The Wounded Invisible Hand Regulating the World
China, the once communist nation, is turning into a capitalist country. According to the Financial Times, the Chinese government is even willing to privatize its education and health system. In order to establish this, China asked the British Financial minister, George Osborne, for help. The question is why China explicitly chose Great Britain as guidance in its transformation from communism to capitalism. Some economics argue that the latter is quite easy to explain: Adam Smith, the founder of capitalism, is from Great Britain. However, why should this specific men be of such importance?
Adam Smith was a Scottish writer and philosopher from the 18th century. He is the author of one of the most influential books written: An Inquiry into the Nature and Causes of the Wealth Of Nations. Back in his time, the economy was based on a mercantile system. Mercantilism is a form of economic nationalism, wherein governmental regulation of a nation’s economy is promoted in order to establish an autarky. Much of the wealth was created at the costs of other nations, especially at the costs of the motherland’s colonies. Smith opposed this practice of economy. Instead, he wanted to establish an economy based on free trade, such as in the United States at that time.
In his book An inquiry into the nature and causes of the wealth of nations, Smith wrote about the invisible hand. This is the price mechanism in a free market economy, that creates a market equilibrium. According to the theory, individuals’ efforts to pursue their own interest, benefit the society as a whole. As a result, state intervention becomes unnecessary. Therefore, governments should follow a policy of ‘laissez-faire’, or to say ‘let it go’. The market should be left over to the market mechanism, while the government should take a passive role in regulating it. Even though the absence of a welfare system, there would be no poverty, since the market mechanism would maximize wealth. According to Smith’s ‘Theory of Moral Sentiments’, the rich people will take care of the poor. However, this should not be enforced through taxes. Instead, the prosperous people will provide aid in exchange for honor and respect.
However, the government does have some power in the market economy. According to Smith, the government should behave passively, only focusing upon the affairs that the market cannot influence itself, such as infrastructure, education and health care. On top of that, the government does have the duty to protect the private property rights of individuals. This is in conformity with Article 17 of the Universal Declaration of Human Rights:
(1) Everyone has the right to own property alone as well as in association with others.
(2) No one shall be arbitrarily deprived of his property.
As you can see, Smith’s ideas are still visible today. In fact, capitalism, that is based on Smith’s invisible hand’, controls the majority of economies worldwide. However, the current market economy does not perfectly conform to Smith’s theories. The invisible hand has been restricted in its ability to regulate the market, as a consequence of state intervention. Minimum- and maximum prices are maintained in order to protect firms and consumers. Besides, governments are providing subsidies to promote the production of a some goods, while raising taxes to combat the production of other goods.
In short, Adam Smith’s ideas have been very important for the development of the current market economy based on capitalism. The free market principle is still accurate today: the theories of ‘laissez-faire’ and ‘the invisible hand’ rule our current economies. As a consequence, it is very logical that the Chinese government asked the British governement for help. Who else does know more about the capitalist market economy than the founding fathers themselves? However, state-intervention hinders the invisible hand in its working: the invisible hand of Adam Smith, the pure theory of the free market economy, has been wounded.