 1: Conversation between Gen. Groves and Lt. Col. Rea, August 25, 1945 Appendix 2: Flyer for UCPV Event, October 10, 1967 Appendix 3: Scientists Condemn the Destruction of Crops in Vietnam, January 21, 1966 Appendix 4: Nelson Anjain’s Open Letter to Robert Conard, April 9, 1975 Appendix 5: Marshallese Medical Records in Hands of Gensuikin, July 27, 1976 Appendix 6: Memorandum on Iraqi Use of Chemical Weapons, November 1, 1983 Appendix 7: Open Letter to Africa, December 12, 2011 Appendix 8: Anjali Appadurai’s Speech in Durban, December 9, 2011 Appendix 9: Point Hope Protest Letter to JFK, March 3, 1961 Appendix Acknowledgments About the Authors About Seven Stories Press Preface If humans choose to work to minimize the existential threats of our time, perhaps the most improbable aspect of remedy is that we will accept modalities based on collaboration and creative adaptation, rather than perpetual combat and domination.1 It is a stark fact that present and future economies are predicated on a finite energy resource: carbon-based fuels.2 Consensual science on climate change presents another fact: we may only have a few years to make adjustments in the collective carbon load before we are faced with irreversible consequences.

President’s Council of Advisors on Science and Technology, “Sustaining the Nation’s Innovation Ecosystems,” January 2004. The Bureau of Labor Statistics projects US employment in manufacturing will continue to trend as an area of rapid decline. Richard Henderson, “Industry Employment and Output Projections to 2020,” Monthly Labor Review, January 2012. 6. Research and Religion (or, The Invisible Hand) Laray Polk: Forty percent of the electorate in most states identify as evangelical. Pew Research indicates evangelical Christians largely reject anthropogenic climate change and are skeptical there is even solid evidence that the earth is warming.74 So I think the extreme beliefs of the religious right benefit business interests and vice versa. Noam Chomsky: That’s an interesting combination because the business leadership tends to be secular.


Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Andrei Shleifer, Andrew Keen, Asian financial crisis, asset allocation, barriers to entry, basic income, bitcoin, Black Swan, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, clean water, crony capitalism, David Graeber, David Ricardo: comparative advantage, deindustrialization, Donald Trump, Double Irish / Dutch Sandwich, experimental economics, financial repression, full employment, George Akerlof, Gini coefficient, Gunnar Myrdal, high net worth, hiring and firing, illegal immigration, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labor-force participation, libertarian paternalism, Long Term Capital Management, market fundamentalism, means of production, moral hazard, Naomi Klein, New Urbanism, obamacare, offshore financial centre, open economy, Pareto efficiency, Paul Samuelson, price stability, principal–agent problem, profit maximization, pushing on a string, quantitative easing, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, Tyler Cowen: Great Stagnation, universal basic income, unorthodox policies, urban planning, very high income, Vilfredo Pareto, War on Poverty, Washington Consensus, women in the workforce

See Public institutions Intangible property, 94–95, 308 Intellectual property overview, 341 athletes, 204–5, 351–53 attempts to extend protection of, 355–56, 359–60 attorneys and, 366 basic needs and, 351 in China, 347, 358 composers, 203, 349 discovery, effect on, 365 entertainment industry, 345, 348, 353 in EU, 347 executive compensation and, 348, 363–64 fashion industry, 345 forms of, 347–48 government protection of, 94–95, 193–94, 203–4, 308, 356, 358–60, 366 historical background, 355 “idea factories,” 344–45 “image rights,” 347–49 incentives and, 362–63, 365 income inequality, effect on, 343–45 income redistribution and, 193–94, 203–4 Industrial Revolution compared, 346, 357 inventors, 203 in Japan, 347, 358 laissez faire and, 359 marginal tax rates and, 353–54, 357 monopolies and, 345–47, 356, 365 patents, 347, 359, 361 in pharmaceutical industry, 365–66 piracy and, 360 rents and, 353 role of government, 354 social value of, 361–62 in South Korea, 347 technology and, 356–57 theft of, 357–58 trade agreements and, 354 traditional societies compared, 360–61 in UK, 357–58 in US, 176, 193, 204, 347, 357–58, 362 wealth creation and, 349–51 436 Index Intergovernmental Panel on Climate Change, 316 Inter-institutional externalities, 290 International Monetary Fund, 7, 8, 109, 113–14, 296–97, 315–16 Internet, 325–26 Inventors, 203 Investment activity, income redistribution and, 194 “Invisible hand of government,” 199 “Invisible hand of market,” 66, 312–13 Iran hostages, 100–1 Ireland bubbles in, 331 challenges to welfare policies in, 60 contingent liabilities in, 138, 140 famine in, 218 influence of conservatives in, 395 marginal tax rates in, 376 public spending in, 121–22, 162 supply-side economics in, 77 Irrationality consumer protection and, 148–49 effect on market, 79, 83 Friedman on, 141–42 nudges and, 141–42 recessions and, 236 Islam, 218 Italian School, 5–6, 63, 65, 178 Italy allocation of resources in, 188 authoritarian government in, 23 bureaucracy in, 234 Communist Party, 1–2 Constitution, 248–50, 266–71 Constitutional Commission of Eighteen, 267–68 corporatism in, 231 corruption in, 120 Corte dei Conti, 161, 234, 290, 381 economic planning in, 27 fascism in, 23, 231, 266–67 financial accountability in, 291 incentives in, 381 influence of conservatives in, 395 “Keynesian Revolution” in, 269 Labor Charter of 1927, 248 marginal tax rates in, 376 privatization in, 33–34 public ownership in, 135 public spending in, 23 regulations in, 279 sovereign debt in, 241 unions in, 23, 231 welfare policies in, 214 women’s suffrage in, 20 Japan economic planning in, 27 executive compensation in, 364 “fake goods” in, 149 intellectual property in, 347, 358 marginal tax rates in, 376, 377 sovereign debt in, 241 Jefferson, Thomas, 249–50 Jensen, Michael, 363 Johnson, Lyndon B., 43, 56, 58, 229 Journal of Financial Economics, 363 Jouvenel, Bertrand de, 45 Judges, legal rules and, 251 Justice systems, 295–96 Kahneman, Daniel, 79 Keen, Andrew, 325–26 “Keepers of the gate,” 336 Kennedy, John F., 2–3, 55–58, 239 Keynes, John Maynard generally, 7–8 on capitalism, 28–30 on corporatism, 231 countercyclical policy, 61–62 decline in influence of, 86–87 Galbraith and, 46–47 on income inequality, 320 on laissez faire, 31–32 on market, 37, 38 on “new wisdom,” 399–400 pessimism of, 28–30 on public works, 241 on Soviet Union, 27–30, 78 on stabilization policies, 70–71, 189, 237 on taxation, 245 on unions, 230–31 on US, 47 on welfare states, 383 on workers’ rights, 19 “Keynesian Revolution,” 2, 41, 42, 56, 269, 383 King, Melvyn, 113–14, 156, 338 Klein, Lawrence, 42 Klein, Naomi, 29 Kornai, Janos, 26 KPMG International, 376 Krugman, Paul, 240–41, 342–43 Kuznets, Simon, 3 Lady Gaga, 351–52 Laffer Curve, 74–76, 363, 373–74, 377, 379, 394–95, 397 Laissez faire, 15–21 abandonment of, 43 criticism of, 3 in Eastern Europe, 35 Index energy and, 17 entrepreneurs and, 307–8 in Germany, 18 government and, 65 Industrial Revolution and, 16–17 intellectual property and, 359 Keynes on, 31–32 in Latin America, 33 resurgence of, 33–35 role of state, 15–16, 19–20 trade and, 17 in UK, 31 in US, 17–19, 30, 31 workers’ rights and, 18, 19 Landis, James, 57–58 Lange, Oskar, 26 La Porta, Rafael, 263–64 Larosiere, Jacques de, 64 Latin America constitutions in, 250, 271 laissez faire in, 33 public institutions in, 290 Laudato Si' (Francis), 28, 81 Law and Economics, 183–85 Law of public expenditure growth, 51, 87 Laws.

The paternalistic view would have more in common with what could be called a tutorial role of the state, which is a role now pushed by various economists associated with experimental or behavioral economics that uses nudges to help individuals make better decisions (see Thaler and Sunstein, 2008). All of those categories, to some extent, rejected the laissez-faire view of the government role that, in some not always correct interpretations, implied that the government should minimize its role in the economy and just let the “invisible hand” do its miraculous work. According to some historians, the concept of laissez-faire, which had come to play such a large role in classical economics and which, in modern versions, would return to play a growing role in the 1980s and 1990s, had been promoted in the nineteenth century not so much as an ideology that espoused the ability and the innate virtue of the free market to achieve desirable outcomes, as many economists had come to believe, but more as a view that reflected the lack of trust that people had at that time in the ability of governments to solve problems with their interventions.

According to some historians, the concept of laissez-faire, which had come to play such a large role in classical economics and which, in modern versions, would return to play a growing role in the 1980s and 1990s, had been promoted in the nineteenth century not so much as an ideology that espoused the ability and the innate virtue of the free market to achieve desirable outcomes, as many economists had come to believe, but more as a view that reflected the lack of trust that people had at that time in the ability of governments to solve problems with their interventions. If the government was not able to solve problems, it was better if it did not even try to. 66 Termites of the State The view that a free and unregulated market economy can perform economic miracles is a relatively recent one, in spite of the frequent references to Adam Smith’s invisible hand over the years. On this important but rarely acknowledged point, it may be worthwhile to cite from an important historical book that discussed in great detail various reforms introduced in the nineteenth century in the United Kingdom. As the author of that book put it: A great deal of the talk about laissez faire [in the nineteenth century] must be discounted, or at least put into its proper context.


Globalists: The End of Empire and the Birth of Neoliberalism by Quinn Slobodian

Asian financial crisis, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collective bargaining, David Ricardo: comparative advantage, Deng Xiaoping, desegregation, Dissolution of the Soviet Union, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, full employment, Gunnar Myrdal, Hernando de Soto, invisible hand, liberal capitalism, liberal world order, market fundamentalism, Martin Wolf, Mercator projection, Mont Pelerin Society, Norbert Wiener, offshore financial centre, oil shock, open economy, pattern recognition, Paul Samuelson, Pearl River Delta, Philip Mirowski, price mechanism, quantitative easing, random walk, rent control, rent-seeking, road to serfdom, Ronald Reagan, special economic zone, statistical model, The Chicago School, the market place, The Wealth of Nations by Adam Smith, theory of mind, Thomas L Friedman, trade liberalization, urban renewal, Washington Consensus, Wolfgang Streeck, zero-sum game

His defense of ­free trade separated him from many entrenched members of the GOP. Geoffrey M. Kabaser­v ice, Rule and Ruin: The Downfall of Moderation and the Destruction of the Republican Party, from Eisenhower to the Tea Party (New York: Oxford University Press, 2012), 55. 91. Kim Phillips-­Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: W. W. Norton, 2009), 56–58. 92. Rick Perlstein, Before the Storm: Barry Goldwater and the Unmaking of the American Consensus (New York: Hill and Wang, 2001), 33. 93. Röpke to Paul Wilhelm Wenger, August 5, 1964, RA, file 89, p. 568. 94. Phillips-­Fein, Invisible Hands, 57, 59. Kim Phillips-­Fein, “Business Conservatives and the Mont Pèlerin Society,” in Mirowski and Plehwe, The Road from Mont Pèlerin, 292. 95. See George H. Nash, The Conservative Intellectual Movement in Amer­i­ca since 1945 (Wilmington, DE: ISI Books, 2006), 69; Sarias Rodríguez, “ ‘We Are All Eu­ro­pe­a ns,’ ” 213; Christopher S.

On Goodrich’s role in financing MPS meetings, see Phillips-­Fein, Invisible Hands, 48–51. 132. Hennecke, Wilhelm Röpke, 224. 133. Kirk to Röpke, March 19, 1963, RA, file 21, p. 649. 134. For his resignation letter, see Brandt to Members of the MPS, January 8, 1962, Machlup Papers, box 279. 135. Brandt to Röpke, December 8, 1964, RA, file 22, p. 30. 136. Walpen, Die offenen Feinde, 108. 137. Burgin, The ­Great Persuasion, 146. 138. Hunold to Röpke, January 1, 1965, RA, file 22, p. 206. 139. Ibid., 145. 140. Röpke used the expression in a letter to Alexander Rüstow. Quoted in Philip Plickert, Wandlungen des Neoliberalismus: Eine Studie zu Entwicklung und Ausstrahlung der “Mont Pelerin Society” (Stuttgart: Lucius und Lucius, 2008), 189. 141. On Spiritual Mobilization, see Phillips-­Fein, Invisible Hands, 71–74. 142. Hunold to Röpke, March 20, 1964, RA, file 22, p. 298. 143.

Markets buttress the repository of cultural values that are a necessary but not sufficient condition for markets’ continued existence. GENEVA SCHOOL, NOT CHICAGO SCHOOL In 1983 one of Hayek’s students, the leading international economic ­lawyer Ernst-­Ulrich Petersmann, wrote, “The common starting point of the neoliberal economic theory is the insight that in any well-­functioning market economy the ‘invisible hand’ of market competition must by necessity be complemented by the ‘vis­i­ble hand’ of the law.” He listed the well-­k nown neoliberal schools of thought: the Freiburg School, birthplace of German ordoliberalism, and home to Walter Eucken and Franz Böhm; the Chicago School, identified with Milton Friedman, Aaron Director, Richard Posner, and ­others; and the Cologne School of Ludwig Müller-­Armack.


The State and the Stork: The Population Debate and Policy Making in US History by Derek S. Hoff

"Robert Solow", affirmative action, Alfred Russel Wallace, back-to-the-land, British Empire, business cycle, clean water, creative destruction, David Ricardo: comparative advantage, demographic transition, desegregation, Edward Glaeser, feminist movement, full employment, garden city movement, George Gilder, Gunnar Myrdal, immigration reform, income inequality, income per capita, invisible hand, Jane Jacobs, John Maynard Keynes: technological unemployment, Joseph Schumpeter, labor-force participation, manufacturing employment, mass immigration, New Economic Geography, new economy, old age dependency ratio, Paul Samuelson, peak oil, pensions crisis, profit motive, Ralph Waldo Emerson, road to serfdom, Ronald Reagan, Scientific racism, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, trickle-down economics, urban planning, urban sprawl, wage slave, War on Poverty, white flight, zero-sum game

I encountered the phrase “market-knows-best demography” in Marc Linder, The Dilemmas of Laissez-Faire Population Policy in Capitalist Societies: When the Invisible Hand Controls Reproduction (Westport, Conn.: Greenwood Press, 1997), 16. Linder uses it to refer specifically to the new household microeconomics, which treats children as consumer durables. I apply it more broadly to a whole constellation of overlapping pro-market and pro–population growth positions. A crucial discussion—and rejection—of these ideas was Paul Demeny’s 1986 Population Association of America presidential address (Paul Demeny, “Population and the Invisible Hand,” Demography 23 [November 1986]: 473–87). 70. Demeny, “Population and the Invisible Hand,” 479. 71. See Albert O. Hirschman, The Strategy of Economic Development (New Haven: Yale University Press, 1958); and Ester Boserup, The Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure (New York: Aldine, 1965).

The fusion between older concerns about limited resources and newer themes of ecological fragility and finiteness reflected a consensus among natural scientists that population growth was harmful.52 It was the economists, however, who first constructed a more formal new theory of the “limits to growth,” launching a heretical “environmental economics,” followed by its offshoot, “ecological economics,” which rejected the cult of “growthism” and identified limits to the economy and number of inhabitants in a finite and fragile world.53 In its moderate guise, environmental economics implied efforts to integrate environmental concerns into orthodox economic thought and public policy, for example by taxing negative externalities (spillover effects) like pollution so that consumer prices reflect true environmental costs. It also reserved room for beauty and other intangibles. In the memorable phrase of Herman Daly, a leading environmental economist, the trampling “invisible foot” of market activity was as important as the more famous and benign “invisible hand.”54 En- the new environmental state and the zero growth movement 175 vironmental economics quickly gained acceptance in mainstream circles. In a 1967 essay that critiqued but ultimately defended the “aesthetically concerned minority,” political scientist Aaron Wildavsky suggested that the takeoff of the environmental movement was closely associated with a “new economics” of the natural environment in which intangibles were assigned large if imprecise values.55 Environmental economics offered not merely an insistence on market failure but also a powerful attack on core assumptions of neoclassical economics, including the rationality of the consumer and the desirability of letting the market reduce all goods and human activity to commodities.56 The more radical ecological economics offered a fundamental rejection of the compatibility of economic progress—as traditionally defined—and ecological sustainability.

Fourth, even if a healthy economy amid a stable population is theoretically possible (as SPK insists), the state cannot be relied upon to make the necessary adjustments. Fifth, population growth advances human liberty. The ascendancy of MKBD was in step with the overall withering of Keynesianism during the 1960s and 1970s, but, at the time, it was not the exclusive domain of conservatives. Guided by the central laissez-faire premise that the invisible hand produces socially optimal results, however, the doctrine was constitutive of the political “New Right” and the new classical economics that swept American politics in the 1970s. MKBD articulated many themes amenable to the New Right’s worldview: faith in the market, the importance of innovation, entrepreneurship, and liberty, and unabashed celebration of economic growth. Many leaders of the late twentieth-century conservative intellectual movement would subsequently draw from MKBD.


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Platform Scale: How an Emerging Business Model Helps Startups Build Large Empires With Minimum Investment by Sangeet Paul Choudary

3D printing, Airbnb, Amazon Web Services, barriers to entry, bitcoin, blockchain, business process, Chuck Templeton: OpenTable:, Clayton Christensen, collaborative economy, commoditize, crowdsourcing, cryptocurrency, data acquisition, frictionless, game design, hive mind, Internet of things, invisible hand, Kickstarter, Lean Startup, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, means of production, multi-sided market, Network effects, new economy, Paul Graham, recommendation engine, ride hailing / ride sharing, shareholder value, sharing economy, Silicon Valley, Skype, Snapchat, social graph, social software, software as a service, software is eating the world, Spread Networks laid a new fibre optics cable between New York and Chicago, TaskRabbit, the payments system, too big to fail, transport as a service, two-sided market, Uber and Lyft, Uber for X, uber lyft, Wave and Pay

Increasingly, many industries that have traditionally been considered non-tech, including retail, transportation, and consumer goods, are opening up APIs to encourage innovation by coalescing an external ecosystem of developer-partners. THE INVISIBLE HAND IS THE NEW IRON FIST The business processes that enabled pipe scale have historically been managed via hierarchies. As value creation in a platformed world moves to networks, we need a new form of management and culture, both inside and outside the organization. Hierarchies are based on rules and compliance, which require a unidirectional flow of information from the top down. This iron fist is giving way to the invisible hand. This is most evident in the rise of on-demand labor platforms where the invisible hand of algorithms and APIs dispatches supply to meet demand. The invisible hand – typically taking the form of algorithmic decisions – nudges producers to continue creating value on the platform.

The invisible hand – typically taking the form of algorithmic decisions – nudges producers to continue creating value on the platform. In a networked age, we are moving from a world of command and control to a self-serve world where user participation is encouraged through an invisible hand powered by data, APIs, and algorithms. PLATFORM SCALE IMPERATIVE A world of pipes creates value through linear processes managed through command-and-control mechanisms, contractual integration, and internal labor and resource allocation. Platforms move away from closed, controlled processes to open, enabled interactions. The management of platforms must be designed around the goal of enabling interactions between producers and consumers in a platform’s ecosystem. The platform manifesto lays out the changes in business principles that are occurring as we move from a world of managing processes to a world of enabling interactions on plug-and-play platforms.

User journeys are the new sales funnels 9. Distribution is the new destination 10. Behavior design is the new loyalty program 11. Data science is the new business process optimization 12. Social feedback is the new sales commission 13. Algorithms are the new decision makers 14. Real-time customization is the new market research 15. Plug-and-play is the new business development 16. The invisible hand is the new iron fist 1.3 THE RISE OF THE INTERACTION-FIRST BUSINESS A Fundamental Redesign Of Business Logic Platforms compete with each other on the basis of their ability to enable interactions sustainably. Platforms do not compete merely on the strength of better features or larger user bases. They build sustainable businesses when producers and consumers participate regularly in interactions.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

T H E AGE OF T U R B U L E N C E phasize personal initiative: "The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle, that it is alone, and without any assistance . . . capable of carrying on the society to wealth and prosperity" He concluded that to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way" Competition was a key factor because it motivated each person to become more productive, often through specialization and division of labor. And the greater the productivity, the greater the prosperity This led Smith to his most famous turn of phrase: individuals who compete for private gain, he wrote, act as if "led by an invisible hand" to promote the public good. The metaphor of the invisible hand, of course, captured the world's imagination—possibly because it seems to impute a godlike benevolence and omniscience to the market, whose workings are in reality as impersonal as natural selection, which Darwin came along and described more than half a century later. The expression "invisible hand" does not seem to have been very important to Smith; in all his writings, he used it only three times. The effect it describes, however, is something he discerns at every level of society, from the great flows of goods and commodities between nations to everyday neighborhood transactions: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

The resulting advance of global financial markets has markedly improved the efficiency with which the world's savings are invested, a vital indirect contributor to world productivity growth.* As I saw it, from 1995 forward, the largely unregulated global markets, with some notable exceptions, appeared to be moving smoothly from one state of equilibrium to another. Adam Smith's invisible hand was at work on a global scale. But what does that invisible hand do? Why do we experience extended periods of stable or rising employment and output and only gradually changing exchange rates, prices, wages, and interest rates? Are we fools to trust such stability when we see it in the markets? Or, as a newly anointed finance minister once asked, "How can we control the inherent chaos of unregulated international trade and finance without significant governmental intervention?"

After being forced into retreat by its failures of the 1930s and the subsequent expansion of state intervention through the 1960s, market capitalism slowly reemerged as a potent force, beginning in earnest in the 1970s, until it now pervades 14 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. I NTRODUCTION almost all of the world to a greater or lesser extent. The spreading of a commercial rule of law and especially the protection of the rights to property has fostered a worldwide entrepreneurial stirring. This in turn has led to the creation of institutions that now anonymously guide an ever-increasing share of human activity—an international version of Adam Smith's "invisible hand." As a consequence, the control of governments over the daily lives of their citizens has lessened; the forces of the marketplace have gradually displaced some significant powers of the state. Much regulation promulgating limits to commercial life has been dismantled. Throughout the early post-World War II years, international capital flows were controlled and exchange rates were in the grip of finance ministers' discretion.


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Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"Robert Solow", Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

They fall from the presses, not stillborn, but clone-dead. The cynic might say: Leave it to academics to turn a pervasive human disaster into another unsustainable growth industry. What could be the purpose of yet another jokey variation on the metaphor of the “Invisible Hand” on the cover of some text that purports to convince us that a very few select events or principles (usually a prime number) constitute the Rosetta Stone for decoding recent events? The distance from self-help books (Six Things Momma Taught Me to Succeed When Good People Do Bad Things) to crisis prescription books (Dunk That Invisible Hand in Talcum Powder and Snap on the Handcuffs) and get-rich-quick books (Who’s Afraid of the Big Black Swan?) narrows precipitously in the modern marketplace of ideas. Rest assured this will not be another of those books “about the crisis,” in the sense of purveying yet one more play-by-play account of who did what to whom.

There was a short interlude when editorial cartoonists and TV comedians tried to turn the whole thing into a joke, portraying how buffoon bankers bemoaned that the restive public just could not understand that they were the only ones who could clean up the godawful mess they had made, and proved petulant and unrepentant when Uncle Sam unloaded truckloads of money to pay them to do just that. As usual, reality outpaced satire when the former CEO of AIG, Hank Greenberg, brought suit against the U.S. government for not bailing out AIG at a sufficiently munificent rate.13 Bitter comic mordancy can be ripping fun; but a nagging voice whispers: isn’t it just too easy to make fun of the Invisible Hand? Isn’t there something lazy about Stephen Colbert and Jon Stewart? Is the right response to the nightmare of crisis fatigue to laugh it off? What if the people who helped bring on the crisis were quite literally laughing all the way to the bank as the financial system approached the precipice? Gales of merriment apparently rocked the meetings of the Federal Reserve Open Market Committee, as revealed by a tabulation of all the recorded instances of stipulated “[laughter]” in meetings transcripts from 2001 to 2006, reproduced in Figure 1.1.14 Figure 1.1: Hilarity at the Federal Reserve * * * * * * Source: Federal Reserve FOMC Transcripts, Graph created by Daily Stag Hunt Sometimes the best response to crisis fatigue is not an injunction to recover your flagging sense of humor, or to aspire to the status of he who laughs last.

Paul Krugman, feeling secure in his status, has conveniently confessed to the derangement: The brand of economics I use in my daily work—the brand that I still consider by far the most reasonable approach out there—was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore. It’s a deeply reasonable approach—but it’s also intellectually unstable.


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The People's Republic of Walmart: How the World's Biggest Corporations Are Laying the Foundation for Socialism by Leigh Phillips, Michal Rozworski

Berlin Wall, Bernie Sanders, call centre, carbon footprint, central bank independence, Colonization of Mars, combinatorial explosion, complexity theory, computer age, corporate raider, decarbonisation, discovery of penicillin, Elon Musk, G4S, Georg Cantor, germ theory of disease, Gordon Gekko, greed is good, hiring and firing, index fund, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, invisible hand, Jeff Bezos, Joseph Schumpeter, linear programming, liquidity trap, mass immigration, Mont Pelerin Society, new economy, Norbert Wiener, oil shock, passive investing, Paul Samuelson, post scarcity, profit maximization, profit motive, purchasing power parity, recommendation engine, Ronald Coase, Ronald Reagan, sharing economy, Silicon Valley, Skype, sovereign wealth fund, strikebreaker, supply-chain management, technoutopianism, The Nature of the Firm, The Wealth of Nations by Adam Smith, theory of mind, transaction costs, Turing machine, union organizing

Adam Smith, the eighteenth-century Scot now considered the father of economics, is famous for introducing the “invisible hand” of the market. By this he meant no mystical force, but the idea that while individuals are making decisions whether to sell or to buy in the pursuit of self-interest, they are “led by an invisible hand to promote an end which was no part of [their] intention”—the welfare of society realized through a market system. Smith’s hand often appears in economics textbooks as proof that markets produce, without any kind of plan, the best possible outcomes. However, Smith himself understood that real economies involve all manner of nonmarket interactions—even the phrase “invisible hand” makes but a single appearance in his Wealth of Nations. Smith, for example, assumed that factory owners would scheme together—that is, plan—to keep wages low.

While the real world is often one of messy disequilibrium, of prices created by fiat rather than emerging from the competitive ether—and, as we’ll see, one configured by capitalists who plan—it remains one where markets determine much of our economic, and thereby social, life. In general, criticisms of the current way of doing things propose that the market be replaced, or at least reined in. But if allocation does not proceed via the market, then it will occur via economic planning, also known as “direct allocation”—made not by the “invisible hand” but by very visible humans. Indeed, this form of planned allocation already takes place widely in our current system, on the part of elected and unelected individuals alike, by both states and private enterprises, and in centralized and decentralized forms. Even arch-capitalist America is home not only to Walmart and Amazon, but also to the Pentagon: in spite of being incredibly destructive, the US Department of Defense is the single-largest employer in the world, and a centrally planned public sector operation.

At first, the familiar strategy of merciless, life-destroying post-acquisition cost cutting and layoffs did manage to turn around the fortunes of the merged Kmart-Sears, now operating as Sears Holdings. But Lampert’s big wheeze went well beyond the usual corporate raider tales of asset stripping, consolidation and chopping-block use of operations as a vehicle to generate cash for investments elsewhere. Lampert intended to use Sears as a grand free market experiment to show that the invisible hand would outperform the central planning typical of any firm. He radically restructured operations, splitting the company into thirty, and later forty, different units that were to compete against each other. Instead of cooperating, as in a normal firm, divisions such as apparel, tools, appliances, human resources, IT and branding were now in essence to operate as autonomous businesses, each with their own president, board of directors, chief marketing officer and statement of profit or loss.


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Social Life of Information by John Seely Brown, Paul Duguid

business process, Claude Shannon: information theory, computer age, cross-subsidies, disintermediation, double entry bookkeeping, Frank Gehry, frictionless, frictionless market, future of work, George Gilder, George Santayana, global village, Howard Rheingold, informal economy, information retrieval, invisible hand, Isaac Newton, John Markoff, Just-in-time delivery, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, lateral thinking, loose coupling, Marshall McLuhan, medical malpractice, moral hazard, Network effects, new economy, Productivity paradox, Robert Metcalfe, rolodex, Ronald Coase, shareholder value, Shoshana Zuboff, Silicon Valley, Steve Jobs, Superbowl ad, Ted Nelson, telepresence, the medium is the message, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, Turing test, Vannevar Bush, Y2K

De Long and Froomkin even suggest that such frictionlessness might disable the "Invisible Hand." The great classical economist Adam Smith used the image of the invisible hand to describe forces that reconcile the pursuit of private interests through markets with the public good and with what we have called the social fabric. If not actually producing good, at least the invisible hand prevents the pursuit of private interests from doing harm. "Assumptions which underlie the microeconomics of the Invisible Hand," de Long and Froomkin conclude, "fray badly when transported to the information economy."26 Better bots, then, will require a better understanding of human negotiation, the contribution of the social fabric, and the role of human restraint in the functioning of the invisible hand. Development will be ill served by people who merely redefine elaborate social processes in terms of the things that bots do well.

The second includes "time users spend in a befuddled state while clearing up unexplained happenings [and] overcoming the confusion and panic when computers produce enigmatic messages that stop work." 24 Home office workers usually lack this sort of cash. More significantly, they lack necessary peer support. Consequently, with Page 78 current technology, money-losing futzing, late at night and early in the morning, is endemic to the home office. Lacking the boundaries and structures provided by office life, work spills relentlessly over into private and family life. Invisible Hands Within organizations, this stealth spending is readily hidden from those at the top. Unfortunately, so is the need for such spending. Life at Xerox brought us face to face with this issue, too, this time over the matter of copier design. Xerox has long made usability a critical issue for the design and marketing of its photocopiers. With one series of copiers, however, reports came back from the field saying that machines were proving unmanageable for most people.


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Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

"Robert Solow", 3Com Palm IPO, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, Paul Samuelson, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, Supply of New York City Cabdrivers, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

In fact, an early pioneer of what we would now call a behavioral treatment of self-control was none other than the high priest of free market economics: Adam Smith. When most people think about Adam Smith, they think of his most famous work, The Wealth of Nations. This remarkable book—the first edition was published in 1776—created the foundation for modern economic thinking. Oddly, the most well-known phrase in the book, the vaunted “invisible hand,” mentioned earlier, appears only once, treated with a mere flick by Smith. He notes that by pursuing personal profits, the typical businessman is “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.” Note the guarded language of the second sentence, which is rarely included (or remembered) by those who make use of the famous phrase, or invoke some version of the invisible handwave.

Chapter 6: The Gauntlet 44 whether real managers actually behaved this way: See Mongin (1997) and Frischmann and Hogendorn (2015) for a review of this debate on marginal analysis. 45 “This paper raises grave doubts”: Lester (1946). 45 “He would simply rely on his sense or his ‘feel’ of the situation”: Machlup (1946). 46 billiard players: Friedman (1953), p. 21. 48 “preference reversals”: Lichtenstein and Slovic (1973). 49 Raising the stakes made things worse: Grether and Plott (1979). 51 “Suppose there were people doing silly things”: Markets can actually exacerbate welfare losses resulting from the presence of consumer biases. Firms may not have an incentive to debias consumers since under some circumstances, firm profits are increasing in the degree of naiveté: credit card late payment fees (Heidhues and Kszegi, 2010); gym memberships (DellaVigna and Malmendier, 2006); printer cartridges and hotel room shrouded fees (Gabaix and Laibson, 2006). 51 Adam Smith’s invisible hand: For a thoughtful take on how to think about the concept of the invisible hand, see Ullmann-Margalit (1997). 52 transform people into rational agents: The study of how profit-maximizing firms interact with Human consumers is the subject of the exciting field of behavioral industrial organization. For a textbook treatment see Spiegler (2011). The examples discussed in chapter 13 are also relevant. 52 failing to act in accordance with the rational agent model is not fatal: For a thorough analysis of these kinds of arguments see Russell and Thaler (1985), Haltiwanger and Waldman (1985), and Akerlof and Yellen (1985). 53 “An Economic Theory of Self-Control”: Thaler and Shefrin (1981).

I have not been able to find such an argument in Friedman’s writings, but at Rochester at that time, people attributed it to Uncle Miltie, as he was lovingly called. The speech goes something like this. “Suppose there were people doing silly things like the subjects in your experiments, and those people had to interact in competitive markets, then . . .” I call this argument the invisible handwave because, in my experience, no one has ever finished that sentence with both hands remaining still, and it is thought to be somehow related to Adam Smith’s invisible hand, the workings of which are both overstated and mysterious. The vague argument is that markets somehow discipline people who are misbehaving. Handwaving is a must because there is no logical way to arrive at a conclusion that markets transform people into rational agents. Suppose you pay attention to sunk costs, and finish a rich dessert after a big dinner just because you paid for the dessert.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

Through another series of interviews, this time with top global hedge fund traders who managed risk well through 2008 and into 2009, the book highlights certain valuable elements of the global macro approach that could be applied to other mandates within money management. The Invisible Hands begins by defining and discussing the importance of real money management. It then discusses the evolution of real money management and raises some important questions about how real money portfolios are constructed. Next, the experts speak for themselves. First, my business partner Dr. Andres Drobny, “The Researcher,” discusses where the global economy is headed. Then, “The Family Office Manager,” Jim Leitner, addresses the lessons he learned in 2008 and offers his own thoughts on rethinking real money. Next, the “Invisible Hands”—10 anonymous global macro hedge fund managers, the Philosopher, the House, the Professor, et al—discuss how they approach money management, how they managed to make money or avoid large losses in the crisis, and how they would address some of the challenges faced by real money managers.

Focusing on 2007-2008 brings into stark focus the possibility of buying cheap insurance when the market is willing to sell it, before the horse has left the barn. Part Two The Invisible Hands [E]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.

Table of Contents Title Page Copyright Page Dedication Praise Foreword Preface Part One - REAL MONEY AND THE CRASH OF ‘08 Chapter 1 - Rethinking Real Money I. Why Real Money? II. The Evolution of Real Money III. RETHINKING REAL MONEY—MACRO PRINCIPLES Chapter 2 - The Researcher Chapter 3 - The Family Office Manager Part Two - The Invisible Hands Chapter 4 - The House Chapter 5 - The Philosopher Chapter 6 - The Bond Trader Chapter 7 - The Professor Chapter 8 - The Commodity Trader Chapter 9 - The Commodity Investor Chapter 10 - The Commodity Hedger Chapter 11 - The Equity Trader Chapter 12 - The Predator Chapter 13 - The Plasticine Macro Trader Part Three - FINAL WORD Chapter 14 - The Pensioner Conclusion Acknowledgements Bibliography About the Author Index Copyright © 2010 by Steven Drobny.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

“They do not understand that all parts of society hold together,” he wrote in 1883 in one of a series of Harper’s articles later bundled into the classic tract What the Social Classes Owe to Each Other, “and that forces which are set into action act and react throughout the whole organism, until an equilibrium is produced by a readjustment of all interests and rights.”10 The concept of equilibrium, in which competing influences balance each other out, lends itself naturally to mathematical treatment (all it takes is an equal sign) and was crucial to the early development of chemistry and physics. Hints of it had already appeared in economics—Scotsman Adam Smith’s notion of an “invisible hand” steering selfish individuals toward societally beneficial results was the most famous example11—but attempts to build a unified theory of economics around it had foundered upon the imprecision of the field. Economists were long stuck, for example, on the crucial question of what gave a product value. Was it the labor that went into producing it? Its abundance or scarcity? Its usefulness? Some combination of all three?

The abstract high point of the economic theorizing enabled by such simplifying assumptions came from two young scholars who had worked at the Cowles Commission, Kenneth Arrow and Gerard Debreu.9 In one paper written together and in several separate works in the 1950s, the two men rebuilt economic equilibrium theory from the ground up. What has since come to be known as “Arrow-Debreu equilibrium” (or the “Arrow-Debreu framework,” the “Arrow-Debreu paradigm,” or just plain “Arrow-Debreu”) amounted to a mathematical proof of the existence of Adam Smith’s invisible hand. This version was far more logically consistent and mathematically sophisticated than its predecessors. Crucially, it made room for economic actors who couldn’t see perfectly into the future. What was needed to achieve equilibrium under uncertainty was what Arrow termed a “complete” securities market, in which one could bet on or insure against every possible future state of the world. No such market existed, of course, and Arrow spent much of the rest of his career exploring ways that economic reality diverged from equilibrium theory.

“A lot of us who took the antitrust course or the economics course underwent what can only be called a religious conversion,” said Robert Bork, who studied law at Chicago in the early 1950s. “It changed our view of the entire world.”18 Many of Director’s students went on to make his economics teachings the focal point of their careers. An academic movement had been launched. Director’s main message was that things happened in the business world for a reason, and that when one looked hard enough one would usually find Adam Smith’s invisible hand at work—even at General Motors. “In each of the various practices he has analyzed (tie-in sales, patents, resale price maintenance, etc.) he has sought the profit-seeking reason that led businessmen to adopt the practice,” wrote Chicago economist and kindred spirit George Stigler. “Sometimes the reason was the exercise of monopoly power, but other times an important efficiency was achieved by the practice.”19 As a result, Director argued, there was far less need for antitrust laws, or consumer protection regulations, than was commonly believed.


pages: 340 words: 91,387

Stealth of Nations by Robert Neuwirth

accounting loophole / creative accounting, big-box store, British Empire, call centre, collective bargaining, corporate governance, full employment, Hernando de Soto, illegal immigration, income inequality, informal economy, invisible hand, Jane Jacobs, jitney, Johannes Kepler, joint-stock company, Joseph Schumpeter, megacity, microcredit, New Urbanism, Pepto Bismol, pirate software, profit motive, Shenzhen was a fishing village, Simon Kuznets, special economic zone, The Wealth of Nations by Adam Smith, thinkpad, upwardly mobile, Vilfredo Pareto, yellow journalism

A century later, here’s what Adam Smith had to say about inequality in The Theory of Moral Sentiments, his first book, which he published in 1759: The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, 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 make nearly the same division of necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants; and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. This was Smith’s first use of “invisible hand,” the phrase that would become his most captivating, most enduring, and most controversial literary creation. It’s a great economic fantasy: the master unwittingly shares everything equally with his slaves; lords and ladies with their servants; royalty with the plebes; bosses with their workers; and capitalism is really communism.

Even in his time, the rich didn’t restrict their consumption to little more than the poor (King George II received an annual allotment of almost £900,000 from the national treasury to support his retinue, while the average clerk at a joint stock company earned perhaps £200 a year and the average laborer more likely on the order of £50) and, left to their own devices, didn’t ensure that the necessities of life were apportioned equally among all (otherwise there would have been no need for the aristocracy to pass the Poor Laws, which treated unemployment and poverty as crimes rather than as consequences of other people’s economic decisions). Perhaps this was why Smith lowered the profile of the invisible hand the single time he mentioned it in The Wealth of Nations. Sixty years after Smith died, the French journalist and utopian thinker Pierre-Joseph Proudhon articulated a revolutionary plan to spur growth and reduce inequality based on superabundant credit (Proudhon proposed forcing interest rates down to between one-fourth and one-half of 1 percent), and increasing local control (his plan called for the creation of a massive number of cooperative associations to manage the economy based on reciprocity, voluntary contract, and buying and selling at a just price).

It allows previously disenfranchised and disempowered people to reach a level of economic empowerment. It encourages illegal migrants—like the recycler from Henan province—to build a future in a place they are not allowed to live (and, perhaps, over time, to emerge as a constituency that can organize against restrictive rules like the five-decade-old houkou system). There’s no doubt that it’s hard to reconsider or reformulate cherished notions like Adam Smith’s invisible hand. But, as Kuznets pointed out in his Nobel speech, if those notions simply don’t fit reality, and if the things the market has tried so far have not ameliorated the problem—if they had, lack of employment and income inequality would not continue to plague the world—then it’s not too much to suggest that we at least should ask why the dominant economic theories and conventional market institutions are not working.


pages: 1,205 words: 308,891

Bourgeois Dignity: Why Economics Can't Explain the Modern World by Deirdre N. McCloskey

Airbnb, Akira Okazaki, big-box store, Black Swan, book scanning, British Empire, business cycle, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, clean water, Columbian Exchange, conceptual framework, correlation does not imply causation, Costa Concordia, creative destruction, crony capitalism, dark matter, Dava Sobel, David Graeber, David Ricardo: comparative advantage, deindustrialization, demographic transition, Deng Xiaoping, Donald Trump, double entry bookkeeping, en.wikipedia.org, epigenetics, Erik Brynjolfsson, experimental economics, Ferguson, Missouri, fundamental attribution error, Georg Cantor, George Akerlof, George Gilder, germ theory of disease, Gini coefficient, God and Mammon, greed is good, Gunnar Myrdal, Hans Rosling, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, immigration reform, income inequality, interchangeable parts, invention of agriculture, invention of writing, invisible hand, Isaac Newton, Islamic Golden Age, James Watt: steam engine, Jane Jacobs, John Harrison: Longitude, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labor-force participation, lake wobegon effect, land reform, liberation theology, lone genius, Lyft, Mahatma Gandhi, Mark Zuckerberg, market fundamentalism, means of production, Naomi Klein, new economy, North Sea oil, Occupy movement, open economy, out of africa, Pareto efficiency, Paul Samuelson, Pax Mongolica, Peace of Westphalia, peak oil, Peter Singer: altruism, Philip Mirowski, pink-collar, plutocrats, Plutocrats, positional goods, profit maximization, profit motive, purchasing power parity, race to the bottom, refrigerator car, rent control, rent-seeking, Republic of Letters, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scientific racism, Scramble for Africa, Second Machine Age, secular stagnation, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, spinning jenny, stakhanovite, Steve Jobs, The Chicago School, The Market for Lemons, the rule of 72, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, total factor productivity, Toyota Production System, transaction costs, transatlantic slave trade, Tyler Cowen: Great Stagnation, uber lyft, union organizing, very high income, wage slave, Washington Consensus, working poor, Yogi Berra

Being an egalitarian, he believed, in Hayek’s words, that “the same innate capacity to think will take a wholly different turn according to the task it is set,” that of being the philosopher or the street porter, a courtier or an improver.13 * What of it? This: Smith had two invisible hands, two outcomes of (in his uncharacteristically clumsy phrase) “the obvious and simple system of natural liberty.”14 One was the invisible hand of the marketplace, whose effects are occasionally noted in The Wealth of Nations. For example, to mention Smith’s most original economic contribution, the marketplace in labor equalizes the wage-plus-conditions in Scotland with those in England, within social and legal limits, because people move from one place to the other until it is so, as though directed by an invisible hand. Likewise the invisible hand gently pushes people out of their solipsistic cocoons to consider what is valued in trade by other people. “Every individual . . . neither intends to promote the public interest, nor knows how much he is promoting it.”15 Smith scorned interference in the affairs of workers and bourgeois, writing, for example, that “it is the highest impertinence and presumption . . . in kings and ministers to pretend to watch over the economy of private people.”16 The private person “intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value [in terms of what others are willing to pay], he intends only his own gain,” though a gain from providing goods and services for others, and for the benefit in profits earned of the circle of family and friends close to him.17 Smith is not recommending selfishness, merely the literal minding of one’s own business.

“Every individual . . . neither intends to promote the public interest, nor knows how much he is promoting it.”15 Smith scorned interference in the affairs of workers and bourgeois, writing, for example, that “it is the highest impertinence and presumption . . . in kings and ministers to pretend to watch over the economy of private people.”16 The private person “intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value [in terms of what others are willing to pay], he intends only his own gain,” though a gain from providing goods and services for others, and for the benefit in profits earned of the circle of family and friends close to him.17 Smith is not recommending selfishness, merely the literal minding of one’s own business. He concludes that the private person “is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention,” namely, the nation’s modest prosperity—and, though it was no part of Smith’s intention, accidentally promoting something entirely new, the Great Enrichment. The passage is not (as imagined by recent economists, having read one or two excerpts from The Wealth of Nations, and back-projecting from later theorizing) merely a poor approximation to our modern understanding of the pretentiously named First and Second Theorems of Welfare Economics.18 And especially Smith’s invisible hand does not mean, as Mandeville had asserted in 1705, that “Thus every part was full of vice, / Yet the whole mass a paradise.”

A patent or copyright monopoly, to be sure, must be broken for the poor to benefit. But aside from overlawyered definitions of so-called intellectual property, for the most part it has been.10 The mechanism that raised up the poor is not a trickle down of expenditures from rich people. One hears such an argument from the right—even, alas, from Adam Smith on a rare bad day, in one of merely two uses in his published writings of the phrase “invisible hand.”11 One hears too a Keynesian form of trickle up from the left, as from the well-meaning Robert Reich in the Nation magazine: “If consumers don’t have adequate purchasing power, businesses have no incentive to expand or hire additional workers [note Reich’s desideratum: jobs]. Because the rich spend a smaller proportion of their incomes than the middle class and the poor, it stands to reason that as a larger and larger share of the nation’s total income goes to the top, consumer demand is dampened.”12 Reich’s reasoning supposes that the point of an economy is jobs, jobs, jobs, and that spending assures jobs.


pages: 558 words: 168,179

Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right by Jane Mayer

affirmative action, Affordable Care Act / Obamacare, American Legislative Exchange Council, anti-communist, Bakken shale, bank run, battle of ideas, Berlin Wall, Capital in the Twenty-First Century by Thomas Piketty, carried interest, centre right, clean water, Climategate, Climatic Research Unit, collective bargaining, corporate raider, crony capitalism, David Brooks, desegregation, diversified portfolio, Donald Trump, energy security, estate planning, Fall of the Berlin Wall, George Gilder, housing crisis, hydraulic fracturing, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, job automation, low skilled workers, mandatory minimum, market fundamentalism, mass incarceration, Mont Pelerin Society, More Guns, Less Crime, Nate Silver, New Journalism, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, oil shock, plutocrats, Plutocrats, Powell Memorandum, Ralph Nader, Renaissance Technologies, road to serfdom, Robert Mercer, Ronald Reagan, school choice, school vouchers, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, the scientific method, University of East Anglia, Unsafe at Any Speed, War on Poverty, working poor

Carrying out this attack: In The Rise of the Counter-establishment: From Conservative Ideology to Political Power (Times Books, 1986), Sidney Blumenthal made the term “counter-establishment” famous and for the first time told much of the early intellectual history of the movement. “Attack on American Free Enterprise System”: For more on the origins and impact of Lewis Powell’s memorandum, see Phillips-Fein, Invisible Hands, 156–65. “We didn’t have anything”: Piereson’s comments were made in a panel discussion with Gara LaMarche at an Open Society Institute forum, Sept. 21, 2006. “lay siege to corporations”: Staughton Lind, quoted in Phillips-Fein, Invisible Hands, 151. Powell’s defense of the tobacco companies: See Jeffrey Clements, Corporations Are Not People (Berrett-Koehler, 2012), 19–21. Income in America: Isaac William Martin, Rich People’s Movements, 155. Powell called on corporate America: Some have questioned whether too much has been made of Powell’s memo.

Hayek’s ideas arrived in America during the post-Depression years, when conservative businessmen were scrambling to salvage the credibility of the laissez-faire ideology that had been popular before the 1929 market crash. Since then, Keynesian economics had taken its place. Hayek’s genius was to recast the discredited ideology in an appealing new way. As Kim Phillips-Fein writes in her book Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan, rather than describing the free market as just an economic model, Hayek touted it as the key to all human freedom. He vilified government as coercive, and glorified capitalists as standard-bearers for liberty. Naturally, his ideas appealed to American businessmen like Charles Koch and the other backers of the Freedom School, whose self-interest Hayek now cast as beneficial to all of society.

In August, Powell delivered a seething memo that was nothing less than a counterrevolutionary call to arms for corporate America, warning the business community that its very survival was at stake if it didn’t get politically organized and fight back. The five-thousand-word memo was marked “confidential” and titled “Attack on American Free Enterprise System.” A virtual anti–Communist Manifesto, it laid out a blueprint for a conservative takeover. As Kim Phillips-Fein describes it in her history, Invisible Hands, Powell’s memo transformed corporate America into a “vanguard.” Also heeding the battle cry were the heirs to some of America’s greatest corporate fortunes, including Scaife, who were poised to enlist their private foundations as the conservative movement’s banks. Foundations had several advantages for both the donors and the recipients of this largesse. Unlike most businesses, few people controlled them, so they could move quickly on controversial projects.


pages: 255 words: 75,172

Sleeping Giant: How the New Working Class Will Transform America by Tamara Draut

affirmative action, Affordable Care Act / Obamacare, always be closing, American ideology, battle of ideas, big-box store, blue-collar work, collective bargaining, creative destruction, David Brooks, declining real wages, deindustrialization, desegregation, Detroit bankruptcy, Donald Trump, Edward Glaeser, ending welfare as we know it, Ferguson, Missouri, financial deregulation, full employment, immigration reform, income inequality, invisible hand, job satisfaction, knowledge economy, knowledge worker, low skilled workers, mass incarceration, minimum wage unemployment, mortgage tax deduction, new economy, obamacare, occupational segregation, payday loans, pink-collar, plutocrats, Plutocrats, Powell Memorandum, profit motive, race to the bottom, Ralph Nader, rent-seeking, rising living standards, Ronald Reagan, shared worldview, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, trickle-down economics, union organizing, upwardly mobile, War on Poverty, white flight, women in the workforce, young professional

Brady, Kay Lehman Scholzman, and Sidney Verba, The Unheavenly Chorus: Unequal Political Voice and the Broken Promise of American Democracy (Princeton, N.J.: Princeton University Press, 2012), p. 361. 26. Kim Phillips-Fein, Invisible Hands: The Businessmen’s Crusade Against the New Deal (New York: W. W. Norton & Company, 2010), p. 153. 27. Ibid., pp. 151–56. 28. Lewis Powell, “Attack on American Free Enterprise System,” August 23, 1971. The Washington and Lee University School of Law, which Lewis Powell attended, maintains an archive of his writing and work. The complete text of the Powell Memorandum is available on the website http://law2.​wlu.​edu/​powell​archives/​page.​asp?​pageid=​1251, and from many other sources on the Internet. 29. Phillips-Fein, Invisible Hands, p. 154. 30. Jacob S. Hacker and Paul Pierson, Winner-Take-All-Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class (New York: Simon and Schuster, 2010), p. 116. 31.

Hacker and Paul Pierson, Winner-Take-All-Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class (New York: Simon and Schuster, 2010), p. 116. 31. Powell, “Attack on American Free Enterprise System.” 32. Phillips-Fein, Invisible Hands, pp. 166–70. 33. Ibid., p. 188. 34. Hacker and Pierson, Winner-Take-All-Politics, p. 117. 35. Ibid., p. 119. 36. Ibid. 37. Ibid., p. 121. 38. Phillips-Fein, Invisible Hands, p. 187. 39. Alyssa Katz, The Influence Machine: The U.S. Chamber of Commerce and the Corporate Capture of American Life (New York: Spiegel & Grau, 2015), p. 15. 40. Lee Drutman, The Business of America Is Lobbying: How Corporations Became Politicized and Politics Became More Corporate (New York: Oxford University Press, 2015), pp. 8–9. 41. John Logan, “The Union Avoidance Industry in the USA,” British Journal of International Relations (December 2006): p. 653. 42.

CEOs passed the memo along to each other, and in short order several rich capitalists stepped up to respond to the call, establishing and generously funding what are now the dominant conservative think tanks in America: the Heritage Foundation, the American Enterprise Institute, the Manhattan Institute, and the Cato Institute.32 It didn’t take long for Powell’s call to arms to be realized. Kim Phillips-Fein catalogs in Invisible Hands the growing army that was assembled to advance the free enterprise idea. The number of corporate PACs grew from 89 in 1974 to 821 in 1978. These PACs quickly became a giant tributary of political campaign funding, rapidly outpacing the number of union PACs, which stabilized at 250.33 The business lobbying brigade was also formed during the 1970s, mushrooming from only 175 companies employing lobbyists in 1971 to over 2,500 by 1982.34 Meanwhile, the Chamber of Commerce grew exponentially, doubling in membership and tripling its budget between 1974 and 1980, while the National Federation of Independent Businesses doubled its membership over the same time.35 The membership of these two groups covered a wide range of American small and midsized businesses.


pages: 290 words: 76,216

What's Wrong with Economics? by Robert Skidelsky

"Robert Solow", additive manufacturing, agricultural Revolution, Black Swan, Bretton Woods, business cycle, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, disruptive innovation, Donald Trump, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

Interactive behaviour can only be brought into the maximising framework by modelling it as a strategic game, as in the Prisoner’s Dilemma, in which actors calculate the value of the payoffs from cheating or cooperating. Sociology is partly responsible for economists’ neglect of it. The demand for sociology as a science of society may have weakened, but there is also a problem with the supply. Contemporary sociologists have, by and large, left the economy to the economists, even though the economists’ image of a world in which the ‘invisible hand’ of the market guarantees social stability is profoundly opposed to the sociological standpoint. Sociology, writes Wolfgang Streeck, must rediscover political economy.9 The choice between the individual and the social is not straightforward. One strong defence can be offered for methodological individualism: it guards against treating individuals simply as members of groups, deprived of agency.

Since scarcity of time can never be overcome, the day when efficiency will no longer be needed will never arrive. To give the devil her due, economic reasoning is a useful antidote to politicians who promise today what they know cannot be paid for tomorrow. Economists have typically believed that the most efficient mechanism for achieving coordination of production and consumption decisions is the ‘invisible hand’ of the market. To this day, this insight remains the single most important contribution of economics to the economy. Although economic choices are hard, economic life need not be a zero-sum – winner take all – game. This is because economics assumes that no voluntary trade will occur unless both sides see an advantage in doing so. Wants The Robbins definition of economics pivots on the tension between wants and means.

What makes them a theoretically dissident strand of modern economics is that, in contrast to orthodox or neoclassical economics, they model the world economy as a binary system, borrowing from Marxian class analysis and replacing ‘capitalist’ and ‘worker’ with ‘centre’ and ‘periphery’. The two contrasting methods of modelling economic life reflect different views of reality. Both can be criticised for ignoring important aspects of that reality. Structuralists were alert to the distribution of power in the world economy, but blind to the absence of a competent state to deliver the results promised by their ‘big push’ policies. Globalisers put their faith in the ‘invisible hand’ of the market, but paid far too little attention to the fact that successful marketisation requires entrepreneurs. Both approaches thus neglected two vital institutional requisites for economic growth: a strong, relatively uncorrupt state and a commercial middle class. Most of East Asia had these; most of Latin America and Africa did not; hence the different results. Who is right? A flavour of the difference between the structuralist and orthodox views of development is given by the following exchanges in 2002 between Professor Robert Wade of the London School of Economics and Martin Wolf, chief economic commentator of the Financial Times.17 This took place in the heyday of the Washington Consensus, before the collapse of 2008.


pages: 400 words: 94,847

Reinventing Discovery: The New Era of Networked Science by Michael Nielsen

Albert Einstein, augmented reality, barriers to entry, bioinformatics, Cass Sunstein, Climategate, Climatic Research Unit, conceptual framework, dark matter, discovery of DNA, Donald Knuth, double helix, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, Erik Brynjolfsson, fault tolerance, Fellow of the Royal Society, Firefox, Freestyle chess, Galaxy Zoo, Internet Archive, invisible hand, Jane Jacobs, Jaron Lanier, Johannes Kepler, Kevin Kelly, Magellanic Cloud, means of production, medical residency, Nicholas Carr, P = NP, publish or perish, Richard Feynman, Richard Stallman, selection bias, semantic web, Silicon Valley, Silicon Valley startup, Simon Singh, Skype, slashdot, social intelligence, social web, statistical model, Stephen Hawking, Stewart Brand, Ted Nelson, The Death and Life of Great American Cities, The Nature of the Firm, The Wisdom of Crowds, University of East Anglia, Vannevar Bush, Vernor Vinge

By being so credited they can build up a reputation, which can be turned into a paying job. It’s a type of property rights in ideas, leading to an economy based on reputation, and establishing an invisible hand for science that strongly motivates scientists to share their results. The foundation for this reputation economy is a set of very strong social norms: scientists must credit other people’s work; they cannot plagiarize; and scientists judge other scientists’ work by their record of publishpapers. But these norms focus on just one way of sharing scientific knowledge: the scientific paper. If we could establish similar norms and a reputation economy that encourages broader sharing of scientific knowledge, then the invisible hand of science would become stronger, and the process of science would be greatly accelerated. How can we expand science’s reputation economy in this way?

(When Polanyi was writing, the grant agencies had far smaller budgets, anonsequently much less power.) I agree with Polanyi’s concerns—indeed, it’s tempting to write a follow-up essay on “The Oligarchy of Science”—but the point of the current discussion is, of course, to find best actions in the world we find ourselves in, not in some idealized world. p 193: On property rights in ideas and the invisible hand in science, see [172,48]; an interesting general article on invisible hand explanations is [230]. I don’t know where the term “reputation economy” originates; it has been in wide use since the 1990s (and perhaps earlier), but the idea is much older. p 194: SPIRES is at http://www.slac.stanford.edu/spires/. The physics preprint arXiv is, as previously noted, at http://arxiv.org. p 195: On new ways of measuring science, see, for instance, [175] and references therein.

Internet groupware for scientific collaboration. 2000. http://jonudell.net/GroupwareReport.html. [228] Jon Udell. Sam’s encounter with manufactured serendipity. Jon Udell’s Radio blog, March 4, 2002. http://radio-weblogs.com/0100887/2002/03/04.html. [229] UK Medical Research Council policy on data sharing and preservation. http://www.mrc.ac.uk/Ourresearch/Ethicsresearchguidance/ Datasharinginitiative/Policy/index.htm. [230] Edna Ullmann-Margalit. Invisible-hand explanations. Synthese, 39(2): 263–291, 1978. [231] Vernor Vinge. Rainbows End. New York: Tor, 2007. [232] Steven S. Vogt, R. Paul Butler, Eugenio J. Rivera, Nader Haghighipour, Gregory W. Henry, and Michael H. Williamson. The Lick-Carnegie Exoplanet Survey: A 3.1 M_Earth planet in the habitable zone of the nearby M3V star Gliese 581. eprint arXiv:1009.5733, 2010. [233] Eric von Hippel.


The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us by Robert H. Frank, Philip J. Cook

accounting loophole / creative accounting, air freight, Alvin Roth, Apple's 1984 Super Bowl advert, business cycle, Daniel Kahneman / Amos Tversky, delayed gratification, global village, haute couture, income inequality, invisible hand, labor-force participation, longitudinal study, Marshall McLuhan, medical malpractice, Network effects, positional goods, prisoner's dilemma, rent-seeking, rising living standards, Ronald Reagan, school choice, Shoshana Zuboff, Stephen Hawking, transaction costs, trickle-down economics, winner-take-all economy

Wall Street money manager George Soros is not quite a celebrity, yet there is no denying the power of his $ 1 . 1 billion 1993 income to capture the imaginations of ambitious col­ lege students. 15 It is easy to think of examples of the relative handful who have made it big, but much harder to summon individual exam­ ples from the multitudes of anonymous individuals who have not; and hence, in part, the biased perception in favor of success. The invisible-hand theory says that we get socially optimal career choices when people make well-informed, self-serving decisions on the basis of market incentives. But it also says, by implication at least, that if people generally overestimate their prospects in winner-take-all markets, the resulting career choices will not be socially (or even indi­ vidually ) optimal. W hatever its ultimate source, the Lake Wobegon ef­ fect describes just such a bias, for it makes participation in winner-take-all markets seem misleadingly attractive. 106 The Winner-Take-All Society A Simple Winner-Take-All Economy Free marketeers will not be surprised that we get inefficient outcomes when people make career choices on the basis of inaccurate informa­ tion.

Having exploited their best opportunities, they turn next to investments with smaller re­ turns. If our goal, as before, is to maximize society's total income, we should keep investing in performance enhancement as long as the last dollar invested yields at least a dollar's worth of extra performance. (If the last dollar invested had yielded less than an extra dollar's worth, it would have been better to invest less. ) Does an invisible hand lead contestants to invest in accordance with this criterion? Unfortunately, the answer seems to be no. The dif­ ficulty is that whereas from society's point of view we want invest­ ments to be driven by their effect on the value of the final product, the primary concern from each contestant's point of view is their effect on who will be the winner. Some insight into how individual incentives drive competitive in­ vestments is afforded by experiments involving a simple auction called the entrapment game.

In the standard economic calculus, we decide whether to work an­ other hour by weighing the value of what can be bought with the extra The Problem o/Wasteful Investment 143 income against what we lose by giving up an hour of leisure. TIlls cost­ benefit test presumes that the value of what can be bought with extra income is independent of what others buy, which implies that the pri­ vate and social incentives regarding work are one and the same. But when satisfaction-or the likelihood of promotion-depends not only on absolute but also on relative effort, the invisible hand breaks down. At the individual level, for example, each worker's goal may be to en­ hance her odds of promotion by working a little longer. The logic of this strategy, economist Lotte Bailyn explains, follows from the fact that it is much easier for the employer to measure and reward a work­ er's hours than to measure the amount she actually produces.36 But if all workers pursue this strategy, they are destined to be frustrated, for no matter how much they work, there are only so many slots for pro­ motion.


The Ages of Globalization by Jeffrey D. Sachs

Admiral Zheng, British Empire, Cape to Cairo, colonial rule, Columbian Exchange, Commentariolus, coronavirus, COVID-19, Covid-19, cuban missile crisis, decarbonisation, demographic transition, Deng Xiaoping, domestication of the camel, Donald Trump, en.wikipedia.org, endogenous growth, European colonialism, global supply chain, greed is good, income per capita, invention of agriculture, invention of gunpowder, invention of movable type, invention of the steam engine, invisible hand, Isaac Newton, James Watt: steam engine, job automation, John von Neumann, joint-stock company, Louis Pasteur, low skilled workers, mass immigration, Nikolai Kondratiev, out of africa, packet switching, Pax Mongolica, precision agriculture, profit maximization, profit motive, purchasing power parity, South China Sea, spinning jenny, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, Turing machine, Turing test, urban planning, Watson beat the top human players on Jeopardy!, wikimedia commons

By giving vent to greed, the logic goes, societies can best harness the insatiable ambitions, great energies and ingenuity of their citizens. While greed by itself might be unappetizing and seem to be antisocial, the unleashing of greed could in fact lead to the common good. Thus was born the idea that Adam Smith would crystalize as the “invisible hand”—the idea that the pursuit of self-interest by each person promotes the common interest of society as a whole as if by an invisible hand. Smith himself was a moralist and a believer in personal virtues, self-restraint, and justice. Yet Smith’s concept of the invisible hand quickly became an argument to let market forces play out as they might, no matter the distributional consequences. The first statement of this counterintuitive idea came not from Smith but from a London-based pamphleteer and poet at the start of the eighteenth century, Bernard Mandeville, in an ingenious poem called “The Fable of the Bees.”

See information and communications technologies Ieyasu, Tokugawa, 150 illiteracy, of countries, 164, 164–65 impartial spectator, 124 imperialism, 107 India, 148–49 Indian Ocean, 97, 102–4 indigenous people, 102, 116–20 Indo-European language, 50, 64–65 Industrial Age, 2, 4, 7, 11, 195; Britain entering, 133; globalization in, 129; lessons from, 167–68; steam engine in, 16–17, 131–34, 132 industrialization, 5, 7–9; of Britain, 135–38, 142–43, 155; coal in, 27–28, 145; colonial era ending and, 163–64; economic divergence in, 144, 144; Europe’s diffusion of, 141–43; global patterns of, 145–46; of Japan, 150; self-sustaining, 137–38; stages of, 141 industrial production, 14 Industrial Revolution, 17, 138 inequalities, 196–97; challenges from, 185–86; economic, 184; gender, 199; technological changes for, 30 Influence of Sea Power Upon History, 1660–1783, The (Mahan), 112 information, 169 information and communications technologies (ICTs), 141 information technologies, 4–5 infrastructure development, 161 innovative designs, 138–41 In Praise of Folly (Erasmus), 105 input layer, 174 inquiry, age of, 104–6 institutions, 1, 17, 18, 19–20 integrated circuits, 171–72 intelligent technologies, 141 internal combustion engines, 4 International Monetary Fund, 161, 178 investments, 183 invisible hand, 114 iron, 61–62 irrigation, 47 Isabella (queen), 99, 108 Islam, 78, 85–88 Iwakura Mission, 151 James II (king of Britain), 122 Japan: China invaded by, 147; feudal structure of, 151; geography of, 150; industrialization of, 150; as military powerhouse, 146; population of, 150; Russo-Japanese War and, 151; Sino-Japan War and, 151 Jaspers, Karl, 70–71 Jeopardy (game show), 175 Jesuit Order of the Catholic Church, 106 Jin Dynasty, 90 job losses, 185 Judaism, 67 Jurchen horsemen, 90 Kant, Immanuel, 207, 212 Kasparov, Garry, 175–76 Kelekna, Pita, 62, 81 Kennedy, John F., 30–31, 200, 211, 213–14 Kenya-Somalia border, 190, 191 Keynes, John Maynard, 155–56, 158 Kievan Rus, 92 Kilby, Jack, 171 kingdoms, of Egypt, 66 King William’s War, 122 knowledge, advancements in, 105–6 Koch, Alexander, 102 Kondratiev, Nikolai, 139 Kondratiev waves, 139–41, 140 Köppen-Geiger climate system, 22–23, 23, 218 Köppen-Geiger Mediterranean climate zone, 79 Kuhn, Dieter, 90 Kurki, Sofi, 139, 141 land areas, 228n10 land-based empires, 3–4, 73–76 land grants (encomiendas), 117 land power (tellurocracy), 72 land use, 103, 188, 222–23 language, 38, 167; book writings with, 71; in China, 72; from Europe, 50, 64–65; Indo-European, 50, 64–65.

See Sustainable Development Goals sea level rise, 192, 192 sea power (thalassocracy), 72–73 secondary sectors, 14–16 Second Opium War, 147 Security Council, 209, 210 sedentism, 41, 43–45 Sedol, Lee, 176 Seleucid Empire, 77 self-driving trucks, 186 Seljuk group, 65 semiconductors, 171 Seven Years’ War, 122, 148 Shandong, China, 191 Shang Dynasty, 48 Shannon, Claude, 171 shared reality, 214 ships, cannon-laden, 104 Silk Road, 24, 84, 85, 98 Sino-Japan War, 151 skilled workers, 186 slavery: from Africa, 118, 118–19; indigenous people and, 116–20; North America plantations with, 119; Saint-Domingue rebellion of, 121; for sugar plantations, 120; in temperate zone, 119 smallpox, 102 smart machines, 202 Smith, Adam, 98; global empires summation by, 124–26; invisible hand from, 114; Wealth of Nations by, 26, 124, 131, 196 Social Conquest of Earth, The (Wilson, E.), 170 social democracy, 202 social-democratic ethos, 201–3 social institutions, 19–20 societies: Eurasia with horse-based, 62–63, 65; Greek, 76–79; hierarchical structure of, 39; horse-based, 59; human, 38–40 soil nutrients, 19 Song Dynasty, 88–91, 89, 104 Soviet Union, 30, 161–62, 207 Spain, 97, 108–11, 110 state law, 71 steam engine, 4; global trading of, 137; in Industrial Age, 16–17, 131–34, 132; Watt patenting, 17 steel, 139 steppes: of Asia, 53; climate zones of, 53; Eurasian, 24, 54; horse domestication in, 59; migration from, 64 subsidiarity doctrine, 196, 203–4 sugar, 119–20 sugar plantations, 120 Summa Theologica (Aquinas), 78 Sun Yat-Sen, 147 sustainable agriculture, 13 sustainable development, 31, 183–85, 196–200; economic growth from, 187; governance of, 200; public goods for, 204–5; religious leaders on, 211–12; U.N. goals of, 198, 201–2 Sustainable Development Goals (SDG), 178, 198, 202 syphilis, 102 tabula rasa (blank-slate learning), 176 Taiping Rebellion, 147 tea infusion, 152 technologies, 1–2, 11, 18, 70; digital, 181; digital revolution and, 166; economic development from, 21; environmental impact of, 188–90; Eurasian advances in, 49; of farm villages, 45; geography and, 18; of Han Empire, 82; horses distributing, 64; inequalities and changes in, 30; information, 4–5; innovative designs for, 138–41; institutions and, 17; intelligent, 141; lucky latitudes innovations in, 50–51; military, 29–30; naval, 96; North America cut off from, 51–52; Old World, 21; for poverty reduction, 177; upheavals from, 130; U.S. advances in, 160; wireless, 181 tellurocracy (land power), 72 temperate zones: advantages to, 22–25; empires, 51; of Eurasia, 48; slavery in, 119 territorial competition, 28 tertiary sectors, 14–16 textile industry, 134; of Britain, 121; of India, 149; robots in, 186 thalassocracy (sea power), 72–73 theileria parva (equine piroplasmosis), 55 Thirty Years’ War, 156–57 Thucydides, 75 Timurid Empire, 83, 93, 93–94 tin mines, 61 tobacco, 119–20 Tokugawa Shogunate, 150 trade, 67 Trajan (emperor), 79 transistors, 171, 172 transnational cooperation, 205 transoceanic empires, 4 transportation vehicle, 54 transport systems, 203 Treaty of Tordesillas (1494), 109–10 Treaty of Versailles, 157 Treaty of Zaragoza (1529), 109–10 triangular trade, 119 tropical vector-borne diseases, 49, 117 tropical zones, 22–23 trucks, self-driving, 186 trypanosomiasis disease, 50 tsetse flies, 56, 152 Turing, Alan, 170, 173 Turing machine, 170 Turkish tribes, 88 Turse, Nick, 162 U.K.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, price anchoring, price stability, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

Myron Scholes: “Omega Has a Nice Ring to It” 100 110 PART III: THE PRACTITIONERS 10. Barclays Global Investors: “It Was an Evangelical Undertaking” 11. The Yale Endowment Fund: Uninstitutional Behavior 12. CAPM II: The Great Alpha Dream Machine: We Don’t See Expected Returns 13. Making Alpha Portable: “That’s Become the New Mantra” 14. Martin Leibowitz: CAPM in a New Suit of Clothes 15. Goldman Sachs Asset Management: “I Know the Invisible Hand Is Still There” 127 148 165 179 196 214 PART IV: CAPITAL IDEAS TOMORROW 16. Nothing Stands Still 237 Notes Bibliography Acknowledgments Index 247 252 261 263 bern_a03fpref.qxd 3/23/07 8:43 AM Page ix Preface Theorists can always resist facts; for facts are hard to establish and are always changing anyway, and ceteris paribus can be made to absorb a good deal of punishment. Inevitably, at the earliest opportunity, the mind slips back into the old grooves of thought since analysis is utterly impossible without a frame of reference, a way of thinking about things, or, in short, a theory.

If he had only given us thirty-three articles in the Financial Analysts Journal and nineteen in The Journal of Portfolio Management— Dayenu! If he had only given us all the wonders I have omitted—Dayenu! If he had only been the nicest, the most generous, the most entertaining friend all of us are honored to have—Dayenu! bern_c15.qxd 3/23/07 9:11 AM Page 214 15 Goldman Sachs Asset Management “I Know the Invisible Hand Is Still There” ischer Black moved from MIT to Goldman Sachs in 1984. Shortly after his arrival in New York, Black expressed one of his most enduring observations: “The market appears a lot more efficient on the banks of the Charles River than it does on the banks of the Hudson.” Black’s quip was welcome news to his associates at Goldman. Goldman has always been among the most aggressive trading firms on Wall Street, and aggressive trading did not look like a matchup with Black’s unshakeable devotion to a world shaped in every dimension by the Capital Asset Pricing Model and equilibrium.

bern_c15.qxd 3/23/07 218 9:11 AM Page 218 THE PRACTITIONERS “The key point is that volatility is a central consideration in all our decisions and in all our strategies,” Litterman observes. “We do not shun risk, because, along with Fischer, we are convinced that expected returns vary directly with risk—that is what Fischer meant and what I mean when I refer to ‘equilibrium.’ This belief is at the core of all our strategies. Equilibrium, and the notion of the world moving toward equilibrium, is at the heart of the way we think about the world. I know the Invisible Hand is still there.” Day-to-day portfolio management has to go forward, and Litterman recognizes you cannot just sit back and let the forces of equilibrium run the show: “We are determined to keep volatility under tight control so that it does not exceed the clients’ specifications as to how much benchmark risk and tracking error they can tolerate. Volatility is never easy to live with.” Because volatility is difficult to live with, investors must also control how much active risk their managers are taking.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

"Robert Solow", bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Experience suggests that it will—and that the main mechanism for this survival will be the Micawber Principle: the seemingly improvident assumption that a problem postponed long enough is, effectively, a problem solved. Hoping that “something will turn up” may sound like deluded wishful thinking, but it is really just an extension into politics and macroeconomics of Adam Smith’s arguments about the self-organizing dynamics of the capitalist economy. Smith showed how the “invisible hand” of competitive markets automatically coordinates the actions of millions of individuals pursuing their own self-interest so that they satisfy each other’s needs, despite the fact that no one is thinking consciously about the common good. This same invisible hand steers individual initiative and creativity toward solutions of society’s collective problems, provided two conditions are satisfied. First, the process of spontaneous self-organization must be given enough time to produce new adaptations after each of capitalism’s periodic crises.

But they were crystallized by Adam Smith in The Wealth of Nations, producing some astonishingly counterintuitive revelations. Smith observed that a market economy, although it involves millions of unconnected individuals who work at highly specialized and narrow tasks, is a naturally self-organizing mechanism provided a few simple rules of commerce and mutual trust are generally obeyed and enforced. This self-organizing system produces mutually satisfactory outcomes as if it were guided by an “invisible hand,” but without the need for supernatural or divine intervention. And individuals, as long as they act predictably within this mutually agreed social framework, can satisfy each other’s material needs simply by pursuing their own self-interest. To provide useful services to other people, we do not need to know them, love them, or anticipate their desires. As Smith said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”3 The miraculous efficiency of the market system, taken for granted everywhere today, was far from obvious to half of humanity just a few decades ago, as illustrated by the famous, though probably apocryphal, anecdote about Nikita Khrushchev’s first trip to the United States.

One, 3 billion new consumers, producers, and savers joined the global capitalist system from the late 1980s onward, roughly doubling the potential size of the world economy and vastly increasing its potential growth rate for decades ahead. What set off this dynamic megatrend was the interaction between three historic events described in the last chapter—the breakup of the Soviet bloc, the opening up of China, and the end of proxy wars between communism and capitalism in the developing world. The result was that almost the entire world’s population found their lives guided for the first time by the invisible hand of market forces, instead of being ruled by the iron fists of communism and feudalism or the clumsy robotic grip of central planning. Two, globalization transformed almost every economic activity in every country, as the principles of market competition, private enterprise, and free trade won universal acceptance after the breakdown of central planning and state ownership. In effect, the entire world economy started moving toward a NAFTA-style free trade area, if not quite a European-style single market.


pages: 470 words: 130,269

The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas by Janek Wasserman

Albert Einstein, American Legislative Exchange Council, anti-communist, battle of ideas, Berlin Wall, Bretton Woods, business cycle, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, different worldview, Donald Trump, experimental economics, Fall of the Berlin Wall, floating exchange rates, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, housing crisis, Internet Archive, invisible hand, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liberal capitalism, market fundamentalism, mass immigration, means of production, Menlo Park, Mont Pelerin Society, New Journalism, New Urbanism, old-boy network, Paul Samuelson, Philip Mirowski, price mechanism, price stability, RAND corporation, random walk, rent control, road to serfdom, Robert Bork, rolodex, Ronald Coase, Ronald Reagan, Silicon Valley, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, union organizing, urban planning, Vilfredo Pareto, Washington Consensus, zero-sum game, éminence grise

., 67, 74–75. 40. Ibid., 78, 83–85. See especially ch. 7 on economic activity. 41. Ibid., 86–90. On unemployment, see 148–49. His discussion of “security against privation” defends the ideas of a universal minimum income and minimum provisions of food, shelter, and clothing in developed countries. 42. Ibid., 238. 43. Ibid., 20–23. 44. Phillips-Fein, Invisible Hands, 15–19, 41–42. The Hayek quotation appears in Road, 20. 45. Phillips-Fein, Invisible Hands, 27–34, 42–43; Nik-Khah and Van Horn, “Inland Empire.” 46. Morgenstern, Diaries, October 25, 1943, Box 13, OMP; Morgenstern, Diaries, April 19, 1945, Box 14, OMP. 47. Morgenstern, Diaries, July 12, 1941, Box 13, OMP, also quoted in Leonard, Von Neumann, 225. On the Morgenstern–von Neumann collaboration, see Leonard, Von Neumann, chs. 9–11. 48.

See Rothbard, “Confidential,” 61. The disagreements between Mises’s Austrian and US friends would only increase with time. 32. Friedman and Friedman, Two Lucky People, 161. 33. Quoted in Hülsmann, Mises, 799, 802. For Mises’s financial status, see Bilo, “Mises in NYC.” 34. Quoted in Hülsmann, Mises, 823. On NAM, see Phillips-Fein, Invisible Hands, 56–60. 35. On California conservatism, see Olmsted, California; McGirr, Suburban Warriors. See also Nash, Conservative, especially 13; and Phillips-Fein, Invisible Hands, 34–51. 36. Hazlitt, “Capitalism,” 70. On Human Action, see Hülsmann, Mises, 884–87, 893–95. On Rand and Mises, see Burns, Goddess, 141–43. 37. Mises, Human Action, 3. 38. Ibid., 32. On Hayek-Mises, see Caldwell, Hayek’s Challenge, 119–26, 193–96. On Machlup, see Scheall, “What Is Extreme”; Zanotti and Cachanosky, “Implications.” 39.

Mont Pèlerin Society, “Statement of Aims.” 2. On the MPS and the World Economic Forum, see Carroll and Sapinski, “Neoliberalism.” 3. On the MPS, see Walpen, Die offenen Feinde; Mirowski and Plehwe, Mont Pèlerin; Burgin, Great Persuasion. The official history of MPS is also helpful: Hartwell, History. For a list of the first participants, see Walpen, Die offenen Feinde, 391–92. Phillips-Fein, in Invisible Hands, 41–51, details the involvement of anti–New Deal businessmen. 4. On economics imperialism, see Lazear, “Economic Imperialism”; Nik-Khah and Van Horn, “Inland Empire.” 5. Lionel Robbins drafted the preamble. On US social science, see Cohen-Cole, Open Mind. On the transition of the Austrian civilizational project, see Dekker, Viennese Students, 141–50, 176–80. For more on conservative internationalism, see Schmelzer, Freiheit; Duranti, Conservative Human Rights; Mazower, Governing. 6.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, AltaVista, altcoin, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Boris Johnson, British Empire, Broken windows theory, Columbian Exchange, computer age, Corn Laws, cosmological constant, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, Ethereum, ethereum blockchain, facts on the ground, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Gunnar Myrdal, Henri Poincaré, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta analysis, meta-analysis, mobile money, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, rising living standards, road to serfdom, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, twin studies, uber lyft, women in the workforce

As so often, Smith got there first, saying in The Wealth of Nations: ‘The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.’ Invisible hands This decentralised emergence of order and complexity is the essence of the evolutionary idea that Adam Smith crystallised in 1776. In his famous metaphor, Smith made the guiding hand invisible: each person ‘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’. Yet when Smith wrote his Wealth of Nations, there was little good evidence for his central idea that free exchange of goods and services would produce general prosperity.

Yet the childless Smith observed that a child does not have a sense of morality, and has to find out the hard way that he or she is not the centre of the universe. Gradually, by trial and error, a child discovers what behaviour leads to mutual sympathy of sentiments, and therefore can make him or her happy by making others happy. It is through everybody accommodating their desires to those of others that a system of shared morality arises, according to Smith. An invisible hand (the phrase first appears in Smith’s lectures on astronomy, then here in Moral Sentiments and once more in The Wealth of Nations) guides us towards a common moral code. Otteson explains that the hand is invisible, because people are not setting out to create a shared system of morality; they aim only to achieve mutual sympathy now with the people they are dealing with. The parallel with Smith’s later explanation of the market is clear to see: both are phenomena that emerge from individual actions, but not from deliberate design.

Imperfect markets are better than no markets Few would disagree with this formulation, but equally few would accept that the ideal is ever realised in practice. And that, churchmen aside, is where all the disagreement about markets comes from. Fine in theory, useless in practice – so goes the verdict of most right-thinking people on the topic of markets. The question then becomes whether commerce only works if it is perfect. Are semi-free markets better than none? The economist William Easterly is in no doubt that the invisible hand is not Utopia: ‘It is the process of driving out of business the incompetent in favour of the mediocre, the mediocre in favour of the good, and the good in favour of the excellent.’ A glance at economic history makes clear that countries run by and in the interests of merchants have not been perfect, but they have always been more prosperous, peaceful and cultured than countries run by despots.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"Robert Solow", bank run, banking crisis, banks create money, Basel III, basic income, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, David Graeber, decarbonisation, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, Mahatma Gandhi, mass immigration, means of production, meta analysis, meta-analysis, moral hazard, mortgage debt, Naomi Klein, new economy, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, profit motive, purchasing power parity, quantitative easing, Richard Thaler, road to serfdom, Robert Gordon, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

‘It is not from the benevolence of the butcher, the brewer and the baker that we expect our dinner, but from their regard to their own self-interest’, Smith famously wrote in An Inquiry into the Nature and Causes of the Wealth of Nations. Everyone is continually exerting himself in his own self-interest, said Smith. ‘It is his own advantage, indeed and not that of the society, which he has in view’, but ‘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’.31 The metaphor of the invisible hand turned out to be an extraordinarily powerful one and it has been central to modern economics. Even though Smith himself wrote passionately about the dangers of corporate interests and the indispensable role for government in curbing these, this one single metaphor has motivated a ferocious defence of the virtues of an unbridled ‘free market’ in which self-interest is given full rein.

If selection takes place at the level of the individual, it should, in the long run, favour the evolution of individuals who exhibit only selfish (i.e., self-preserving) behaviour. Selfishness attained not just a legendary but an evolutionary status. It is interesting to note the parallels between early economics and nineteenth-century evolutionary thought. Just as the self-interest of economic agents is supposed to lead ‘as if by an invisible hand’ to the most favourable outcome for society, so the self-interest of individuals is supposed to lead through ‘the survival of the fittest’ to the most favourable outcome for species. Economics has continued to ‘borrow’ credibility for the centrality of self-interest from the theory of evolution ever since. But this credibility is critically, perhaps fatally, flawed.34 Beyond the selfish gene Evolutionary explanations of behaviour are by no means confined to the idea that human beings are inherently selfish.

The collapse of communism in the 1990s did nothing to persuade ordinary people that an active, interventionist state can be a good thing. The historical weaknesses of communism – the corruption of power, the erosion of autonomy, the destructive nature of its economic model – appear to underline the same message. Big government is bad for prosperity. Quite often justification for this position is sought in the metaphor of the ‘invisible hand’ and the writings of Adam Smith. But it’s useful to recall (Chapter 7) that Smith himself was intensely aware of the distorting power of corporate interests, and argued specifically that government was essential to keep these in check. The bigger the interests, the greater the power needed by government, to protect society against corruption and capture, according to Smith.2 By the middle of the twentieth century, two almost diametrically opposed conceptions of governance lay at the heart of debates about economics.


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The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

"Robert Solow", Apple II, banking crisis, barriers to entry, Bretton Woods, business cycle, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, creative destruction, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, endogenous growth, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, G4S, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, intangible asset, invisible hand, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, Philip Mirowski, popular electronics, profit maximization, Ralph Nader, renewable energy credits, rent-seeking, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, Silicon Valley ideology, smart grid, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, total factor productivity, trickle-down economics, Washington Consensus, William Shockley: the traitorous eight

‘me too’ 64–7; see also pharmaceutical companies (‘pharma’); specific drugs Duhigg, Charles 173–4 DuPont 178–9 economic crisis: boosting clean technologies 142–3; causes of 12, 182; public sector blamed for 15, 17; varied impact of in EU 41 Economist, view on State and enterprise 16 ‘ecosystems’: see innovation ecosystems electric cars/vehicles 108, 123, 124, 133 Electric Power Research Institute (EPRI) 151 Elias, John 102–3 email 104 End of Laissez Faire, The (Keynes) 4, 194 endogenous growth theory: see ‘new growth’ theory energy crisis 137, 144–5; see also green industrial revolution Energy Frontier Research Centers (EFRCs) 133 Enron 148 ‘enterprise zones’ 54 ‘entrepreneurial’ State: building of 54, 196–7; growth and inequality in 183; risk assumption and vision of 24; role of 6, 10, 21, 23; see also State Entrepreneurial State, The (report) 2, 3 entrepreneurs: DARPA’s brokering role with 77; financing of 57; investment choices of 136; myth of in Silicon Valley 63; risk types and 58–9; SBIR funding to 80, 188 EPA (Environmental Protection Agency) 150 equitable growth 13, 177, 185 European Organization for Nuclear Research (CERN) 101 ‘European Paradox’ 53 European Union: approach to green initiatives 124; ‘Big State’ behind innovation in 166; feed-in tariffs in 153; ‘fiscal compact’ of 42, 197; green transition targets in 115n2; gross R&D spending as percentage of GDP 43; growth producing spending in 196; investment in renewable energy 120, 121; public sectors in 17–18; R&D targets of 41; weaknesses of countries in 52–3 Evans, Peter 4 Evergreen Solar 151–2, 162 Evolutionary Theory of Economic Change, An (Nelson and Winter) 34–5 ‘evolutionary theory’ of production 34–5 ‘exogenous growth theory’ 34 externalities 4, 7, 21, 168; see also Apple Fadell, Tony 100n8; see also Apple Fairchild Semiconductor 76 fast Fourier transform (FDT) algorithm 109 feed-in tariffs: in energy technology 114; in European markets 153; German 122, 138, 149, 156; policy changes in 125n7; UK 124 Fert, Albert 96 Fiegerman, Seth 171n3 finance firms 182 financialization 25–8 FingerWorks 103 Finland 120n4, 121, 190 First Solar (formerly Solar Cells Inc.) 128–9, 151, 159–60; see also green industrial revolution Fiscal Investment Loan Program (Japan) 40 flat panel display (FPD) industry 106 Florida, Richard 107 Forbes on WuxiSuntech 153 ‘Fordist’ model of production in 38–9 Foxconn 170–71 France 61, 120, 120n4, 121 Freeman, Chris 193 Fuchs, Erica 133 Funding a Revolution: Government Support for Computing Research 63 G4S, security company 16 game theory 36 GDP, balance in categories of 30 Gedser turbine 145 Genentech Inc. 57, 69, 81 General Electric (GE) 125, 137, 147–8, 160–61, 174n5 general purpose technologies (GPTs) 62, 83 Genzyme 81, 181 Germany: feed-in tariffs 122, 138, 149, 156; government energy R&D spending 121; green revolution in 115n2, 116, 120, 122; long-term support provided by 158; public R&D spending in 61, 144–6; solar resources of 144; State investment bank 190; systems of innovation in 37; wind energy and R&D projects in 144–6, 149, 156 Ghosh, Shikhar 127 giant magnetoresistance (GMR) 96–7 GlaxoSmithKline 66–7, 82 Global Wind Energy Council (GWEC) 138–9 Goldwind 149 Goodenough, John B. 108 Google 20, 174–5 government energy R&D spending 121, 121 GPS (global positioning system) 105, 105n12 Great Transformation, The (Polanyi) 194–5 Greece, R&D/GDP 52 Green, Martin 152 green industrial revolution: ARPA-E 133–5; ‘carbon lock-in’ 117; China’s ‘green’ 5 year plan 122–4; climate change 117, 123, 135; development banks funding of 139–40, 139n14; DoE role in 132–3; Economist on 16; financial commitment for 116; funding of 116–19; global new investment in renewable energy 120; government energy R&D spending 121; government support to 114–15, 119, 129, 141–2; hurdles to 138, 156, 160; leaders in 11–12, 126; national approaches to 119–22; ‘No More Solyndras Act’ 130–31n12; patient capital 138–40; policies impacting 113–15, 119; pushing green development 136–7; renewable energy credits (RECs) 115n1; smart grid technology in 115, 118; sustainability 117, 119, 123; UK’s approach to 124–6; US approach to 126–35; venture capital in 127–9, 128n9; venture capital subsectors in 128; see also clean technology; solar power; wind power Green Investment Bank 125n7 Gronet, Chris 151 growth: economy-wide 62; effect of venture capital on 49; of firms and R&D benefit 44; firm size relationship to 45–6; ‘inclusive’ 167, 183, 195; inequality and 31, 54, 177; innovation as key source of 9, 177; measures of 33; myths about innovation and 10; national debt relationship to 18; ‘smart’ 167, 183; and technology 33–4; theories of 33–4; variables important for 18; see also equitable growth Grünberg, Peter 96, 97 Grunwald, Michael 113, 136 Haltiwanger, J 45 Hamilton, Alexander 73 Hanwha Group 157 hard disk drives (HDD) 96–7, 109 Harrison, Brian 154 Harrod, Roy F. 33 Haslam, Karen 171n3 Heymann, Matthias 145 Hoffman Electronics 150, 150n4 Hopkins, Matt 129n10, 160 House of Commons Energy and Climate Change Committee 125 Hsieh, Chang-Tai 46 HTTP/HTML 103–5, 109 Hughes, Alan 45 Hurst, Samuel 101 IBM 50, 97, 104, 107 ‘iGesture Numpad’ 103 Ill Fares the Land (Judt) 1 Immelt, Jeffrey 126 income-contingent loans and equity 189–90 income distribution 30n1 India 45–6, 120 industrial policy: challenges to 13; decentralized 78; in ‘rebalancing’ of economies 27; recent US history of 10, 21; redistributive tools needed in 167; State led 40; see also ‘picking winners’ inequality: as debilitating economic issue 177; growth impacted by 31; reducing 166, 186; shareholders as source of 183; tax cut impact on 54 information and communications technology (ICT) 50, 118 Information Processing Techniques Office (DARPA’s) 76 Innovalight 158 innovation: collective character of 183–7, 193; ‘culture’ of 87; as cumulative 167, 187; Death Valley stage of 47, 48, 122; development banks fostering 139–40; development of 3, 41–2; and distribution 186; economic growth driven by 9; firms resisting pressure for 77; global process of 155; government support for 31; in Japan 37–8; macro models on 44; myths about 10, 22; myths of R&D being about 44; ‘open innovation’ model of 25, 27; patent increase relationship to 50–51; process in energy technology 114; Schumpeterian innovation economics 5; State as a force in 5, 166; State leading in risky 62–4; stock market speculation and 49–50; tax policy impact on 51; threatened in US 24; undermining of in US 53, 183, 187; US 24; see also ‘systems of innovation’ approach innovation ecosystems: cumulative innovation curve in 167–8; open systems 193; socioeconomic prosperity dependence on 179; symbiotic vs. parasitic 23–5, 155, 162–3, 179; types of 2; see also actors ‘innovation fund’ 189 innovation networks 36, 40 innovation policy 22–3, 44, 46, 54, 167 Inquiry into the Nature and Causes of the Wealth of Nations, An (Smith) 1; see also ‘Invisible Hand’ Institute for Fiscal Studies (IFS) 51–2 institutional change, assessment of 36 integrated circuits 98, 98n6 Intel 130n11 intellectual property protection 110 intellectual property rights 174 International Bank for Reconstruction and Development (IBRD) 5 Internet: Apple’s use of 109; commercialization of 22; DARPA’s role in 76; and HTTP/HTML 103–5, 109; origin of 63; public funding behind 105 interventionist policy 83 investment returns, social vs. private 3–4 ‘Invisible Hand’ 30 iOS mobile operating system 89–90 iPad 102, 105, 109, 111n14 iPhone 101–3, 105–6, 109 iPlayer 16 iPod 95–6, 100–102, 105, 109, 110 Ireland 120n4, 121, 121 IRS 529 plans 111, 111n15 Italy 17, 39, 41, 52, 121 Jacobs 149 Janeway, William H. 49–50 Japan: Apple entering market of 110; computer electronics competition by 97, 98, 98n7, 106–7; economic growth of 37–8; finance system coordination by 40; flat panel display (FPD) industry of 106; government energy R&D spending 121; lithium-ion battery perfection by 108; MITI 37–8, 40; public R&D spending in 61; systems of innovation in vs.

(Lent and Lockwood 2010, 7) This is the view that asks little of government other than correcting market failures – such as through investment in basic science, education and infrastructure. The ‘appropriate’ role of the State is not a new debate, but it is one that benefits from a broader understanding of the academic literature on the role of innovation in creating economic growth. Over two hundred and fifty years ago, when discussing his notion of the ‘Invisible Hand’, Adam Smith argued that capitalist markets left on their own would self-regulate, with the State’s role being limited to that of creating basic infrastructure (schools, hospitals, motorways) and making sure that private property, and ‘trust’ (a moral code) between actors, were nurtured and protected (Smith 1904 [1776]). Smith’s background in politics and philosophy meant that his writings were much more profound than the simple libertarian economics position for which he is usually acknowledged, but there is no escaping that he believed that the magic of capitalism consisted in the ability of the market to organize production and distribution without coercion by the State.

Battelle, J. 2005. The Search. New York: Penguin. Berners-Lee, T. 1989. ‘Information Management: A Proposal’. CERN. Available online at http://info.cern.ch/Proposal.html (accessed 22 January 2013). Block, F. L. 2008. ‘Swimming against the Current: The Rise of a Hidden Developmental State in the United States’. Politics and Society 36, no. 2 (June): 169–206. _____. 2011. ‘Innovation and the Invisible Hand of Government’. In State of Innovation: The U.S. Government’s Role in Technology Development, edited by F. L. Block and M. R. Keller. Boulder, CO: Paradigm Publishers. Block, F. L. and M. R. Keller, eds. 2011a. State of Innovation: The U.S. Government’s Role in Technology Development. Boulder, CO: Paradigm Publishers. _____. 2011b. ‘Where do innovations come from?’ In State of Innovation: The U.S.


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The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

"Robert Solow", Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, Plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Ronald Reagan, Silicon Valley, Silicon Valley ideology, smart cities, software patent, too big to fail, total factor productivity, trade liberalization, transaction costs, tulip mania, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

Although the conventional narrative is a true story, it is not the whole truth—far from it. This book aims to tell the rest of the story. The missing narrative is that government has contributed actively to inequality, not just by failing to restrain naturally inegalitarian market forces but by distorting market forces in an inegalitarian direction. The rise of inequality is, to a significant extent, a function of state action rather than the invisible hand. And this state action, by suppressing and misdirecting entrepreneurship and competition, has rendered our economy less innovative and dynamic as well as less fair. II BIPARTISAN BLIND SPOT Recognition of this possibility has been slow in coming because of an ideological blind spot shared by left and right alike. The simple story that inequality is the natural result of unchecked market forces is very convenient to both worldviews.

In both the economic and political realms, the prevalence of rent-seeking is a measure of institutionalized corruption. In the ideal market economy, the rules of the game are set so that the desire for private gain is channeled into bettering the lives of others. In the ideal democracy, the mechanisms of government are devised so that the clash of contending opinions and interests is converted into policies that serve the common good. To the extent that rent-seeking holds sway, the invisible hand of capitalism degenerates into the grasping hand of crony capitalism, and the lofty pursuit of the public interest devolves into a feeding frenzy of special interests. Free markets depend, paradoxically for some, on the existence of a state strong enough to enforce the rules of the game in an impartial, public-spirited fashion. Economic power must, somehow, be kept from being translated into the political power to game those rules for the benefit of market incumbents.

See also copyright/patent law benefits of protecting, 64–65 concentrated benefits and, 131 costs of expansion of, 75–81 digital era and, 70–71 European views on, 65, 76, 195n32 information imbalance and, 139–40 institutional bias and, 149 market failure and, 68–69, 74 monopolies and, 85 morality of, 84–89, 195n32 policy image and, 141–45 rent-seeking and, 64 interest rates, 40, 51–54, 59 International Monetary Fund (IMF), 60 Internet. See digital era/information technology intolerance, 2–3 invisible hand, 6, 18 Islam, Roumeen, 61 Issa, Darrell, 176 IT. See digital era/information technology Jones Act, 33 judicial review, 170–75 Keating, Charles, 54 Kelo v. New London, 135 Kimball, David, 132 Kleiner, Morris, 94–95, 99, 105 “kludgeocracy”, 129 Krueger, Alan, 95 Kwak, James, 142 land-use regulations, 32–33, 109–26, 159, 208n14. See also home ownership/housing; zoning effect on growth, 120–21 effect on inequality, 115–23 housing supply and, 111–113 policy image and, 143 Lee, Tim, 149 Leech, Beth, 132 legal occupational licensing, 106–8 “legislative subsidy” theory of lobbying, 137 Lerner, Josh, 71 Levine, Ross, 166 Levy, Frank, 11 liberalism.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

"Robert Solow", affirmative action, Albert Einstein, Bernie Madoff, British Empire, business cycle, capital controls, cleantech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, longitudinal study, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

Increasing revenues come not from a mere scheme of carrots and sticks but from the development and application of productive knowledge. By focusing on incentives rather than on information, free market economists have encouraged the idea that capitalism is based on greed. But greed, in fact, prompts capitalists to seek government guarantees and subsidies that denature and stultify the works of entrepreneurs. Greed, as I put it in Wealth & Poverty, leads as by an invisible hand to an ever-growing welfare state—to socialism. It is not the enlargement of incentives and rewards that generates growth and progress, profits for the entrepreneur and revenues for the government, but the expansion of information and knowledge. The competitive pursuit of knowledge is not a dog-eat-dog Darwinian struggle. In capitalism, the winners do not eat the losers but teach them how to win through the spread of information.

Some apologists will say that Mark Zuckerberg’s Facebook billions were a reward for his brilliant entrepreneurship and software coding, while penury is the just outcome of alcoholism and improvidence. But Suzy Saintly, Barack Obama, and Dan Bricklin are neither improvident nor necessarily less brilliant than Mark. All these arguments are beside the point. The distributions of capitalism make sense, but not because of the virtue or greed of entrepreneurs, nor as inevitable byproducts of the invisible hand. The reason capitalism works is that the creators of wealth are granted the right and burden of reinvesting it. Warren Buffett worries that his average personal tax rate of 17 percent is “unfair” when his secretary pays more. The accuracy of his 17 percent calculation aside (it ignores the 39 percent corporate rate and 55 percent inheritance and other levies), the reason Buffett pays 17 percent has nothing to do with “fairness.”

The dilemma was resolved, however, at the very beginning of the industrial revolution by the leading philosopher of classical liberal economics. Adam Smith was at once an intellectual who shared all the typical prejudices against the business class and a libertarian conservative who knew the value of freedom and enterprise. His solution was to locate the source of wealth not in the creative activities of businessmen but in the “invisible hand” of the market. Smith believed that capitalism worked not because of the virtues of capitalists but because of the “great machine” of exchange that converted their apparent greed and vices into economic value. Businessmen may be vulgar and avaricious, full of “childish vanities” and selfish indulgences, said Smith, and “seldom do they gather but to conspire against the public.” But it was their very “self-love,” their avarice, their desire for self-indulgence that impelled the growth of economies.


pages: 486 words: 150,849

Evil Geniuses: The Unmaking of America: A Recent History by Kurt Andersen

affirmative action, Affordable Care Act / Obamacare, airline deregulation, airport security, always be closing, American ideology, American Legislative Exchange Council, anti-communist, Apple's 1984 Super Bowl advert, artificial general intelligence, autonomous vehicles, basic income, Bernie Sanders, blue-collar work, Bonfire of the Vanities, bonus culture, Burning Man, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, centre right, computer age, coronavirus, corporate governance, corporate raider, COVID-19, Covid-19, creative destruction, Credit Default Swap, cryptocurrency, deindustrialization, Donald Trump, Elon Musk, ending welfare as we know it, Erik Brynjolfsson, feminist movement, financial deregulation, financial innovation, Francis Fukuyama: the end of history, future of work, game design, George Gilder, Gordon Gekko, greed is good, High speed trading, hive mind, income inequality, industrial robot, interchangeable parts, invisible hand, Isaac Newton, James Watt: steam engine, Jane Jacobs, Jaron Lanier, Jeff Bezos, jitney, Joan Didion, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, knowledge worker, low skilled workers, Lyft, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, Menlo Park, Naomi Klein, new economy, Norbert Wiener, Norman Mailer, obamacare, Peter Thiel, Picturephone, plutocrats, Plutocrats, post-industrial society, Powell Memorandum, pre–internet, Ralph Nader, Right to Buy, road to serfdom, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, Saturday Night Live, Seaside, Florida, Second Machine Age, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Stewart Brand, strikebreaker, The Death and Life of Great American Cities, The Future of Employment, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, union organizing, universal basic income, Unsafe at Any Speed, urban planning, urban renewal, very high income, wage slave, Wall-E, War on Poverty, Whole Earth Catalog, winner-take-all economy, women in the workforce, working poor, young professional, éminence grise

But in the real world, where humans operate businesses somewhere in the large range between break-even and maximum profitability, they always have leeway to be unnecessarily and uneconomically fair, trustworthy, decent, and responsible—that is, to take slightly smaller profit margins for the sake of good values and virtuous norms. Friedman, and fellow free-market purists ever since, constantly refer to Adam Smith, who came up with the “invisible hand” idea in the 1700s. But they distort him. Smith also argued in favor of sensible government intervention to improve and optimize free markets. Within a few years of the Friedman Doctrine, elite executives-in-training internalized and felt free to espouse it. Asked in a class in the late 1970s at Harvard Business School about a hypothetical CEO who discovers his product could kill customers, young Jeff Skilling said he “would keep making and selling the product.

We’re taxing work, savings, and investment like never before. As a result we have less work, less savings, and less invested.” See, if you pay less in taxes—and only if you pay less in taxes—America’s economic prosperity and stability will be restored. It’s not selfishness, it’s patriotism. It’s not sleight of hand, or what Reagan’s vice president had derided during his primary campaign against him as “voodoo economics.” It’s the miraculous invisible hand of the market. So what if millionaires would start paying a little less too? So what if big business was relieved of some of the government red tape everybody hates? And as for cutting government programs, people understood that Reagan was only going to get rid of the things that didn’t benefit them—all the waste and fraud, all the foreign aid, all the giveaways for all the lazy bums and welfare queens.

A problem with leveraged buyouts and other private equity takeovers, and with financialization in general, is that so often the main point isn’t to create enterprises of lasting value, enabling particular businesses (or American capitalism or American citizens) to prosper for the long term. It is to obtain those fees, the vigorish, and to score by making this deal, and then another deal, and another, because greed is good, kill them all, and let the invisible hand sort it out. As I was beginning this book in 2017, I noticed that big, familiar retail chains were all going under—Toys “R” Us, Payless, The Limited, Gymboree, and many more. Then I noticed that each of them had been subjected to a leveraged buyout, finally choked and smothered by debt piled on by temporary private equity owners. The list of solid, profitable American companies unnecessarily wrecked this way since then is extremely long.


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

After all, managers in the public sector have to answer to voters, and managers in the private sector have as their mandate the job of maximizing profits and share prices, not consumer welfare. Indeed, some of those who are most suspicious of governments think that the only responsibility of private managers is to maximize share prices. As we have emphasized, the invisible hand will, in some circumstances, lead those trying to maximize profits to maximize consumer welfare too. But when consumers are confused about the features of the products they are buying, it can be profit maximizing to exploit their confusion, especially in the short run but possibly in the long run too. The invisible hand works best when products are simple and purchased frequently. We worry very little about consumers being ripped off by their dry cleaners. A dry cleaner who loses shirts or suddenly doubles prices will not be in business long. But a mortgage broker who fails to point out that the teaser rate will disappear quickly is long gone by the time the customer gets the bad news.

And what is to stop lobbyists, axe-grinders and busybodies of all kinds hijacking the whole effort?”2 We agree that government officials, elected or otherwise, are often captured by private-sector interests whose representatives are seeking to nudge people in directions that will specifically promote their selfish goals. That is one reason that we want to maintain freedom of choice. But if private-sector interests are just following the invisible hand in furthering the interests of their customers, what’s the problem?3 The more serious point is that we should be worried about all choice architects, public and private alike. We should create rules of engagement that reduce fraud and other abuses, that promote healthy competition, that restrict interest-group power, and that create incentives to make it more likely that the architects will serve the public interest.

In the environmental domain, we have suggested that disclosure can be an effective, and low-cost, monitoring device. We would love to see similar principles used to monitor governments. Require government officials to put all their votes, earmarks, and contributions from lobbyists on their Web sites. Require those determining the future of energy policy (to cite a random example) to reveal which profit-maximizing firms were invited to lend their all-too-invisible hands to the process of designing the rules. Require those determining the future of educational policy to reveal which interest groups, and which unions, gave them money in the most recent campaign. Require government agencies, not merely the private sector, to disclose their contributions to air and water pollution, and their greenhouse gas emissions. Supreme Court Justice Louis Brandeis urged that “sunlight is the best of disinfectants.”


Who Rules the World? by Noam Chomsky

"Robert Solow", Albert Einstein, anti-communist, Ayatollah Khomeini, Berlin Wall, Bretton Woods, British Empire, capital controls, corporate governance, corporate personhood, cuban missile crisis, deindustrialization, Donald Trump, Doomsday Clock, Edward Snowden, en.wikipedia.org, facts on the ground, failed state, Fall of the Berlin Wall, Howard Zinn, illegal immigration, Intergovernmental Panel on Climate Change (IPCC), invisible hand, liberation theology, Malacca Straits, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, Nelson Mandela, nuclear winter, Occupy movement, oil shale / tar sands, one-state solution, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, Ralph Waldo Emerson, Ronald Reagan, South China Sea, Stanislav Petrov, structural adjustment programs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trade route, union organizing, uranium enrichment, wage slave, WikiLeaks, working-age population

In Adam Smith’s defense, it should be added that he recognized what would happen if Britain followed the rules of sound economics, now called “neoliberalism.” He warned that if British manufacturers, merchants, and investors turned abroad, they might profit but England would suffer. But he felt that they would be guided by a home bias, so that as if by an “invisible hand” England would be spared the ravages of economic rationality. The passage is hard to miss. It is the one occurrence of the famous phrase “invisible hand” in The Wealth of Nations. The other leading founder of classical economics, David Ricardo, drew similar conclusions, hoping that what is called “home bias” would lead men of property to “be satisfied with the low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations”—feelings that, he added, “I should be sorry to see weakened.”16 Their predictions aside, the instincts of the classical economists were sound.

Watergate was doubtless criminal, but the furor over it displaced incomparably worse crimes at home and abroad, including the FBI-organized assassination of black organizer Fred Hampton as part of the infamous COINTELPRO repression and the bombing of Cambodia, to mention just two egregious examples. Torture is hideous enough; the invasion of Iraq was a far worse crime. Quite commonly, selective atrocities have this function. Historical amnesia is a dangerous phenomenon not only because it undermines moral and intellectual integrity but also because it lays the groundwork for crimes that still lie ahead. 4 The Invisible Hand of Power The democratic uprising in the Arab world has been a spectacular display of courage, dedication, and commitment by popular forces—coinciding, fortuitously, with a remarkable uprising of tens of thousands in support of working people and democracy in Madison, Wisconsin, and other U.S. cities. If the trajectories of revolt in Cairo and Madison intersected, however, they were headed in opposite directions: in Cairo toward gaining elementary rights denied by the Egyptian dictatorship, in Madison toward defending rights that had been won in long and hard struggles and are now under severe attack.

Michael Kinsley, “Down the Memory Hole with the Contras,” Wall Street Journal, 26 March 1987. 27. Patrick Cockburn, “Torture? It Probably Killed More Americans than 9/11,” Independent (London), 6 April 2009. 28. Rajiv Chandrasekaran, “From Captive to Suicide Bomber,” Washington Post, 22 February 2009. 29. Chomsky, Hopes and Prospects, 266. 30. Ibid., 267. 31. Ibid., 268. 4. THE INVISIBLE HAND OF POWER   1. Tareq Y. Ismael and Glenn E. Perry, The International Relations of the Contemporary Middle East: Subordination and Beyond (London: Routledge, 2014), 73; Noam Chomsky, Hegemony or Survival: America’s Quest for Global Dominance (New York: Metropolitan Books, 2003), 150; Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York: Free Press, 1991).   2. Noam Chomsky, Hopes and Prospects (Chicago: Haymarket Books, 2010), 55.   3.


The Limits of the Market: The Pendulum Between Government and Market by Paul de Grauwe, Anna Asbury

"Robert Solow", banking crisis, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, conceptual framework, crony capitalism, Erik Brynjolfsson, eurozone crisis, Honoré de Balzac, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kitchen Debate, means of production, moral hazard, Paul Samuelson, price discrimination, price mechanism, profit motive, Robert Gordon, Ronald Coase, Simon Kuznets, The Nature of the Firm, The Rise and Fall of American Growth, too big to fail, transaction costs, trickle-down economics, ultimatum game, very high income

Cheaper production methods enable them to cut costs, lower prices, and attract more consumers, again raising profits. This mechanism explains why capitalism is a system in which there is constant technological progress, forming the basis for spectacular advances in material prosperity. The dynamics of the market system led the great eighteenth-century Scottish economist Adam Smith to the conclusion that there was effectively an ‘invisible hand’ ensuring that firms’ efforts to promote their own interests automatically lead to the promotion of general well-being. The baker who gets up at four in the morning to bake bread is not acting out of altruism; it is to increase profits. This individual calculation ensures that we have fresh bread each morning, in other words that the consumer’s well-being is served. This insight from Adam Smith was revolutionary, effectively stating that the collective interest is best served when everyone strives to satisfy their own interests, thus reconciling individual rationality with collective rationality.

Joseph Schumpeter, the brilliant Austrian economist, who like so many intellectuals and scientists emigrated to the US during the s to escape Nazi totalitarianism, was not a communist. Yet he had an interesting theory about why capitalism was in trouble and would be overtaken by a new system of organizing the economy. Schumpeter’s idea, which was developed in his book Capitalism, Socialism and Democracy, stressed the hostility of the intellectuals vis-à-vis a decentralized market system. As Adam Smith made clear in his celebrated ‘invisible hand’ analysis, the market system works in a decentralized way to bring about equilibrium between demand and supply, and does so without a central intellect guiding this quest towards the equilibrium. The self-interest of producers and consumers in competitive markets is all you need. It is a system that does not need to be centrally guided.  OUP CORRECTED PROOF – FINAL, 27/10/2016, SPi R I S E A N D F A L L : LINEAR OR CYCLICAL ?

.  Gini coefficients b global capitalism b global financial crisis ()  immigration – imperialism  import protection  income, share of total going to top % f,   INDEX income distribution –b, , , –,  income equality and economic growth trade-off , f,  income inequality , f, , , ,  reformist scenario  United Kingdom and United States  income per capita , f income redistribution policies  income tax f, ,  on highest incomes , , –, , , – productivity, labour costs and public sector  in selected countries f India five-year plans  gross domestic product (GDP) per capita f individual rationality and collective rationality –, –, ,  environment (external limit)  external limits of governments  industrial production, worldwide  inequality –,  assets – reduction  and social and political instability , f wealth ,  world –b see also income inequality inflation and lender of last resort –b insolvency/bankruptcy , ,  interbank market  interest rates , –, – on Spanish and British ten-year government bonds f internal contradictions of capitalism –,  internal limits of capitalism – internal limits of free market system –, , ,  internal limits of government – winner-takes-all phenomenon – International Monetary Fund (IMF) ,  investment boom  in eurozone  projects (efficiency)  public  as share of GDP  ‘invisible hand’ ,  Ireland eurozone government bond spreads, ten-year f global financial crisis ()  labour costs, gross hourly f Italy eurozone government bond spreads, ten-year f gross domestic product (GDP) per capita f labour costs, gross hourly f social security spending as percentage of government spending f Jacobson Schwartz, A. n Japan gross domestic product (GDP) per capita f liberalization and material prosperity  Kahneman, D.  Keynes, J.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

Just as it didn’t start the run on the repo, amplify the crash, or cause risk blindness, so the state had nothing to do with the design of the new instruction sheet. Indeed, the new instruction sheet was designed to keep the state as far away from market processes as possible. Morality was present to be sure, but it was an upturned morality where the naked self-interest of financial market actors was taken to be the most positive virtue because its pursuit led to optimal outcomes despite moral intention. Smith’s invisible hand had just given the public the finger. These new ideas were indeed a kind of morality play, but of a very odd type. But what mattered fundamentally was the failure of a set of ideas that justified finance doing whatever it liked because whatever it did was by definition the most efficient thing that could be done. These ideas were supposed to be “the way the world works.” So when it turned out that the world didn’t work that way, it was hardly a surprise that the rest of the edifice based on them came crashing down.

The difference between Hume and Smith is that while Hume identifies the problem, he offers no solution, seeing the slide into insolvency and enfeeblement as unavoidable. Smith goes one step better. He identifies both the problem and the solution. To solve the problem of debt we should embrace the principal of austerity—otherwise known as the parsimony of the Scots. Smith’s economics are a bit like Shakespeare—often quoted, seldom read. From his notes on the division of labor in the eponymous pin factory to the “invisible hand” guiding selfish actions to common purposes, Smith’s sound bites are well known. The details of what Smith said about the economy are far less well known and quite surprising. Smith brought together much of the scattered work of early economists on the nature of money, economic growth, the role of capital and labor, and a host of other issues, and then had the good sense to put it in one accessible place: The Wealth of Nations.25 As Albert Hirschman observed, this book was no academic project.

First, he showed that although any worker can accept a wage cut to price himself into employment, if all workers did this, it would in the aggregate lower consumption and prices, and thus increase the real wage (the wage-minus-price effects), leaving the worker who “adjusted” poorer and just as unemployed.106 Second, he showed that under conditions of uncertainty about the future, it is irrational for any investor to invest rather than sit on cash, with the result that if investors look to each other for signals about what to do, they all sit on cash and no one will invest.107 Thus we bring about, by our collective self-interested actions, the very depression we are individually trying to avoid. Smith’s invisible hand may well have arthritis, and austerity may make it worse. Keynes showed that decisions to save and invest were temporally separate, and that savings did not necessarily lead to investment. Saving could just as easily lead to hoarding and reduced consumption. The job of the state was, then, to alter the investors’ investment expectations by raising prices so that profits could be made, thereby making it rational to begin hiring workers again and, by doing so, to get out of the slump.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, IKEA effect, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

Neoclassical economics is built on very strong assumptions that, over time, have become “established facts.” Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called invisible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny. Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?

I wish I could tell you that I would often persuade my conversational partner to accept my point of view, but in almost all cases it would become very clear that neither of us was going to be converted to the other’s viewpoint. Of course, I ran into the biggest difficulties when arguing for irrationality with card-carrying rational economists, whose disregard of my experimental data was almost as intense as their nearly religious belief in rationality (if Adam Smith’s “invisible hand” doesn’t sound like God, I don’t know what does). This basic sentiment was expressed succinctly by two fabulous Chicago economists, Steven Levitt and John List, suggesting that the practical usefulness of behavioral economics has been shown to be marginal at best: Perhaps the greatest challenge facing behavioral economics is demonstrating its applicability in the real world. In nearly every instance, the strongest empirical evidence in favor of behavioral anomalies emerges from the lab.

If competition was sufficient to overcome irrationality, wouldn’t that eliminate brawls in sporting competitions, or the irrational self-destructive behaviors of professional athletes? What is it about circumstances involving money and competition that might make people more rational? Do the defenders of rationality believe that we have different brain mechanisms for making small versus large decisions and yet another yet another for dealing with the stock market? Or do they simply have a bone-deep belief that the invisible hand and the wisdom of the markets guarantee optimal behavior under all conditions? As a social scientist, I’m not sure which model describing human behavior in markets—rational economics, behavioral economics, or something else—is best, and I wish we could set up a series of experiments to figure this out. Unfortunately, since it is basically impossible to do any real experiments with the stock market, I’ve been left befuddled by the deep conviction in the rationality of the market.


pages: 279 words: 87,910

How Much Is Enough?: Money and the Good Life by Robert Skidelsky, Edward Skidelsky

"Robert Solow", banking crisis, basic income, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, call centre, creative destruction, David Ricardo: comparative advantage, death of newspapers, financial innovation, Francis Fukuyama: the end of history, full employment, happiness index / gross national happiness, income inequality, income per capita, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, market clearing, market fundamentalism, Paul Samuelson, profit motive, purchasing power parity, Ralph Waldo Emerson, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, union organizing, University of East Anglia, Veblen good, wage slave, wealth creators, World Values Survey, zero-sum game

Smith took himself to have refuted “the selfish system” of Mandeville, but he had not in fact left it all that far behind.17 Mandeville’s central mechanism—the utilization of vice for public benefit—lives on in his invisible hand, purged of its demonic flavor by the simple expedient of redefining “vice” as an innocuous natural quality. With a few exceptions, this has been the strategy of economics ever since. The value-neutral language of “utility” and “preferences” renders capitalism’s Faustian bargain necessarily invisible. Only in a few places does Smith reveal the extent of his debt to Mandeville. One is the famous passage in The Theory of Moral Sentiments describing how the vices of the wealthy redound to the benefit of society as a whole. (This, incidentally, is the first time Smith uses the metaphor of the “invisible hand.”) Though the rich, he writes, mean only their own conveniency, though the sole end which they propose … be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements.

His French contemporary Montesquieu talked of the douceur of commerce.14 Once money-making had been stripped of its ethical opprobrium, it became open to treatment in terms of cause and effect. Hume’s friend, the Scottish philosopher Adam Smith, took the lead. The Wealth of Nations, his masterpiece of 1776, presents humans as driven by a natural desire for self-improvement, which under conditions of free competition leads them “as if by an invisible hand” to promote the public well-being. Newton’s mechanical science of nature was thereby extended to economic relations, with self-interest in the role of gravity. This was a revolutionary invention. Traditional morality had conceived of society as an enterprise devoted to the common good. For Smith, by contrast, it is a purely causal nexus of self-regarding individuals. God, whom Smith quaintly calls “The Great Director of the Universe,” has merely set the machinery in motion, leaving it to self-love to work its benefits.

Though the rich, he writes, mean only their own conveniency, though the sole end which they propose … 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 make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society.”18 Here Smith reverts openly to the old moral language of rapacity, vanity and insatiability. The mask has temporarily slipped. Nor could Smith ignore, despite his best efforts to gloss it, the bad effects of the commercial system on the lives and characters of workers. His description of the warping effects of the division of labor anticipates Marx: The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur.


pages: 329 words: 85,471

The Locavore's Dilemma by Pierre Desrochers, Hiroko Shimizu

air freight, back-to-the-land, British Empire, Columbian Exchange, Community Supported Agriculture, creative destruction, edge city, Edward Glaeser, food miles, Food sovereignty, global supply chain, intermodal, invention of agriculture, inventory management, invisible hand, Jane Jacobs, land tenure, megacity, moral hazard, mortgage debt, oil shale / tar sands, oil shock, peak oil, planetary scale, profit motive, refrigerator car, Steven Pinker, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, Upton Sinclair, urban sprawl

Monocultures Overspecialization and Food Security Locavorism and Military Security Peak Oil and Locavorism Climate Change, Locavorism, and Food Security Chapter 6 - Myth #5: Locavorism Offers Tastier, More Nutritious, and Safer Food The Changing Human Body Taste Nutrition Food Safety Chapter 7 - Well-Meaning Coercion, Unintended Consequences, and Bad Outcomes A Brief Historical Overview of Government Intervention in Food Markets Public Food Reserves Food Export Restrictions and Bans Price Floors Price Ceilings On Appointing “Good” Czars Unleashing the Invisible Hand CONCLUSION EPILOGUE NOTES INDEX Copyright Page To Ferenc (“Ferko”) Csillag (1955–2005), dear friend and mentor. You are sorely missed. [T]he time has arrived . . . when the various portions of the earth will each give forth their products for the use of each and of all; that the over-abundance of one country will make up for the deficiency of another; the superabundance of the year of plenty serving for the scant harvests of its successor . . .

Perhaps this is because, as Adam Smith observed more than two centuries ago, it is typically “the industry which is carried on for the benefit of the rich and powerful that is principally encouraged” by the political system “while that which is carried on for the benefit of the poor and the indigent is too often either neglected or oppressed.”43 In other words, the poor and middle-class can’t afford top lobbyists while the path of least resistance for politicians has always been the creation of new programs rather than the phasing out or redirecting of existing ones. If history is again any guide, however, beneficial change can sometimes happen in the wake of a crisis (although plenty of bad things can happen, too . . . ), as we will now discuss. Unleashing the Invisible Hand For nearly a century and a half, food activists and small producers of all kinds have argued that unbridled competition will destroy family farms and empower “monopolistic” corporations. True, in a free market inefficient firms are continuously being driven out of business while the most efficient ones are rewarded by consumers and growth as long as there are economies of scale to be realized—but only until the day they stop providing the best alternative available and are themselves driven out of business or absorbed by more efficient competitors.

Human body agribusiness and changing evolution of Human intellect Hundred Years War Hunger See also Famine; Food shortage Hunter, William Wilson Hurst, Blake Hybridization Imperfections Imports rice urbanization and India Initiatives, local food economic depression and history of support wartime(photo) Inner cities Innovation Integrated Regional Information Networks Intermediaries Invasive species Invisible hand Irish potato famine Jacks, Graham Vernon Jacobs, Jane Japan famine in World War II and Jefferson, Lorian P. Jeffrey, Clara Jensen Farms Johnson, Paul Juche The Jungle (Sinclair) Junk food Kautsky, Karl Kenyan exports King, Clyde Lyndon Kingsolver, Barbara Know Your Farmer, Know your Food program Ladies’ Home Journal (magazine) Land abandoned grabs management urban Land use debate over trade-off Landsburg, Steven Latitude LCA.


pages: 297 words: 84,009

Big Business: A Love Letter to an American Anti-Hero by Tyler Cowen

23andMe, Affordable Care Act / Obamacare, augmented reality, barriers to entry, Bernie Sanders, bitcoin, blockchain, Bretton Woods, cloud computing, cognitive dissonance, corporate governance, corporate social responsibility, correlation coefficient, creative destruction, crony capitalism, cryptocurrency, dark matter, David Brooks, David Graeber, don't be evil, Donald Trump, Elon Musk, employer provided health coverage, experimental economics, Filter Bubble, financial innovation, financial intermediation, global reserve currency, global supply chain, Google Glasses, income inequality, Internet of things, invisible hand, Jeff Bezos, late fees, Mark Zuckerberg, mobile money, money market fund, mortgage debt, Network effects, new economy, Nicholas Carr, obamacare, offshore financial centre, passive investing, payday loans, peer-to-peer lending, Peter Thiel, pre–internet, price discrimination, profit maximization, profit motive, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Ronald Coase, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, The Nature of the Firm, Tim Cook: Apple, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, ultimatum game, WikiLeaks, women in the workforce, World Values Survey, Y Combinator

In this sense Hollywood is not wrecking America’s intellectual or ideological climate. Unfortunately, however, many of the virtues of business and markets are hard to show on the screen. Adam Smith wrote of “the invisible hand” as a core mechanism through which profit-seeking behavior can cause businesspeople to act in the greater interest of society, yet without their necessarily feeling any benevolence. A balancing of profit and loss goes on behind the scenes, and resources are removed from one set of uses and moved to another. The thing about the invisible hand is that it is, well, invisible. It also requires some level of conceptual understanding, and much of the American public doesn’t know enough economics to follow invisible-hand reasoning on the screen. Furthermore, in popular culture, viewers tend to judge individuals by their intentions, and intentions are often easier to show on the screen than the final results of actions.

Many employers go out of their way to make their companies sources of worker dignity and satisfaction, most of all because workers and potential workers, especially among the relatively young, value such things. The more a company is viewed positively, the easier it is to recruit talented workers. The desire to attract and keep talent is the single biggest reason companies try to create pleasant, tolerant, stimulating atmospheres. That is yet another example of how Adam Smith’s invisible hand leads greedy corporations to take costly actions in the social interest. ALL IS NOT PERFECT As I have been writing this book, sexual harassment in the workplace has emerged as one of the major issues in the public eye, and I am seeing an increasing number of appalling scandals being brought to light, including in the corporate arena. Many women have reported that harassment in the workplace (and elsewhere) has damaged their self-confidence or led them to think a particular profession or institution was not for them.


pages: 261 words: 81,802

The Trouble With Billionaires by Linda McQuaig

"Robert Solow", battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, British Empire, Build a better mousetrap, carried interest, collateralized debt obligation, computer age, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Douglas Engelbart, Douglas Engelbart, employer provided health coverage, financial deregulation, fixed income, full employment, George Akerlof, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invention of the wheel, invisible hand, Isaac Newton, Jacquard loom, Joseph-Marie Jacquard, laissez-faire capitalism, land tenure, lateral thinking, Mark Zuckerberg, market bubble, Martin Wolf, mega-rich, minimum wage unemployment, Mont Pelerin Society, Naomi Klein, neoliberal agenda, Northern Rock, offshore financial centre, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, pre–internet, price mechanism, purchasing power parity, RAND corporation, rent-seeking, rising living standards, road to serfdom, Ronald Reagan, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, trickle-down economics, Vanguard fund, very high income, wealth creators, women in the workforce

.), Inflation and its Effects (Chicago: University of Chicago Press, 1982), p. 261. ‌19 Cockett, Thinking the Unthinkable, pp. 25–34. ‌20 Timmins, The Five Giants, p. 167. ‌21 Cockett, Thinking the Unthinkable, pp. 102–3. ‌22 Hayek note, cited in ibid., p. 104. ‌23 Ibid., p. 122. ‌24 Fisher quoted in ibid., pp. 123–4. ‌25 Quoted in ibid., p. 176. ‌26 Quoted in ibid., p. 174. ‌27 Ibid., p. 307. ‌28 Quoted in Kim Phillips-Fein, The Invisible Hand (New York: W. W. Norton & Company, 2009), p. 119. ‌29 Dwight D. Eisenhower, in L. Galambos & D. van Ee, ‘The Papers of Dwight David Eisenhower’, doc. 1147. ‌30 Phillips-Fein, The Invisible Hand, p. 165. ‌31 Lee Edwards, The Power of Ideas (Ottawa, IL: Jameson, 1997), p. 9. ‌32 Phillips-Fein, The Invisible Hand, pp. 169–72. ‌33 Yasha Levine & Mark Ames, ‘Charles Koch to Friedrich Hayek: Use Social Security!’, The Nation, 27 September 2011. ‌34 Harry G. Frankfurt, ‘Reflections on Bullshit’, Harper’s, February 1987. Frankfurt later developed his theory into a bestselling book, On Bullshit, published by Princeton University Press in 2005. 10 Revamping the Ovarian Lottery ‌1 Norbert Haring & Niall Douglas, Economists and the Powerful (London: Wimbledon Publishing Company, 2012), p. 1. ‌2 Adam Smith, The Wealth of Nations (London: Penguin Books, 1999), p. 857. ‌3 Hugh Stretton & Lionel Orchard, Public Goods, Public Enterprise, Public Choice: Theoretical Foundations of the Contemporary Attack on Government (New York: St.

Rather than seeing depression and high rates of unemployment as an aberration, Keynes saw them as a natural and recurring state of affairs. Capitalism, left on its own, was far from self-correcting. On the contrary, said Keynes, it was inherently unstable. Something else was needed. When humans were nervous and uncertain, as they are during a recession, it wasn’t enough to rely on the unpredictable ‘invisible hand’ of supply-and-demand forces in the marketplace. A strong, highly visible hand was needed, one that would be seen injecting money directly into the economy, into the pockets of consumers and business owners. But whose hand would this be? Individual entrepreneurs were understandably obsessed with their own financial survival and were unlikely to be able to rise above their fears. What was needed, then, was government, with its ability to draw on the collective resources of the community and to operate in the collective interest.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

"Robert Solow", accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, different worldview, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

What’s the right weight for policymakers to put on different indicators? How should they assess the metrics? One answer, the one many people would have given until recently, is that this challenge is best left to markets. Markets automatically reflect information widely dispersed through the economy and also the preferences of countless individuals, and aggregate all of that to match supply with demand, “as if by an invisible hand,” to use Adam Smith’s famous phrase. For a generation—certainly for the twenty years after the end of the Cold War and fall of communism—relying on market mechanisms seemed the obvious way to ensure the economy delivered for all. Questions of value and values fell out of fashion. For obvious reasons, the earlier big ideological questions of communism versus capitalism seemed to have been settled by history.

He believed that the moral foundations of both communism and capitalism were shaky; that the efficiency of the American economy in delivering on its citizens’ desires would threaten the ability to define a consensus on matters of public morality. Galbraith, in one of his most famous works, The Affluent Society (1958), challenged the assumption that the continual increase in material production was a sign of economic and societal health. Because of this he is considered to be one of the first postmaterialists. Fred Hirsch, in The Social Limits to Growth, argued that Adam Smith’s invisible hand was no longer operative in developed economies. He argued that the luxuries of one generation became necessities for the next as if society were a column moving steadily forward with the rich tasting the fruits that would eventually be conveyed to the rest of humanity. He predicted a future of increasing personal competition in an ever more vicious rat race and that such a process would have a detrimental impact on the moral fabric of society.

The Bottom Billion. New York: Oxford University Press. ———. 2010. The Plundered Planet. New York: Oxford University Press. Corrado, Carol, Charles Hulten, and Daniel Sichel. 2006. “Intangible Capital and Economic Growth.” Working Paper No. 11948. Cambridge, MA: Na: National Bureau of Economic Research. Cosmides, Leda, and John Tooby. 1994. “ Better than Rational: Evolutionary Psychology and the Invisible Hand.” The American Economic Review 84:2, pp. 327–32. Coyle, Diane. 1996. The Weightless World. Oxford: Capstone. ———. 2001. Paradoxes of Prosperity. New York: Texere. ———. 2003. “Corporate Governance, Public Governance, and Global Governance: The Common Thread.” Manchester, UK: University of Manchester, Institute of Political and Economic Governance. ———. 2007. The Soulful Science: What Economists Really Do and Why It Matters.


Rummage: A History of the Things We Have Reused, Recycled and Refused To Let Go by Emily Cockayne

Cape to Cairo, carbon footprint, card file, Fellow of the Royal Society, full employment, invisible hand, Isaac Newton, joint-stock company, Kickstarter, New Journalism, oil shale / tar sands, On the Economy of Machinery and Manufactures, paper trading, South Sea Bubble

William Crookes, ‘Chemical Products – the Application of Waste’, Popular Science Review, 2:5 (January 1863), p. 59. 69. The arguments that profits gained from by-products outweighed the costs of production were disputed at the same time: see Desrochers, ‘Does the Invisible Hand Have a Green Thumb?’ Geographic Journal, 175:1, 2009, pp. 7–12. 70. [Wynter], ‘The Use of Refuse’, p. 346. 71. Pierre Desrochers has detailed the interplay between legislative demands to clean up and the urge to find creative ways to maximise profit: ‘win-win outcomes’: ‘Does the Invisible Hand Have a Green Thumb?’, at pp. 12–13. See also Pierre Desrochers, ‘Promoting Corporate Environmental Sustainability in the Victorian Era’, V&A Online Journal, 3 (Spring 2011). 72. Trades’ Guide for Midland Counties (Birmingham, 1879), p. 176. 73.

Bristol Archives, M/BCC/SAN/14/1, Salvage Drive Minute Book 1941–1944, minutes for the meeting 28 July 1941. 48. [Edwin Chadwick], An Inquiry into the Sanitary Condition of the Labouring Population of Great Britain (London, 1842), p. 381. 49. Desrochers, ‘Does the Invisible Hand?’, pp. 8–11. 50. Simmonds, Waste Products, p. 460. 51. Bashley Britten, ‘Utilisation of Blast-Furnace Slag for the Manufacture of Glass’, British Architect & Northern Engineer, 6:13, 29 September 1876, p. 201. 52. Simmonds, Waste Products, pp. 2, 464–5; Greenwood, ‘The Utilisation of Waste IV’, p. 840; James Winter, Secure from Rash Assault (Berkeley, CA, 1999), pp. 146–7. 53. Britten, ‘Utilisation of Blast-Furnace Slag’, p. 201; Desrochers, ‘Does the Invisible Hand?’, pp. 9–11; Thomas Greenwood, ‘The Utilisation of Waste IV’, Leisure Hour, 35, December 1886, p. 840. 54. C. T. Flower, ‘Manuscripts and the War’, Transactions of the Royal Historical Society, 4th ser., 25 (1943), p. 28. 55.

John Haggard, Reports of Cases Argued and Determined in the Consistory Court of London, 2 vols (London, 1822), vol. 1, pp. 409–14. 16. ‘Much Excitement’, Evening Mail, 22 January 1836, p. 6; London Metropolitan Archives, MJ/SP/C/W/1730, Coroner’s report Henry Kirkman, Westminster district, St Pancras no. 33, 22 January 1836. 17. OB, t18250113–200, 13 January 1825. 18. Desrochers, ‘Does the Invisible Hand?’, pp. 5–6; Charles Slack, Noble Obsession (London, 2002), p. 61. 19. London Metropolitan Archives, CLC/W/JB/044/MS01018/001, St Dunstan in the West precinct: registers of presentments of the Wardmote Inquest, 2 vols, 1558–1870, vol. 1, fol. 200. Presentment of William Sturt, 1814. 20. Peter Thorsheim, ‘The Paradox of Smokeless Fuels: Gas, Coke and the Environment in Britain, 1813–1949’, Environment and History, 8:4 (2002), pp. 381–401. 21.


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To Serve God and Wal-Mart: The Making of Christian Free Enterprise by Bethany Moreton

affirmative action, American Legislative Exchange Council, anti-communist, Berlin Wall, big-box store, Bretton Woods, Buckminster Fuller, collective bargaining, corporate personhood, creative destruction, deindustrialization, desegregation, Donald Trump, estate planning, Fall of the Berlin Wall, Frederick Winslow Taylor, George Gilder, global village, informal economy, invisible hand, liberation theology, longitudinal study, market fundamentalism, Mont Pelerin Society, mortgage tax deduction, Naomi Klein, new economy, post-industrial society, postindustrial economy, prediction markets, price anchoring, Ralph Nader, RFID, road to serfdom, Ronald Reagan, Silicon Valley, Stewart Brand, strikebreaker, The Wealth of Nations by Adam Smith, union organizing, walkable city, Washington Consensus, white flight, Whole Earth Catalog, Works Progress Administration

Individual academicians were sponsored by corporations like Bristol-Â�Meyers, Caterpillar, Dupont, and Westinghouse.7 Read wrote “I, Pencil: My Family Tree as Told to Leonard E. Read,” in 1958, laying out the theory of the invisible hand of the market in the first-Â�person voice of a humble pencil. The lesson I have to teach is this: Leave all creative energies uninhibited. Merely orÂ�gaÂ�nize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-Â�hows freely to flow. Have faith that free men and Â�women will respond to the Invisible Hand. This faith will be conÂ�firmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth. 8 Friedman’s example on the nationally broadcast Free to Choose thus adapted the former public relations man’s homily aimed at schoolchildren.

Many sources contributed to the late-twentieth-century prestige of neoliberalism, or the belief that individual entrepreneurship, vigorous private property rights, and minimal barriers to trade best provide for personal freedom and well-being.2 The economists who coined the term in the years around World War II blended the free-market enthusiasm of some nineteenth-century political economists with Adam Smith’s classic image: the invisible hand of the market that mysteriously guided the most venal human concerns into the collective good. Thus neoliberalism envisions the economy as a sphere inÂ�deÂ�penÂ�dent of other social institutions and relationships. It understands the market to operate by natural laws that will, if left to their own devices, optimize the conditions of human existence. In this logic, there is no such thing as society or community, only individuals; the commons are a crime against efÂ�fiÂ� ciency; and government action intrudes illegitimately on the sovereign territory of economics, to the detriment of all.

The pencil arose from miners in Ceylon who dug up the graphite, and the people who made the string that tied the sacks in which the graphite was shipped, and those who loaded the sacks onto boats, and so forth, at exhaustive length. The miracle in this proÂ�cess was said to lie in the ab193 TO SERVE GOD AND WAL - Â�M ART sence of any central mastermind, or even any intent to make a pencil on the part of most of those implicated in the proÂ�cess. So what brought it all together? SIFE’s answer was clear: The invisible hand of the market. The Harding students who toured with their giant pencil referred to themselves as followers of Milton Friedman, the passionate laissez-Â�faire economist and 1976 Nobel Prize winner. Soon after retiring from his teaching duties at the University of Chicago in the late 1970s, Friedman and his wife, fellow economist Rose Friedman, were approached by the renegade CEO of a Public Broadcasting Service (PBS) affiliate in Erie, Pennsylvania.


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

"Robert Solow", 23andMe, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon footprint, Cesare Marchetti: Marchetti’s constant, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, Flynn Effect, food miles, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, hedonic treadmill, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, Kickstarter, knowledge worker, Kula ring, Mark Zuckerberg, meta analysis, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, plutocrats, Plutocrats, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, Thales and the olive presses, Thales of Miletus, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, Vilfredo Pareto, wage slave, working poor, working-age population, Y2K, Yogi Berra, zero-sum game

Human beings are a species that stops its own population expansions once the division of labour reaches the point at which individuals are all trading goods and services with each other, rather than trying to be self-sufficient. The more interdependent and well-off we all become, the more population will stabilise well within the resources of the planet. As Ron Bailey puts it, in complete contradiction of Garrett Hardin: ‘There is no need to impose coercive population control measures; economic freedom actually generates a benign invisible hand of population control.’ Most economists are now more worried about the effects of imploding populations than they are about exploding ones. Countries with very low birth rates have rapidly ageing workforces. This means more and more old people eating the savings and taxes of fewer and fewer people of working age. They are right to be concerned, though they would be wrong to be apocalyptic, after all, today’s 40-year-olds will surely be happier to continue operating computers in their seventies than today’s 70-year-olds are to continue operating machine tools.

Even John Stuart Mill, conceding that returns were showing no signs of diminishing in the 1840s, put it down to a miracle, innovation, he said, was an external factor, a cause but not an effect of economic growth, an inexplicable slice of luck. And Mill’s optimism was not shared by his successors. As discovery began to slow, so competition would drive the profits of enterprise out of the increasingly perfect market till all that was left was rent and monopoly. With Smith’s invisible hand guiding infinite market participants possessed of perfect information to profitless equilibria and vanishing returns, neo-classical economics gloomily forecast the end of growth. It was a description of an entirely fictional world. The concept of a steady final state, applied to a dynamic system like the economy, is as wrong as any philosophical abstraction can be. It is Pareto piffle. As the economist Eamonn Butler puts it, the ‘perfect market is not just an abstraction; it’s plain daft ...

In the mega-droughts of the ice ages, Africa could support very few early hunter-gatherers; in a warm and moist interglacial, it can support a billion mostly urban exchanger-specialisers. Chapter Eleven The catallaxy: rational optimism about 2100 In this book I have tried to build on both Adam Smith and Charles Darwin: to interpret human society as the product of a long history of what the philosopher Dan Dennett calls ‘bubble-up’ evolution through natural selection among cultural rather than genetic variations, and as an emergent order generated by an invisible hand of individual transactions, not the product of a top-down determinism. I have tried to show that, just as sex made biological evolution cumulative, so exchange made cultural evolution cumulative and intelligence collective, and that there is therefore an inexorable tide in the affairs of men and women discernible beneath the chaos of their actions. A flood tide, not an ebb tide. Somewhere in Africa more than 100,000 years ago, a phenomenon new to the planet was born.


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Goddess of the Market: Ayn Rand and the American Right by Jennifer Burns

anti-communist, bank run, barriers to entry, centralized clearinghouse, collective bargaining, creative destruction, desegregation, feminist movement, financial independence, George Gilder, invisible hand, jimmy wales, Joan Didion, John Markoff, Joseph Schumpeter, knowledge worker, laissez-faire capitalism, lone genius, Menlo Park, minimum wage unemployment, Mont Pelerin Society, new economy, Norman Mailer, offshore financial centre, Ponzi scheme, profit motive, RAND corporation, rent control, road to serfdom, Robert Bork, rolodex, Ronald Reagan, side project, Stewart Brand, The Chicago School, The Wisdom of Crowds, union organizing, urban renewal, white flight, Whole Earth Catalog

Rand and libertarianism more generally are given a thorough, albeit brief, treatment by John Kelley in Bringing the Market Back In: The Political Revitalization of Market Liberalism (1997). As historians have begun to locate the origins of conservatism in reaction against the New Deal and thereby accord more weight to business libertarianism, Rand has emerged as a figure of greater consequence. In Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (2009), Kimberly Phillips-Fein asserts the centrality of libertarian businessmen to the conservative renaissance, an important new line of interpretation that is being followed by a host of emerging scholars. Phillips-Fein notes Rand’s popularity among businessmen and describes her early political activism. Although not academic in nature, Brian Doherty’s celebratory Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement (2007) also recognizes Rand as a foundational thinker of libertarianism, alongside F.

Recently historians have begun to trace the connections between this Old Right and the postwar conservative movement. See Gregory L. Schneider, The Conservative Century: From Reaction to Revolution (New York, Rowman and Littlefield, 2008); Donald Critchlow, The Conservative Ascendancy: How the GOP Right Made Political History (Cambridge, MA: Harvard University Press, 2007); Kimberly Phillips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Ronald Reagan (New York: Norton, 2009); Joseph Lowndes, From the New Deal to the New Right (New Haven, CT: Yale University Press, 2008). 28. Although it did not become widely used until the 1950s, “libertarian” was in circulation prior to the New Deal. It emerged after Roosevelt popularized a new understanding of “liberal,” the term formerly used by advocates of limited government.

Chamber of Commerce, and the Pamphleteers are taken from Greg Eow, “Fighting a New Deal: Intellectual Origins of the Reagan Revolution, 1932–1952,” PhD diss., Rice University, 2007. Read’s influence and the libertarian climate of southern California more generally is described in Lisa McGirr, Suburban Warriors: The Origins of the New American Right (Princeton, NJ: Princeton University Press, 2001), 34. 6. The national business movement against the New Deal is described in Kimberly Phillips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: Norton, 2009). For state activities, see Elizabeth Tandy Shermer, “Counter-Organizing the Sunbelt: Right-to-work Campaigns and Anti-Union Conservatism, 1943–1958,” Pacific Historical Review 78, no. 1 (2009): 81–118. Interestingly, Rand later came out in opposition to right-to-work laws, which she saw as an infringement upon freedom of contract.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

"Robert Solow", accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

The critics were right: society is more than the sum of its individual members, and a society’s behavior cannot be modeled by simply adding up the behaviors of all the individuals in it. To see why the critics have been vindicated by economists, and yet economists still pretend that they won the argument, we have to take a trip down memory lane to late eighteenth-century England. The kernel Adam Smith’s famous metaphor that a self-motivated individual is led by an ‘invisible hand’ to promote society’s welfare asserts that self-centered behavior by individuals necessarily leads to the highest possible level of welfare for society as a whole. Modern economic theory has attempted, unsuccessfully, to prove this assertion. The attempted proof had several components, and in this chapter we check out the component which models how consumers decide which commodities to purchase.

The first assumption in fact amounts to assuming that there is only one person in society (or that society consists of a multitude of identical drones) – since how else could ‘everybody’ have the same tastes? The second amounts to assuming that there is only one commodity – since otherwise spending patterns would necessarily change as income rose. These ‘assumptions’ clearly contradict the case economists were trying to prove, since they are necessarily violated in the real world – in fact, they are really a ‘proof by contradiction’ that Adam Smith’s invisible hand doesn’t work. Sadly, however, this is not how most economists have interpreted these results. When conditions (a) and (b) are violated, as they must be in the real world, then several important concepts which are important to economists collapse. The key casualty here is the vision of demand for any product falling as its price rises. Economists can prove that ‘the demand curve slopes downward in price’ for a single individual and a single commodity.

TABLE 4.3 Sales and costs determine the level of output that maximizes profit It’s no wonder, then, that, despite all the criticisms leveled at it, neoclassical economists cling to the model of the ‘perfect’ competitive market. In a competitive market, since marginal revenue equals price, profit-maximizing behavior leads to an output level at which price equals marginal cost. This is the embodiment of Smith’s ‘invisible hand’ metaphor about the capacity of market economy to reconcile private interest and public virtue, and that is the real message of the ‘Totem of the Micro.’8 Perfect competition The main distinguishing feature of the perfectly competitive market is the number of firms in it. Whereas a monopoly has just one firm – which therefore has the entire market demand curve to itself – a perfectly competitive market has many little firms, each competing for a tiny slice of total demand.


The Toaster Project: Or a Heroic Attempt to Build a Simple Electric Appliance From Scratch by Thomas Thwaites

carbon footprint, global supply chain, invisible hand, lateral thinking, supply-chain management, The Wealth of Nations by Adam Smith

They’d have to take them back when they’d reached the end of their working life. Therefore, in theory, the manufacturers could save themselves a bit of money in the end if, in the first place, they designed their products so that they could easily dismantle them and sort all the components and materials into nice separate piles that could be reused or recycled. Thus while acting entirely in the interests of saving themselves some money, the invisible hand of the market would guide these companies to make products that were less environmentally harmful. This led to lots of interesting ideas about how you could design things to be easily and quickly (and therefore cheaply) disassembled. For example, Nokia made a mobile phone that would spring itself apart in the right conditions, and screws were developed that would actually unscrew themselves if heated to the right temperature.

., said to me (well, me and the rest of the audience), “A complex product being made is like one of those films of a glass smashing that they play backwards—all the bits come together in the right place at exactly the right time to be assembled into this thing—it’s amazing.” I agree with Mr. Ive; it is amazing. I even have one of his iPhones, which at the moment I quite like (though strangely it does make me feel like a bit of an idiot when everyone else in the room has one too—like going to a party and everyone’s wearing the same “fashionable” top—but that’s the point of fashion right?). However, before we get too chummy with Adam Smith and his invisible hand, it seems that the need to buy more stuff to stimulate our economy, and the need to consume less to save our environment, are on a collision course. So while the £1187.54 price of my toaster doesn’t really include all that it cost to make it, £3.94 isn’t really what the Argos Value version cost either. The real “cost” of products is hidden. We don’t see (or smell) the pollution emitted when iron is smelted or plastics are made.


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Company: A Short History of a Revolutionary Idea by John Micklethwait, Adrian Wooldridge

affirmative action, barriers to entry, Bonfire of the Vanities, borderless world, business process, Charles Lindbergh, Corn Laws, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, double entry bookkeeping, Etonian, hiring and firing, industrial cluster, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, knowledge worker, laissez-faire capitalism, manufacturing employment, market bubble, mittelstand, new economy, North Sea oil, race to the bottom, railway mania, Ronald Coase, Silicon Valley, six sigma, South Sea Bubble, Steve Jobs, Steve Wozniak, strikebreaker, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, tulip mania, wage slave, William Shockley: the traitorous eight

In the nineteenth century, the gains to be had from integrating mass production with mass distribution were enormous—as Alfred Chandler, the doyen of business historians, puts it, the “visible hand of managerial direction” replaced “the invisible hand of market mechanisms.” In the twenty-first century, technology and globalization are helping to reduce barriers to entry—and thus helping to unbundle the corporate package. At the touch of a button, a mere journalist can get access to more information than a corporate giant could amass a decade ago. The fashion nowadays is for virtual companies—for airlines that do not own their own planes, for banks that do not have branches, for the invisible hand to claw back ground from the visible one. That should not imply that the company is beginning a slow, inevitable decline. Despite the seductive charm of frictionless capitalism, most people seem to like being in companies.

Even the parsimonious Andrew Carnegie, whose writings included The Advantage of Poverty, owned a Scottish castle, Skibo, with a staff of eighty-two and a New York mansion with sixty-four rooms.5 FIRST CAME THE RAILROADS Why did these extraordinary organizations take off when they did? Alfred Chandler has provided the classic answer: “Modern business enterprise” became viable “only when the visible hand of management proved to be more efficient than the invisible hand of market forces.” For that to happen, a new system of transport and communication was necessary. The railroads were not just great enablers for modern business; they were also the first modern businesses.6 It took gigantic quantities of capital—much of it from Britain—to build 31,000 miles of railroad, as America had in 1860 (let alone the 240,000 miles it had by 1910).7 Railroads had equally little choice about being the first firms to employ large armies of full-time managers.


pages: 164 words: 57,068

The Second Curve: Thoughts on Reinventing Society by Charles Handy

"Robert Solow", Airbnb, basic income, Bernie Madoff, bitcoin, bonus culture, British Empire, call centre, Clayton Christensen, corporate governance, delayed gratification, Diane Coyle, disruptive innovation, Edward Snowden, falling living standards, future of work, G4S, greed is good, informal economy, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kickstarter, Kodak vs Instagram, late capitalism, mass immigration, megacity, mittelstand, Occupy movement, payday loans, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, Ronald Coase, shareholder value, sharing economy, Skype, Social Responsibility of Business Is to Increase Its Profits, Stanford marshmallow experiment, Steve Jobs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Veblen good, Walter Mischel

Adam Smith, the godfather of economics, said it, so it had become a hallowed truth, almost the foundation stone of capitalism. So how could it all have gone so wrong? Let us be clear from the start: Adam Smith did not say that the ‘invisible hand’ would allow self-interest to work for the good of all. He only mentioned that metaphor once in his book The Wealth of Nations, and that was to suggest that an invisible hand would incline a merchant to invest at home rather than in foreign lands. His exact words are: 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. Just one example of how language can be twisted to mean what you want it to mean.


pages: 323 words: 92,135

Running Money by Andy Kessler

Andy Kessler, Apple II, bioinformatics, Bob Noyce, British Empire, business intelligence, buy and hold, buy low sell high, call centre, Corn Laws, Douglas Engelbart, family office, full employment, George Gilder, happiness index / gross national happiness, interest rate swap, invisible hand, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, knowledge worker, Leonard Kleinrock, Long Term Capital Management, mail merge, Marc Andreessen, margin call, market bubble, Maui Hawaii, Menlo Park, Metcalfe’s law, Mitch Kapor, Network effects, packet switching, pattern recognition, pets.com, railway mania, risk tolerance, Robert Metcalfe, Sand Hill Road, Silicon Valley, South China Sea, spinning jenny, Steve Jobs, Steve Wozniak, Toyota Production System, zero-sum game

Plus, someone constantly had to seal the cylinder to make a strong vacuum and prevent steam from leaking out of the craggy-edged cylinder. Wet hemp, Jamaica’s finest, was the sealant of the day. The professor in charge of Watt at Glasgow University, Dr. Joseph Black, was teaching courses, theorizing about a concept known as latent heat, starting back in 1761. Another professor at U of G around the same time was Adam Smith (of the invisible hand). In fact, Smith and Black were good friends. Latent heat is the reason a watched pot never boils or why you put ice cubes in soda. Latent heat means you can add heat to a pot of water, but it won’t boil and give off steam until the entire pot of water is at 212° Fahrenheit. And no matter how much heat is applied by the hot sun at a baseball game, all the ice has to melt before a soda increases in temperature, right before the kid behind you spills it on your shoes.

Even after spending billions on research, they make 50% operating margins and can afford to spend more each and every year on research. Nothing static about it. Wealth is a process. If I learned nothing else from running money, that is it. Running money is supposed to be unemotional. Get conviction Why It’s Imperative to Drive a Beemer 279 on things others don’t or can’t know about and find future returns. But the stock market is also a force of change. It is the embodiment of Adam Smith’s invisible hand. It funds growth and starves dying businesses and pushes progress. Not always, I suppose, but enough. With intellectual property and the margin surplus the U.S. is running, the stock market plays a key role in balancing payments and currencies and how the world now works. In an odd way, being a player in the stock market is a form of activism, albeit indirect and invisible activism, in pushing a model that increases living standards.

It’s about finding waterfalls that create massive growth and monster markets and change for the better to the status quo. One hundred thousand or more people running money all day, every day, most staring at their screens, doing trades, providing access to capital, sloshing capital around. Whether we realize it or not, we are all driving progress, not individually, but collectively. Adam Smith’s invisible hand? If you like. That’s what a stock market does. But in this postindustrial, intellectual property world, it’s more like Doug Engelbart’s visible hands, clasped together, rising up, scaling knowledge, augmenting humans. > > > Ghana a Goner This virtuous model of the margin surplus creating jobs and a middle class in the developing world at the same time it increases wealth in the U.S. and other intellectual property economies is pretty counterintuitive.


When the Money Runs Out: The End of Western Affluence by Stephen D. King

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

This was a reaction to the excess inflation of the 1970s, a period during which central banks were too often required to do the bidding of their political masters. For a while, inflation was endemic, leading to losses for those on 77 4099.indd 77 29/03/13 2:23 PM When the Money Runs Out fixed monetary incomes – most obviously pensioners – and huge distortions to the price mechanism – Adam Smith’s ‘invisible hand’. By making central banks independent, and thus no longer subject to the temptations of the electoral cycle, the hope was that inflation would eventually be brought back under control, leaving the world a much happier place. The financial crisis has destroyed this separation of monetary church from state. By altering the yield on government debt, quantitative easing has, in effect, brought governments and central banks back together again.

The first is for the central bank to buy a much wider range of assets – not just government paper but also asset backed-­securities, corporate bonds, foreign currency or maybe even equities. Central banks have dabbled in all of these areas in the past and many continue to do so today.14 There is, however, an obvious drawback. A central bank simply doesn’t have the resources to manage credit risk. Allocating capital is supposed to be the job of the invisible hand, not the long arm of the central banker. Widening the range of assets to be purchased turns a central bank slowly but surely into the financial equivalent of a state planner. It is not an edifying vision. The second option is to dig holes or to send for the helicopters. Quantitative easing is designed to bypass the banking system in a bid to put cash directly in people’s pockets. One reason why it hasn’t been particularly successful is simply that people already feel heavily indebted and have no desire to borrow any more.

Collective undertakings of any kind, not merely governmental, become difficult or impossible 132 4099.indd 132 29/03/13 2:23 PM Loss of Trust, Loss of Growth not only because A may betray B but because even if A wants to trust B he knows that B is unlikely to trust him.11 The loss of trust witnessed in recent years – from within the financial system – has been nothing short of extraordinary. Pre-­crisis, faith in the power of the market – and its invisible hand – was sky high. That faith, however, depended on the idea that the market could somehow be trusted to deliver not just outcomes better than under any alternative system of resource allocation but also outcomes that were genuinely good for all. Yet, slowly but surely, trust has been chipped away, so much so that financial markets are no longer capable of delivering the outcomes of old. Creditors and debtors – and all those who lie in-­between – eye each other with suspicion.


pages: 338 words: 92,465

Reskilling America: Learning to Labor in the Twenty-First Century by Katherine S. Newman, Hella Winston

active measures, blue-collar work, business cycle, collective bargaining, Computer Numeric Control, deindustrialization, desegregation, factory automation, interchangeable parts, invisible hand, job-hopping, knowledge economy, longitudinal study, low skilled workers, performance metric, reshoring, Ronald Reagan, Silicon Valley, social intelligence, two tier labour market, union organizing, upwardly mobile, War on Poverty, Wolfgang Streeck, working poor

John Hildebrand, “Regents: High School Students Can Seek Waiver of One History Exam,” Newsday, January 12, 2015, http://www.newsday.com/long-island/regents-high-school-students-can-seek-waiver-of-one-history-exam-1.9800090. 4. What Industry Needs 1.   Joleen Kirschenman and Kathryn M Neckerman, “‘We’d Love to Hire Them, But…’: The Meaning of Race for Employers,” Urban Underclass 203 (Washington, DC: Brookings Institution, 1991), 203–32. 2.   Deirdre Royster, Race and the Invisible Hand: How White Networks Exclude Black Men from Blue-Collar Jobs (Berkeley: University of California Press, 2003). 3.   Rosenbaum, Beyond College for All, 136. 4.   Despite the bad name that standardized tests have garnered, especially for bias of various kinds, in employment it has been shown that firms making use of tests are fairer in their hiring decisions than those that rely on interviews.

Christopher Tilly, “Skills and Race in Hiring: Quantitative Findings from Face-to-face Interviews” (with Philip Moss), Eastern Economic Journal 21, no. 3 (1995): 357–74. 5.   Deirdre Royster’s work shows that even when black and white students are trained in the same vocational programs, the homegrown, kinship, and neighborhood-based networks of whites advantage them in job seeking. This is why institutions need to step in and cultivate employer connections. Royster, Race and the Invisible Hand. 6.   John H. Bishop and Ferran Mañe, “The Impact of School-Business Partnerships,” in The School-to-Work Movement: Origins and Destinations, ed. William J. Stull and Nicholas Sanders (Westport, CT: Praeger, 2003), 189–202. 7.   The report touted public-private partnerships as a way of creating new schools that would be better aligned with opportunities in the job market and set forth a list of broad and vague recommendations for improvement, including: defining core competencies all students need to succeed; expanding beyond core competencies to skills and knowledge needed for successful postsecondary transitions; empowering industry to define sector-specific skills; creating innovative courses and programs of study; and putting more students on a path to success.

Michael Axmann, “Apprenticeship System Finance,” Graphic Demonstration and Transcript, December 6, 2013, https://prezi.com/su4am9ojtg-q/apprenticeship-system-finance/. 7.   National Assessment of Career and Technical Education: Interim Report (Washington, DC: US Department of Education, Office of Planning, Evaluation and Policy Development, Policy and Program Studies Service, 2013), https://www2.ed.gov/rschstat/eval/sectech/nacte/career-technical-education/interim-report.pdf. 8.   Royster, Race and the Invisible Hand. 9.   Sandra Susan Smith, Lone Pursuit: Distrust and Defensive Individualism Among the Black Poor (New York: Russell Sage Foundation, 2010). 10.    “Two Unamalgamated Worlds,” Economist (London), April 3, 2008, http://www.economist.com/node/10958534. 11.    Hermann Nehls, personal communication. 12.    Karin Schuller, “Ethnic Inequality in Vocational Education and Training in Germany: The Role of Educational Policy,” poster presented at Education Systems: Inequalities, Labour Markets and Civic Engagement Conference, Amsterdam Centre for Inequality Studies, February 13, 2014. 13.    


pages: 329 words: 88,954

Emergence by Steven Johnson

A Pattern Language, agricultural Revolution, Brewster Kahle, British Empire, Claude Shannon: information theory, complexity theory, Danny Hillis, Douglas Hofstadter, edge city, epigenetics, game design, garden city movement, Gödel, Escher, Bach, hive mind, Howard Rheingold, hypertext link, invisible hand, Jane Jacobs, Kevin Kelly, late capitalism, Marshall McLuhan, mass immigration, Menlo Park, Mitch Kapor, Murano, Venice glass, Naomi Klein, new economy, New Urbanism, Norbert Wiener, pattern recognition, pez dispenser, phenotype, Potemkin village, price mechanism, profit motive, Ray Kurzweil, slashdot, social intelligence, Socratic dialogue, stakhanovite, Steven Pinker, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, theory of mind, Thomas Kuhn: the structure of scientific revolutions, traveling salesman, trickle-down economics, Turing machine, Turing test, urban planning, urban renewal, Vannevar Bush

A highly complex system such as a rain forest runs its nutrients so tightly, via elaborate microflora and microfauna in the tree roots, that the soil is largely deprived of nutrients. This is one reason why the destruction of rain forests is so wasteful: the soil left behind is largely sterile.” Ibid., 122. “This acceleration in”: Ibid., 29. Some critics, such: Wright sees “group brains” even in low-tech societies, even using the term as an alternative to “invisible hands.” “Hands aren’t very cerebral, after all; guiding any invisible hand there must be an ‘invisible brain.’ Its neurons are people. The more neurons there are in regular and easy contact, the better the brain works—the more finely it can divide economic labor, the more diverse the resulting products. And, not incidentally, the more rapidly technological innovations take shape and spread. As economists who espouse ‘new growth theory’ have stressed, it takes only one person to invent something that the whole group can then adopt (since information is a ‘non-rival’ good).

“It amazes me how difficult it is for people to think in terms of collective phenomenon,” Keller says today. Thirty years after the two researchers first sketched out their theory on paper, slime mold aggregation is now recognized as a classic case study in bottom-up behavior. Keller’s colleague at MIT Mitch Resnick has even developed a computer simulation of slime mold cells aggregating, allowing students to explore the eerie, invisible hand of self-organization by altering the number of cells in the environment, and the levels of cyclic AMP distributed. First-time users of Resnick’s simulation invariably say that the on-screen images—brilliant clusters of red cells and green pheromone trails—remind them of video games, and in fact the comparison reveals a secret lineage. Some of today’s most popular computer games resemble slime mold cells because they are loosely based on the equations that Keller and Segel formulated by hand in the late sixties.

* * * The pattern-seeking algorithms of emergent software are already on their way to becoming one of the primary mechanisms in the great Goldberg contraption of modern social life—as familiar to us as more traditional devices like supply and demand, representational democracy, snap polls. Intelligent software already scans the wires for constellations of book lovers or potential mates. In the future, our networks will be caressed by a million invisible hands, seeking patterns in the digital soup, looking for neighbors in a land where everyone is by definition a stranger. Perhaps this is only fitting. Our brains got to where they are today by bootstrapping out of a primitive form of pattern-matching. As the futurist Ray Kurzweil writes, “Humans are far more skilled at recognizing patterns than in thinking through logical combinations, so we rely on this aptitude for almost all of our mental processes.


pages: 351 words: 93,982

Leading From the Emerging Future: From Ego-System to Eco-System Economies by Otto Scharmer, Katrin Kaufer

Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Asian financial crisis, Basel III, Berlin Wall, Branko Milanovic, cloud computing, collaborative consumption, collapse of Lehman Brothers, colonial rule, Community Supported Agriculture, creative destruction, crowdsourcing, dematerialisation, Deng Xiaoping, en.wikipedia.org, European colonialism, Fractional reserve banking, global supply chain, happiness index / gross national happiness, high net worth, housing crisis, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Johann Wolfgang von Goethe, Joseph Schumpeter, Kickstarter, market bubble, mass immigration, Mikhail Gorbachev, Mohammed Bouazizi, mutually assured destruction, Naomi Klein, new economy, offshore financial centre, peak oil, ride hailing / ride sharing, Ronald Reagan, Silicon Valley, smart grid, Steve Jobs, technology bubble, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, Washington Consensus, working poor, Zipcar

Table 4 offers two dimensions for defining how a society coordinates itself: according to a primacy of the whole or a primacy of the parts. The evolution of economic coordination mechanisms began with 1.0, central planning (in the lower left quadrant). It moved from there to 2.0, markets and competition (in the lower right). Both the visible hand of central planning and the invisible hand of decentralized markets have one thing in common: They do not require the individual decision-maker to consider the well-being of the whole. If the individual or the organization meets the targets (of central planning) or pursues their own self-interest (in the market), then the visible or invisible hand will magically take care of the whole. TABLE 4 Four Economic Coordination Mechanisms: A Journey of Interiorizing the Whole That’s what the theory said! In reality, the story unfolded somewhat differently—namely, with overwhelming externality problems.

The challenges we are dealing with as a society force us to rethink this mental model, and to include the impact of our actions on the environmental, social, and cultural context in which we are operating. The Death of Economic Monotheism Another important building block of contemporary economic thought concerns the bias toward an economic monotheism that puts the primacy of one coordination mechanism atop all economic activities: the invisible hand of the market.2 This mechanism is omnipotent in the sense that it isn’t limited by other coordination mechanisms, as we saw in the deregulated financial markets before the 2008 crisis. It is omnipresent through its ever-increasing penetration of all sectors and systems of society. And it is omniscient in its assumed access to all information. As the economic monotheisms of the past have resulted in a long list of catastrophic failures—including the state-fundamentalist monotheism that led the Soviet Union into a collapse in 1991 and the market-fundamentalist neoliberal model that put the world financial system at the brink of collapse in 2008—an increasing number of leading economists, including Nobel laureates Joseph Stiglitz and Paul Krugman, have pointed to various structural flaws in mainstream (neoclassical and neoliberal) economic thought.

See Income inequality Infrastructures for co-evolving, 188 to co-initiate, 187–188 to co-inspire, 188 for co-sensing, 188 for prototyping, 188 Ingerslev, Karen, 207 Innovation hubs, 244, 246 Institutional innovations, 76 Institutional inversion, 192–195 Institutional transformation, sectors of current, 196t, 197 Intention, 236 connecting to it as an instrument, 170 Interest groups, organizing around, 54–55 International Monetary Fund (IMF), 27 Internet, 120, 136 Inversion (Umstülpung), 192 institutional, 192–195 See also Conversation(s) Inversion journey, 240 Invisible hand of the market, 70, 122 Jacob, Gail, 156, 161–163, 168 Jandernoa, Beth, 179, 180, 190 Japan, 59–60 Jaworski, Joseph, 17–18 Jews. See Holocaust Jobless growth, 85 Jobs, Steve, 86, 114, 115, 170, 227 Johnson, Simon, 32, 71, 94, 100 Joy, Bill, 105, 106 Judgment, 172 suspension of old habits of, 146 Kabat-Zinn, Jon, 163–169 Kahane, Adam, 224 Kalungu-Banda, Martin, 180–182 Katjivena, Bertha, 206 Kegan, Robert, 214 Kelly, Dave, 114 Kimmitt, Robert, 93 Klatzky, Antoinette, 158, 161–163 Krugman, Paul, 71, 100 Kuhn, Thomas, 73 Kwak, James, 94 Labor, 75, 77, 241 division of, 57, 83 relinking jobs with purpose, 82–89 Labor theory of property, 130–131 Landshare project, 135 Lau, Lawrence, 5 Leaders in an organization, multiple, 112 Leadership, 75, 77, 241 is about creating and communicating a vision, 113 as a distributed or collective capacity in a system, 112 essence of, 110, 114–115 myths about, 112–113 the only real leadership issue, 111–112 origin of the term, 110 shifting the locus from the center to the periphery, 191–192 the tao of, 143–145 See also specific topics Leadership disconnect, 46 Leading from the emerging future, 19–20 Leal, Guilherme, 222, 227 Learning journeys, 224–225 individualized lifelong, 244–245 Legitimacy, 128 Lehman Brothers, bankruptcy of, 12, 27 Letting come, 29 Letting go, 29, 146, 148t going to the edge of, 162–163 Levine, Mark, 134 Lewin, Kurt, 253 Liberation myth, debunking the, 106–107 Lietaer, Bernard, 95 Life-centric technology, 104–106, 110.


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No Such Thing as a Free Gift: The Gates Foundation and the Price of Philanthropy by Linsey McGoey

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, agricultural Revolution, American Legislative Exchange Council, bitcoin, Bob Geldof, cashless society, clean water, cognitive dissonance, collapse of Lehman Brothers, colonial rule, corporate governance, corporate social responsibility, crony capitalism, effective altruism, Etonian, financial innovation, Food sovereignty, Ford paid five dollars a day, germ theory of disease, hiring and firing, Howard Zinn, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, liquidationism / Banker’s doctrine / the Treasury view, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, meta analysis, meta-analysis, microcredit, Mitch Kapor, Mont Pelerin Society, Naomi Klein, obamacare, Peter Singer: altruism, Peter Thiel, plutocrats, Plutocrats, price mechanism, profit motive, Ralph Waldo Emerson, rent-seeking, road to serfdom, Ronald Reagan, school choice, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, Slavoj Žižek, Steve Jobs, strikebreaker, The Wealth of Nations by Adam Smith, Thorstein Veblen, trickle-down economics, urban planning, wealth creators

Indeed, one might say it’s the founding kernel of modern political economy, apparent at least since the writings of Bernard Mandeville, James Steuart, and Adam Smith, each of whom advanced the idea that individuals labouring to meet their own self-interested economic goals naturally contribute to the common good.26 Bishop and Green’s Philanthrocapitalism offers only two cursory references to Smith’s work, neither developed in depth. Perhaps attempting to underscore the originality of their own argument, they gloss over the similarities between their own notion and Smith’s concept of the invisible hand, the idea that ‘by pursuing his own interest [the individual] frequently promotes that of the society more effectively than when he really intends to promote it’.27 Felix Salmon, a former Reuters journalist, has queried this historical amnesia. Criticizing the purported novelty of the notion of philanthrocapitalism, Salmon points out that the ‘realization that business has the capacity to create as well as destroy social value is known as “economics”, and goes back at least as far as Adam Smith.

Criticizing the purported novelty of the notion of philanthrocapitalism, Salmon points out that the ‘realization that business has the capacity to create as well as destroy social value is known as “economics”, and goes back at least as far as Adam Smith. There’s nothing new about it, and nor is there anything new about economists using this insight to assuage the guilt of the rich’.28 The philosopher Slavoj Žižek has also noted the strange déjà vu that pervades the rhetoric of philanthrocapitalism enthusiasts, suggesting that their maxims are like a ‘postmodernized version of Adam Smith’s invisible hand: the market and social responsibility are not opposites, but can be reunited for mutual benefit … their goal is not to earn money, but to change the world (and as a by-product, make even more money)’.29 Both Salmon and Žižek make witty and persuasive points. But two things are new about philanthrocapitalism. One is its scale; the other is its explicitness. On the matter of scale, while solid numbers are elusive, it is clear that global philanthropy is widely believed to be in a golden phase.

‘Generosity’, in Mauss’s words, ‘is an obligation’.12 ‘The Gift’ illuminates the economic usefulness of seemingly selfless acts of charity and friendship. Whether in isolated regions such as the Trobriand Islands or in the dense enclaves of today’s most cosmopolitan global cities, charity is a key source of both social and economic power. ‘The gift cycle’, the anthropologist Mary Douglas suggested, ‘echoes Adam Smith’s invisible hand: gift complements market in so far as it operates where the latter in absent. Like the market it supplies each individual with personal incentives for collaborating in the pattern of exchanges’.13 Work by Mauss, Douglas, and, more recently, the Oxford economic historian Avner Offer has underscored the economic usefulness of philanthropic gestures to the donors of gifts. In both pre-industrial and capitalist economies, wealth is often augmented through what Offer calls ‘economies of regard’: the ability to court favour through extending a network of exclusive political or social contacts; through knowing how to act, dress, and speak around such contacts; through sensitive adherence to duties of gift-giving and economic ‘freebies’ (the corporate box, the Wimbledon tickets, the conference goodie bags).14 Attention to ‘economies of regard’ helps to underscore a rather obvious point.


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Who Owns the Future? by Jaron Lanier

3D printing, 4chan, Affordable Care Act / Obamacare, Airbnb, augmented reality, automated trading system, barriers to entry, bitcoin, book scanning, Burning Man, call centre, carbon footprint, cloud computing, commoditize, computer age, crowdsourcing, David Brooks, David Graeber, delayed gratification, digital Maoism, Douglas Engelbart, en.wikipedia.org, Everything should be made as simple as possible, facts on the ground, Filter Bubble, financial deregulation, Fractional reserve banking, Francis Fukuyama: the end of history, George Akerlof, global supply chain, global village, Haight Ashbury, hive mind, if you build it, they will come, income inequality, informal economy, information asymmetry, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Markoff, Kevin Kelly, Khan Academy, Kickstarter, Kodak vs Instagram, life extension, Long Term Capital Management, Marc Andreessen, Mark Zuckerberg, meta analysis, meta-analysis, Metcalfe’s law, moral hazard, mutually assured destruction, Network effects, new economy, Norbert Wiener, obamacare, packet switching, Panopticon Jeremy Bentham, Peter Thiel, place-making, plutocrats, Plutocrats, Ponzi scheme, post-oil, pre–internet, race to the bottom, Ray Kurzweil, rent-seeking, reversible computing, Richard Feynman, Ronald Reagan, scientific worldview, self-driving car, side project, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, smart meter, stem cell, Steve Jobs, Steve Wozniak, Stewart Brand, Ted Nelson, The Market for Lemons, Thomas Malthus, too big to fail, trickle-down economics, Turing test, Vannevar Bush, WikiLeaks, zero-sum game

Our successes will be our undoing. As we approach abundance, we will overpopulate and overconsume, or otherwise screw up, until catastrophe strikes. The Malthusian humor suggests a fatal, deterministic ineptitude in politics. • Rousseau: Technology is the means to spiritual malaise. As we approach Abundance, we become inauthentic and absurd. • Invisible Hand: Information technology ought to subsume politics. Adam Smith sketched a character known as the “Invisible Hand,” who can serve as a figurehead for subsuming politics under information technology. Markets (or more recently, other, fundamentally similar algorithms) make decisions instead of human, political deliberations. This humor either ignores or rejects Abundance, for markets become absurd as supply approaches infinity. • Marx: Politics ought to subsume information technology.

Turing’s humor also provides a destination, or an eschatology that the Invisible Hand’s humor lacks. Turing’s algorithms could inherit the world in a way that the Hand could not. This is because we can imagine software, improperly, I’ll argue, operating without the need for human operators, and even in an era of Abundance depopulated of people. Abundance kills the hand, but not Turing’s ghosts. • Nelson: Information technology of a particular design could help people remain people without resorting to extreme politics when any of the other, creepily eschatological humors seem to be imminent. Ted Nelson, in 1960, came up with a brand-new, still-emerging humor, which suggests information as a way to avoid excesses of politics even as we approach an inevitably imperfect Abundance. It essentially proposes a consilience between the Invisible Hand and Abundance.

., 129–30, 261, 328 “Forum,” 214 Foucault, Michel, 308n 4chan, 335 4′33″ (Cage), 212 fractional reserve system, 33 Franco, Francisco, 159–60 freedom, 13–15, 32–33, 90–92, 277–78, 336 freelancing, 253–54 Free Print Shop, 228 “free rise,” 182–89, 355 free speech, 223, 225 free will, 166–68 “friction,” 179, 225, 230, 235, 354 Friendster, 180, 181 Fukuyama, Francis, 165, 189 fundamentalism, 131, 193–94 future: chaos in, 165–66, 273n, 331 economic analysis of, 1–3, 15, 22, 37, 38, 40–41, 42, 67, 122, 143, 148–52, 153, 155–56, 204, 208, 209, 236, 259, 274, 288, 298–99, 311, 362n, 363 humanistic economy for, 194, 209, 233–351 361–367 “humors” of, 124–40, 230 modern conception of, 123–40, 193–94, 255 natural basis of, 125, 127, 128–29 optimism about, 32–35, 45, 130, 138–40, 218, 230n, 295 politics of, 13–18, 22–25, 85, 122, 124–26, 128, 134–37, 199–234, 295–96, 342 technological trends in, 7–18, 21, 53–54, 60–61, 66–67, 85–86, 87, 97–98, 129–38, 157–58, 182, 188–90, 193–96, 217 utopian conception of, 13–18, 21, 30, 31, 37–38, 45–46, 96, 128, 130, 167, 205, 207, 265, 267, 270, 283, 290, 291, 308–9, 316 future-oriented money, 32–34, 35 Gadget, 186 Gallant, Jack, 111–12 games, 362, 363 Gates, Bill, 93 Gattaca, 130 Gawker, 118n Gelernter, David, 313 “general” machines, 158 General Motors, 56–57 general relativity theory, 167n Generation X, 346 genetic engineering, 130 g