The “Invisible Hand”: Why America Won And Is Now Failing

The “Invisible Hand”: Why America Won And Is Now Failing

In his 2007 book, Basic Economics: A Common Sense Guide to the Economy, Economist Thomas Sowell illustrates Adam Smith’s so-called “Invisible Hand” of the free market.

“How an incredibly complex, high-tech economy can operate without any central direction is baffling to many. The last President of the Soviet Union, Mikhail Gorbachev, is said to have asked British Prime Minister Margaret Thatcher: How do you see to it that people get food? The answer was that she didn’t. Prices did that” (p. 11).

“While markets coordinated by price movements—‘Capitalism’ as it is called—may seem like a simple thing, markets are misunderstood more often than some other things that are considered more complex. Although a free market economic system is sometimes called a profit system, it is in reality a profit-and-loss system—and the loses are equally important for the efficiency of the economy, because losses tell producers what to stop producing. Without knowing why consumers like one set of features rather than another,  producers automatically produce more of what earns a profit and less of what is losing money. That amounts to producing what the consumers want and stopping the production of what they don’t want. Although the producers are only looking out for themselves and their companies’ bottom line, nevertheless from the standpoint of the economy as a whole the society is using its scarce resources more efficiently because decisions are guided by prices” (p. 15).

“Near the end of the Soviet Union, two of these , Shmelev and Popov, whom we have already quoted, said: ‘Everything is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others.’  Adam Smith, the most famous of all free market economists, could not have said it better. The Soviet economists were especially aware of the role of prices from having seen what happened when prices were not allowed to perform that role. But economists were not in charge of the Soviet economy. Under Stalin, a number of economists were shot for saying things that he did not want to hear” (p. 29).

No socialist or communist government on earth has ever been able to create the high levels of productivity, wealth and population standards of living, and a quality of life that the combination of political freedom and capitalism have. For example, while there are relatively poor people in America, they enjoy standards of living and conveniences that are envied around the world. Why else would quest to immigrate to America be so strong?

America’s great 1976 Nobel Prize winner in Economics was Milton Friedman. In his powerful book, Capitalism and Freedom: Fortieth Anniversary Edition (2009), he carefully documents that Capitalism,  Freedom and relative prosperity have been  closely associated in throughout history.

“I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.

Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom; the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and the development of capitalist institutions. So also did political freedom in the golden age of Greece and in the early days of the Roman era” (Kindle loc. 336).

History would indicate that large sociocultures based upon Marxism/Socialist or Welfare-State designs, by any measure, cannot provide a greater standard of living or quality of life for its citizens than politically free Capitalist societies.

From a psychological perspective, the contingencies of positive reinforcement (rewards), punishment (painful consequences) and extinction (no rewards) that are governmentally imposed by these cultural designs are “bassackwards”. As a result, these systems tend to produce citizens who are dependent upon their governments for their care and general well-fare.

Marxist and socialist societies often heavily resort to using punishment, even executions,  to control  the behaviors of their citizens. They badly mismanage the application of the  Law of Effect. You will recall that this psychological Law states that very important behaviors are controlled by consequences. Furthermore, behavioral science has clearly demonstrated that it is much more effective to use rewards to motivate behavior than to use coercion in the form of threats, fines, fear of imprisonment, or death.

Another important idea is that of the Law of Least Effort. The Law of least effort states that animals and humans tend to learn to obtain their rewards, or escape and avoid pain, in the least effortful ways available. For example, if  welfare entitlements, housing allotments, or disability awards, etc., are easily obtained by those who are capable of working very bad things will happen. In a welfare State, increasing numbers, so raised and acculturated, will settle for dramatically unproductive lives and lower standards of living. These segments of a population may commonly be called “lazy and irresponsible”. But their relatively useless culture-damaging and draining behavior patterns are technically “not their fault”. Their behavior is actually a result of the way their societies have arranged the contingencies of reinforcement for them.

The facts are clear, when creativity, inventiveness, diligent hard work, and lawful pro-social behavior patterns are no longer differentially reinforced within a population the rates of these behavior patterns will diminish. Instead, population rates of dependent, unproductive and damaging classes of behavior will increase.

Can you not see this in America today?

Wake-Up America!

VTM, 1/31/14

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2 Responses to “The “Invisible Hand”: Why America Won And Is Now Failing”

  1. Jim Kanning Says:

    This is exactly what was expressed in the radio broadcast that you shared from Austin, TX. Although her philosophy was highly disagreeable, the young woman expressed that she was able to obtain her rewards in the ‘least effortful ways available.’ If your readers failed to listen to that broadcast, here is the link: But be careful, if you’ve not heard this before, you may, and should, become quite upset.

    I am most concerned that we have enabled such a large segment of our citizenry to become dependent on the government, that they now possess a majority of the voting populace to keep the socialists-leaning politicians in office.


    • vtmawhinney Says:

      Thanks for your spot-on comments, Jim

      I believe that the coming elections will tell the story. We have seen what a radical progressive/socialist Federal Administration and its cloned appointees can do to this nation’s internal economy, culture, and our foreign policy. If this does not turn the voting tide, it will signal to me that America has, indeed, gone beyond the tipping point of fewer “makers” than “takers”.

      Then I fear it would take a major American calamity to reset the prevailing politics, if even then.

      Warm regards, Tom


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