Greed and the ‘invisible hand’

Appetitus divitiarum infinitus means ‘unlimited lust for gain’. And this lust for gain – as its adherents contend – is eating up capitalism from inside. Pope Francis is one of the adherents of this theory. Through ‘Evangelii Gaudium’ – his official proclamation – he voiced his concern about the ‘new tyranny’ of ‘unfettered capitalism’, attacking the ‘idolatry of money’, and decrying the absence of economic equality, high joblessness and increasing misery. He is not the first one to voice such concerns. Pope Leo XIII in his encyclical ‘Rerum Novarum’ (1891) and Pope Pius XI in his encyclical ‘Quadragessimo Anno’ (1931) touched upon the same issue. Hussain H Zaidi’s excellent article also touched upon this aspect of capitalism.

I feel that there is, however, a need to comment further upon this issue. I tend to agree with the part about moral decay upending capitalism. But things take a questionable turn when this insatiable lust for gain is traced back to probably the most celebrated person in economic history and some of his celebrated statements.

Adam Smith’s ‘The Wealth of Nations’ (WON) was published in 1776, the year the US gained independence. Before that, Smith was a diminutive professor of moral philosophy at the University of Edinburgh. But this book propelled him to a kind of stardom from which there has been no retreat, even centuries after his death. Today, Smith is known as the father of economics and his book is viewed as the bible of economics.

Although the book and its contents were quiet a revelation at that time, there is one concept that still stands out: the ‘invisible hand’ and it is working. Many tie this invisible hand to the moral decay that besets today’s capitalism. Is this true? Let’s contemplate.

The first misnomer that one encounters is linking the invisible hand concept to WON. In fact, the concept first appears in ‘Theory of Moral Sentiments’, a book as important as the former but lesser known. This book was all about the importance of moral criteria like compassion and empathy for the working of a society and the economy. The invisible hand makes an appearance and it reads as follows:

“[The rich] consume little more than the poor and in spite of their natural selfishness and rapacity…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 ...”

In WON, Smith contends that:

“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…”

and

“Every individual... neither intends to promote the public interest nor knows how much he is promoting it... 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”.

There are a few noticeable aspects of these paragraphs. One, it’s the greed and selfishness of individuals that indirectly promotes a better society through the invisible hand. Second, it is unintentional. Third, Smith first mentioned this concept in theory of moral sentiments, which cannot be just a coincidence. He tied the working of the invisible hand and laissez faire capitalism to morality. He did not envision the wealth of nations accruing separately from the moral foundations of a society. In fact, that development had to complement it.

But what if it is not unintentional – without any moral compunction – and the pursuit of self-interest actually leads to less enviable outcomes for the economy and society? History is full of conquerors, for example, who laid waste to cities just to satiate their greed for more land. Surely, one person’s self-interest and greed turns out to be bad for other people. And that is so because they are not grounded in morality.

In our times – since the last quarter of the 20th century and after – there has been a precipitous rise in the kind of greed that has no moral grounding. Ask yourself, what forced millions of people to throng the streets a few years ago in the main street vs Wall Street stand-off? It was the crass thuggery of the financial elite. Their ‘financial engineering’ (utilising peoples’ money) led to the disaster that is the great recession, which caused millions to lose their jobs without them having any role in this debacle. As they suffer, this elite along with its stratospheric incomes and privileges remains untouched, non-repentant and unblemished.

Whether it is the 1987 stock market crash or the fall of two financial investment firms that heralded a horrendous period of economic misery of the last decade, it is the insatiable greed of a few that has put millions in misery. Read reports on the recession, watch movies like Big Short, or analyse how financial firms tried to cheat people by manipulating interest rates (the LIBOR scandal), and it could be easily discerned that pursuit of self-interest has taken a rather treacherous turn.

The financial industry is but one example of how the pursuit of destructive self-interest is now a threat to capitalism that has delivered so much for humanity over time. But there could no bigger fallacy than to tie it to Smith’s idea of the invisible hand, which never stood aloof from the good of society. If he were alive today, he would have been despondent and aghast to realise that his idea has been tied to the kind of destructive greed that is running amok.

How greed came to be accepted as part of economic activity is another story, worth another column. For now, we need to recognise that modern capitalism’s sorry predicament reflects the system’s failure to check the galloping greed. But this was not always so. Historically, if we just go by numbers, the bounties that capitalism’s working have wrought are innumerable and have benefitted humanity tremendously. From printing press to the steam engine and to the social media of today, capitalism’s imprint is formidable.

One of the most widely circulated graphs that is doing rounds in the social media nowadays is the enormous decline in absolute poverty world over since 1800, which would not have been possible if it were not for economies adhering to the capitalist mode of functioning.

Today’s challenge for capitalism, though, is that the system that benefitted everybody over time has more or less become dysfunctional. Concentration of wealth has assumed worrying proportions with little signs of the system addressing this fault. Another shock to the system by this unfettered greed – like the one in 2008 – would effectively end capitalism’s reign. Smith and his concepts can hardly be blamed for this state of affairs.

The writer is a freelancecontributor.

shahid.mohmand@ gmail.com

@ShahidMohmand79