Sunday, May 20, 2012

406: The Utopia of the Free Market - unveiled

"...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 [caps by h B] 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." -end quote

In this passage from Book IV, Chapter 2, Adam Smith, explains one of the central mechanisms how a market society works. Every individual works for an income to buy products, keeping his own safety and benefit in mind. 

This is not bad nor wrong because thus he   - tho it is not his intention - often serves the public interest. 

Adam Smith was a deeply religious man, he saw the "invisible hand" as the mechanism by which a beneficent God controls a universe in which human happiness is maximized. 

Here you are confronted with the deepest roots of the Utopia of the Free Market: the belief that what happens in the market is regulated by some kind of "natural" conditions or laws (God?): the basic beliefs of liberalism.

Chapter 7 of Book I is fascinating reading. Just its title to begin with: "Of the Natural and Market Prize of Commodities". You see?! There exists a natural prize of products.

"When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, 

and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price."
-end quote

In that chapter he describes the causes of fluctuations in prizes. For instance,

the increased competition among manufacturers and increased supply would reduce the price of a product to its production costs plus a small margin, the "natural price".

Smith was convinced that, although people often were driven by selfishness and greed, competition in the free market  will benefit the community as a whole.

Contrary to how Rand, Greenspan and Friedman  interpret Adam Smith, 
he did not propagate a social system in which citizens act selfish, he just described the reality: people act in self-interest. 

And second, Smith did not claimed that any form of self-interest contributed to the public interest. In his opinion self-interest is not always good but he did not think it was necessarily bad. 

Adam Smith criticized those who act solely out of greed and warned that "All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." (Book III, Chap. 4)

Smith was by no means an advocate of laissez faire, he does not claim that the free market can solve all economic problems. For example, with respect to regulation, he says:

"Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. 

When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters. (Book 1, Chap. 10).

Nowhere in "The Wealth of Nations" you can catch Adam Smith on an absolute belief in the Free Market, like you find with Rand, Greenspan and neo-liberals.

They just inflated some aspects of his economic theory and abused these for their Utopia, sometimes also called "The American Dream".

The Discussion

[13:23] herman Bergson: Thank you..
[13:23] herman Bergson: listens to the silence...
[13:23] Alarice von Doobie (alarice.beaumont): wow... really a lot to think about
[13:23] Kime Babenco: ;-)
[13:24] Gemma Allen (gemma.cleanslate): at least he is more balanced
[13:24] herman Bergson: I hear you think indeed....
[13:24] Bejiita Imako: aaa yes
[13:24] Ampfan Walkenberg: very interesting
[13:24] Gemma Allen (gemma.cleanslate): not completely clear on his view of the worker s and the masters
[13:24] Debbie Dee (framdor): Ok, the cost model in the natural prize neglects the true cost of energy and materials
[13:24] Alarice von Doobie (alarice.beaumont): i think he really is right about the workers and the masters.. hasn't much changed since
[13:24] Gemma Allen (gemma.cleanslate): what counsellors
[13:24] herman Bergson: The basic idea is that Smith is the first one who describes the working of the market based on supply and demand
[13:25] Bejiita Imako: yes seems so
[13:25] herman Bergson: Indeed Alarice!
[13:25] Kime Babenco: I guess Adam Smith's thinking about a god who wnated maximum human happiness… that one really failed
[13:25] Bejiita Imako: the natural prize id say is created by this
[13:25] Bejiita Imako: supply and demand
[13:25] Debbie Dee (framdor): In a free market system, the result is pillaging of the commons for free.
[13:25] Gemma Allen (gemma.cleanslate): Yes-ah!
[13:25] Gemma Allen (gemma.cleanslate): that is good supply and demand
[13:25] Alarice von Doobie (alarice.beaumont): yes... but one doesn't really find this
[13:25] herman Bergson: Noo Bejiita...and yes Kime I guess you are right
[13:25] Kime Babenco: Market price...
[13:25] Alarice von Doobie (alarice.beaumont): too many other factors come with it
[13:26] Bejiita Imako: however many companies seems also to compete each other out of buisness ex many retail stores here for electronics
[13:26] herman Bergson: Wait....
[13:26] herman Bergson: Here is the catch.....
[13:26] Debbie Dee (framdor): The problem is that the cost model is still wrong - who pays for fukushima?
[13:26] Kime Babenco: What about fixed prices... For example.. if you like to take a plane or bus or train... Fixed price ... Full is full
[13:26] herman Bergson: The neo-liberals refer to Smith's his economic theory....
[13:27] herman Bergson: But what they overlook is that Smith was an observer.....of HIS time....
[13:27] Debbie Dee (framdor): and who pays to clean up the open cast coal mines
[13:27] herman Bergson: real markets...small factories and workshops etc…
[13:28] Merlin (merlin.saxondale): Yeah ..just like Jesus was talking about his time too
[13:28] herman Bergson: Just imagine what Adam Smith would think of our world...where markets are manipulated by commercials and advertisements…
[13:28] Gemma Allen (gemma.cleanslate): hah
[13:28] Kime Babenco: of course
[13:28] Bejiita Imako: yes
[13:28] Gemma Allen (gemma.cleanslate): very different
[13:28] herman Bergson: where banks are not boring banks but playing russian roulette with our savings
[13:29] Bejiita Imako: indeed thats not a good thing
[13:29] Debbie Dee (framdor): and the prize is always too low - no costs relating to environment or depletion
[13:29] herman Bergson: But the Objectivists...the Greenspans and Friedmans and Hayeks adore the free market reffering to Smith...
[13:29] Debbie Dee (framdor): And constant pressure to consume more cheap junk
[13:29] herman Bergson: Believing in that INVISIBLE HAND themselves
[13:30] Alarice von Doobie (alarice.beaumont): but Smith probably saw it differently.... he wouldn't agree to it now I suppose...
[13:30] Alarice von Doobie (alarice.beaumont): ?!
[13:30] herman Bergson: Keep in mind our theme....the UTOPIA of the free market
[13:30] Kime Babenco: It was as well mentioned there became larger companies in stead of smaller... So was said lower prices... which is not at all correct ! Maybe a higher salary for the CEO
[13:30] herman Bergson: I think Smith would go crazy now, Alarice....
[13:30] Debbie Dee (framdor): well, the utopia is a nightmare.
[13:31] Gemma Allen (gemma.cleanslate): me too
[13:31] Gemma Allen (gemma.cleanslate): but some refer to him often as a basis for their business decisions
[13:31] herman Bergson: is a nightmare....
[13:31] Bejiita Imako: indeed
[13:31] herman Bergson: They talk about billions today....
[13:31] herman Bergson: anything goes...
[13:32] Bejiita Imako: dreaming of the impossible trying to realize it in practize and it ends in disaster
[13:32] Bejiita Imako: cause it doesnt work for real
[13:32] herman Bergson: loosing billions..what is the problem....and so on
[13:32] Mick Nerido: where will it end?
[13:32] herman Bergson: Well Mick...I asked that myself....
[13:32] Alarice von Doobie (alarice.beaumont): yes... it would probably stress him to see how what he described developed over the time!
[13:32] Kime Babenco: Why do prices always rice ? They say a shortage for a while..., but when that is over, the prices don't fall again...
[13:32] herman Bergson: But that isn't in fact such a big question at all....
[13:32] Alarice von Doobie (alarice.beaumont): and I don't think anyone knows the solution at all
[13:33] herman Bergson: It is pretty common practice that a country goes bankrupt....
[13:33] herman Bergson: First one was Spain in 1557
[13:33] herman Bergson: and Spain is still there ^_^
[13:33] herman Bergson: Argentina...six times...
[13:33] herman Bergson: France too
[13:33] Velvet (velvet.braham): Greece is having a hard time now
[13:33] Bejiita Imako: six times?
[13:34] Bejiita Imako: hmm yes
[13:34] Bejiita Imako: but looking good at all for greece
[13:34] herman Bergson: Germany two times...1923 and the richest economy in europe
[13:34] Bejiita Imako: not
[13:34] Mick Nerido: It's like a RL monopoly game...
[13:34] herman Bergson: Yes Mick….
[13:34] Bejiita Imako: sort of indeed
[13:34] Velvet (velvet.braham): but in RL when you default on a loan, your property is repossessed
[13:34] Fred123 Aiten: why are we worried about Greece then?
[13:34] herman Bergson: Go straight to the jail.....
[13:34] Velvet (velvet.braham): you can't really do that with a country
[13:34] Kime Babenco: Countries and companies can go bankrupt, and start again... Try as a person ! They will find you...
13:34] herman Bergson: I am not....:-)
[13:35] herman Bergson: I htink they are best of leaving the euro-zone...
[13:35] herman Bergson: go bankruopt...
[13:35] herman Bergson: devaluation of 50 to 70% percent so the best export country in Europe
[13:35] Fred123 Aiten: Then we will never get back the money we have lent them
[13:35] herman Bergson: They'll get rich
[13:36] Kime Babenco: What countries did you had in mind ?
[13:36] Alarice von Doobie (alarice.beaumont): better then giving them more and more ....
[13:36] herman Bergson: Don't know about that Fred..but do you really miss it? :-))
[13:36] Bejiita Imako: why Greece have a such hard time is also cause they haven't any industry only whine and cheese and such no real production
[13:36] Bejiita Imako: no car industry ect
[13:36] Bejiita Imako: that can make the economy spin
[13:37] herman Bergson: and because the country is corrupt in many layers
[13:37] Gemma Allen (gemma.cleanslate): what will it really do to all other economies if they do that herman
[13:37] Gemma Allen (gemma.cleanslate): i hear it will be chaos
[13:37] Alarice von Doobie (alarice.beaumont): oh...that is right.. but the problem is their attitude... and that needs. a looonnngg time to get changed
[13:37] herman Bergson: I think..not much Gemma....
[13:37] Gemma Allen (gemma.cleanslate): hope not
[13:37] Gemma Allen (gemma.cleanslate): not so sure
[13:37] Bejiita Imako: greek food os great but you cant power a countrys economy with that you need a real industry and they dont have that at all
[13:38] Kime Babenco: There you say... corruption is not very attractive to companies to settle down there... So what will they export (even at low price) ? Retsina and olives ?
[13:38] Bejiita Imako: never seen "made in greece" in a product
[13:38] Gemma Allen (gemma.cleanslate): oh i have
[13:38] Mick Nerido: the country is the same after bankrupt, just the money is worth less
[13:38] Kime Babenco: Neither me
[13:38] Alarice von Doobie (alarice.beaumont): oh there are Bejiita
[13:38] herman Bergson: Yes Kime
[13:38] Alarice von Doobie (alarice.beaumont): olive oil, olives :-)
[13:38] Alarice von Doobie (alarice.beaumont): not really much tho
[13:38] Gemma Allen (gemma.cleanslate): Yes-ah!
[13:38] Gemma Allen (gemma.cleanslate): oh
[13:38] Bejiita Imako: beside feta cheese and olives, no cars or such products
[13:38] Gemma Allen (gemma.cleanslate): pottery
[13:38] Velvet (velvet.braham): the problem with Greece is that they lied about their stats when entering the Eurozone
[13:38] Bejiita Imako: or machinery
[13:38] Gemma Allen (gemma.cleanslate): laces
[13:38] Bejiita Imako: in general
[13:38] herman Bergson: Well..let's return to the main subject....
[13:39] Velvet (velvet.braham): it devalues everyone
[13:39] herman Bergson: The idea of the Free Market...
[13:39] Kime Babenco: Because all demonstrations and strikes they are keeping the tourists away as well
[13:39] Bejiita Imako: that too the tourist industry seem their biggest income
[13:39] herman Bergson: For Adam Smith the idea was based on a deep belief in God and his invisible hand...
[13:40] Kime Babenco: I am not sure biggest , but certainly important... You know China already bought a lot there ?
[13:40] Alarice von Doobie (alarice.beaumont): well.. he didn't count in the human greed
[13:40] herman Bergson: Rand and Greenspan generalized his ideas out of context and made self-interest a virtue....
[13:40] Gemma Allen (gemma.cleanslate): stil doing that
[13:40] Gemma Allen (gemma.cleanslate): along with many economists here
[13:41] Debbie Dee (framdor): agreed.
[13:41] herman Bergson: Smith observed that man acts on self-interest.....and he believed that at the end all would turn out well because of that invisible hand in the market
[13:41] Velvet (velvet.braham): I suppose that the counter-argument is that self interest is also in the best interest of the economy
[13:41] herman Bergson: Yes Velvet...
[13:41] Debbie Dee (framdor): but it is not since self interest is greed these days.
[13:41] Velvet (velvet.braham): So if I want to work hard and do well, that also benefits the economy
[13:41] Kime Babenco: Maybe they should bring the ex leaders of such countries like Greece, bring to justice in The Hague
[13:42] Kime Babenco: THough it will not solve a lot
[13:42] Debbie Dee (framdor): along with george bush
[13:42] Velvet (velvet.braham): I can't argue with that. The more money I make, the more I spend.
[13:42] herman Bergson: but the hot issue much government regulation should there be to channel this drive of self-interest...
[13:42] Fred123 Aiten: only providing you spend your money Kime
[13:42] herman Bergson: That is the debate of today...
[13:42] Qwark Allen: ::::::::: * E * X * C * E * L * L * E * N * T  * ::::::::::
[13:42] Gemma Allen (gemma.cleanslate): :-)
[13:42] Bejiita Imako:
[13:42] Bejiita Imako: very interesting
[13:43] Mick Nerido: Economic models work for a time and then fail as things change
[13:43] herman Bergson: the most extreme form of control we have seen in communism…..conclusion..doesn't work...
[13:43] Debbie Dee (framdor): Since there is no invisible hand, we need some new leaders with altruistic objectives
[13:43] Velvet (velvet.braham): So, the "invisible hand" works as long as the majority of people have a good work ethic.
[13:43] herman Bergson: at th eother and the Tea party ideas.....
[13:43] Gemma Allen (gemma.cleanslate): we saw an example of non regulations this week with jp morgan bank loosing 2,000,000,000 of their money
[13:43] Kime Babenco: Therefore those are not models, just fashion apearances
[13:43] Gemma Allen (gemma.cleanslate): maybe more
[13:43] herman Bergson: Yes Gemma.....
[13:43] Alarice von Doobie (alarice.beaumont): yeah.. incredible again
[13:44] Qwark Allen: omg´
[13:44] herman Bergson: Whose money Gemma?????
[13:44] Velvet (velvet.braham): mine. I have money in that bank.
[13:44] herman Bergson: That is the scary question
[13:44] Bejiita Imako: aaw thats no good
[13:44] Gemma Allen (gemma.cleanslate): they keep saying it was "their money " not depositers
[13:44] Gemma Allen (gemma.cleanslate): however
[13:44] Gemma Allen (gemma.cleanslate): they wer in the bail out a ffew years back
[13:44] Debbie Dee (framdor): money is created from debt.
[13:45] Gemma Allen (gemma.cleanslate): byte the government!!!!
[13:45] Velvet (velvet.braham): but my money is protected, unless too many people withdraw at once
[13:45] Gemma Allen (gemma.cleanslate): OUR money
[13:45] Fred123 Aiten: if they lost 2 billion who gained it?
[13:45] Gemma Allen (gemma.cleanslate): bad trades
[13:45] Velvet (velvet.braham): they made poor investments
[13:45] Debbie Dee (framdor): lol. it is only printed....
[13:45] Gemma Allen (gemma.cleanslate): Yes-ah!
[13:45] Kime Babenco: By printing or pressing from machines
[13:45] herman Bergson: yes Fred...the other side of the medal :-)
[13:45] Velvet (velvet.braham): Debbie, not even printed!
[13:45] Qwark Allen: withdraw money is what greeks are doing now
[13:45] Bejiita Imako: yes its we that provide the bank with money so their loosing our money then not theirs
[13:45] Velvet (velvet.braham): money exists only as numbers in the computers of the federal reserve
[13:45] Qwark Allen: 894 mills in o ne day, 2 days ago
[13:46] Velvet (velvet.braham): At least here in the US
[13:46] Debbie Dee (framdor): So where does 2.4 trillion dollars of quantitative easing come in ?
[13:46] Gemma Allen (gemma.cleanslate): it is moves like this that banks sshould nto be able to do
[13:46] herman Bergson: Well.....enough to think about for the weekend...and check your bank accounts
[13:46] Gemma Allen (gemma.cleanslate): Yes-ah!
[13:46] Gemma Allen (gemma.cleanslate): lol
[13:46] Bejiita Imako: hehe
[13:46] Velvet (velvet.braham): they are shuffling game pieces around a board
[13:46] herman Bergson: Thank you all for your participation....
[13:46] Debbie Dee (framdor): lol thanks for the tip herman
[13:46] Kime Babenco: If you liive for hundred years, that's 3,333 billion seconds
[13:46] Gemma Allen (gemma.cleanslate): ♥ Thank Youuuuuuuuuu!! ♥
[13:46] herman Bergson: Class dismissed
[13:47] Gemma Allen (gemma.cleanslate): 80-89-s party today
[13:47] Velvet (velvet.braham): Thank you everyone!
[13:47] Fred123 Aiten: Thank you herman
[13:47] Debbie Dee (framdor): Thanks Herman - excellent topic.
[13:47] Kime Babenco: Thanks Herman!
[13:47] Qwark Allen: ¸¸.´ ¯¨.¸¸`** **´ ¸¸.¨¯` H E R MA N ´ ¯¨.¸¸`** **´ ¸¸.¨¯`
[13:47] Qwark Allen: TY
[13:47] herman Bergson: My pleasure ^_^

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