The Myth of the Invisible Hand

When I wrote “How do we work our way towards utopia?” a question kept ringing in my head: ‘uh, what about the economic system we operate within’? It’s a sociotechnical system we all misunderstand, and we can’t realize an alternative future without seeing it for what it is — a historically contingent artifact, built on faulty premises — that we can make anew. Let’s dig in.

The first faulty premise is that technology is an independent driver of economic growth. This is the bedrock of neoclassical growth models, but according to complexity economists like Brian Arthur, the economy grows and changes more like a dynamic ecological system — it emerges and evolves in combination with technological changes. According to Arthur, the neoclassical model views the economy “like a gigantic container for its technologies…its means of production,” but he sees it differently:

The economy does more than readjust as its technologies change, it continually forms and reforms as its technologies change. And it means that the character of the economy — the form and structure — change as its technologies change.

This might seem like a small semantic distinction, but the difference is a very big deal. As Arthur puts it, it’s like “seeing an ecology not as containing a collection of biological species, but as forming its collection of species. So it is with the economy.” It’s not that technologies causally and independently impact the economy, prompting it to change and grow. It’s that new technologies — by replacing old technologies and calling forth new ones — rearrange institutions and change the structure of the economy. Here’s Arthur describing the introduction of the railway system:

Thus, when the railway locomotive entered the economy, it replaced existing horse-drawn trains; set up needs for the fabrication of iron rails and the organization of railways; caused the canal and horse-drayage industries to wither; became a key component in the transportation of goods; and, in time, caused factories to relocate and towns to grow. The economy transformed itself structurally.

I agree with Arthur’s premise but I’d go a step further: technologies aren’t just entangled in economic systems, they’re entangled in social systems too. Right, the introduction of the railroad didn’t simply rearrange the structure of the economy, it shaped social systems like race, gender, and worker power. If we don’t see social systems as entangled in economic ones, we risk papering over or encoding social inequities, and miss opportunities to transform power relations. So instead of centering the question, ‘how might technologies change economic systems,’ let’s center another: how do sociotechnical systems evolve in combination with new technologies?

The second faulty premise is that the purpose of civil society and governments is to ‘fix markets.’ In grad school, I took a required class on “Markets & Market Failures.” The course, like all mainstream economic frameworks, wrongly presumed governments should only intervene when they find some inefficiency in the market — e.g. when it ‘fails’. You’re working from a pretty limited framework if you assume that the role of government should only be to ‘fix markets’. Though the negative externality of rising pollution might seem like a ‘market failure’, it really is just an expected result of companies continually pursuing their interests. ‘Failure’ connotes an unforeseen error, but in this case, it’s a feature, not a bug.

The idea that governments should only intervene when markets ‘fail’ also mistakes price for value. In Mission Economy: A Moonshot Guide to Changing Capitalism, Mariana Mazzucato writes, “This means many public services that are free are not valued except through the accounting of their paid inputs (e.g. the cost of school teachers). Their costs are accounted for, but many of their outputs (e.g. a well structured public education system) are not.” So, the obvious value added by public and social sectors are disregarded, because they are not quantifiable consumer goods. Last, this framing presumes that only the private sector creates value. This assumption overlooks collective effort to create value, because as Mazzucato puts it, “only individual decisions matter,” also saying that, “value is collectively created by different actors and for the community as a whole, in the public interest.” So rather than seeing their role as ‘fixing markets,’ governments and civil society should see their role as proactively shaping sociotechnical systems toward a public purpose.

The third faulty premise is that people are self-interested, preference maximizers. We’re not.

We know from decades of sociology, anthropology, psychology and political economy research that we’re much more complex, social, and cooperative creatures than that. Hell, even Adam Smith — referred to by some as the father of capitalism — focused on sympathy, not self-interest. “Sympathy is the linchpin of Smith’s moral theory,” Smith scholar Glory M. Liu said in a recent episode of The Gray Area Now. I’m not arguing that we’re only motivated by sympathy; we’re motivated by myriad things, including self-interest, cooperation, etc. But we can’t let ardent capitalists tell us that we’re naive to start from this premise. They play a trick, where they point to the current form of capitalism — which is designed to maximize short-term self-interests — and as validation of the underlying premises. As host Sean Illing says in the episode with Liu, “We build systems that cultivate and incentivize certain impulses, and then we look back and conclude that those impulses pre-existed those systems.”

So, with the above in mind, here’s what our reframing of the economy is doing:

1. Replaces ‘technology impacts markets’ with ‘economic systems continually co-evolve with technologies and their social entanglements;’

2. Jettisons the economy’s current optimization function — short-term profit maximization — and replaces it with co-created public value.

3. Shifts the perceived role of government and civil society from ‘market fixers’ to ‘sociotechnical shapers’ and;

4. Rejects the simple notion that people are self-interested in favor of a more complex, cooperative view.

What’s the first step to making this alternative view of the economy a reality? A good start would be to move away from the idea that companies create value for, and are governed by, shareholders. Instead, we could follow Mazzucato’s lead and understand value as the result of a collective project, where company ownership and governance is distributed across a broader set of stakeholders such as workers and community members. Presumably, this would have the knock-on benefit of reorienting company decisions from short-term share price action to long-term value creation for communities. If this sounds a li’l pie-in-the-sky, we can surely take one step in this direction by reorienting labor laws to build worker power.

Mazzucato offers another reform: shift from redistribution efforts (e.g. redistributing income after its created via taxes or benefits, etc.) to a focus on predistributiion. This is where you get the conditions right in the first place, to prevent massive inequality, rather than mitigating it after the fact. According to Mazzucato, predistribution is “The idea is that if value is created collectively through societal effort, all actors should be getting their fair share in proportion to their risk-taking, input and creativity.” Right, if we see value for what it is — created by a collective, not just private actors — then we need better mechanisms to distribute value. For example, the government could retain equity stakes in companies that benefit from government support. The returns could be plopped into a “public wealth fund’ and then distributed through a ‘citizen’s dividend’ or spent on key social projects.”

This isn’t a utopia that starts with a blank sheet of paper, but by exposing these faulty premises, we can start to build anew. Perhaps the biggest premise to abandon is the idea that the economy will thrive by the ‘invisible hand’ of the market, and instead recognize that it is made. Hell, Adam Smith who wrote of ‘the invisible hand’ only used it three times across all his written work. Two hundred years later, Milton Friedman and the Chicago School of Economics picked up the term and ran with it, weaponizing the term and “cementing this belief that the market is this omnipotent and infinitely wise thing,” according to Liu. It’s not. We make it every day and we can start to make it anew by refusing to let these faulty premises become truisms or natural laws, and see ourselves as shapers of the system, pointing it toward a public purpose and new possibilities.