When people think about the economy, the usually think about the stock and commodity markets, the companies they work for, and the companies they do business with. Economists concern themselves with this economy, and they claim that when left to itself, it is self regulating. "Laissez faire et laissez passer, le monde va de lui mme!," so they say, and they advocate scant if any government intervention or regulation. The invisible hand needs no muscle. But this economy is only one class of economic activity at work in society.
Fraud and embezzlement are economic activities. So are organized crime, robbery and burglary, the distribution of controlled substances, counterfeiting and pirating products. This class of economic activity is huge, but not even the most extreme libertarian would advocate that it be allowed to go on without governmental intervention and regulation.
But why not? If economics, as most economists claim, is a science based on natural laws, shouldn't those laws work in exactly the same way on all economic activity? Don't the laws of physics work on all physical activity, for instance? Shouldn't economists have to explain why the invisible hand works on the legitimate economy but not on the illegitimate one? And why haven't they? Is it because they know the invisible hand doesn't work anywhere?
For instance, within a year or so after the introduction of quartz watches, the one I had needed a new battery, so I took it to a watch repair shop. Since the introduction of quartz watches was recent, many people still had spring-driven watches, and repairing those made up the largest part of this repair shops' business. The repairman, after replacing the battery in my watch, told me that my watch needed cleaning, which of course, was a bald-faced lie, since quartz watches have no moving parts. Nevertheless, I asked what that would cost, and he quoted a price that almost equaled the watch's value. I smiled and told him that I'd think about it.
The repairman was dishonest. Who knows how many other quartz watch owners he hoodwinked? There was little likelihood that he would be exposed, and without that exposure, he could remain in business forever. In cases like this, the invisible hand is the hand that picks the pockets of customers.
In order for the invisible hand to extirpate the weeds of business from business' elysian field, the cheating has to be obvious and extensively promulgated, and it rarely is. The Sharper Image Ionic Breeze air cleaner was tested by Consumer Reports and found to be ineffective. Sharper Image sued Consumer Reports and lost. Yet Sharper Image is still selling the Ionic Breeze. Even the publication of Consumer Reports and press releases about the trial was not promulgation enough to keep Sharper Image's hand from picking pockets. So even in the legitimate economy, the invisible hand, without muscle, is a weakling.
Yet there is something more important about this bifurcated economy that becomes obvious when one thinks about why economists make claims about the legitimate part that do not apply to the illegitimate part.
Alan Greenspan in The Age of Turbulence has a chapter on The Universals of Economic Growth. In it, he cites John Locke's Second Treatise on Government and Locke's triad of natural rights to which he claims that all people are naturally entitled--life, liberty, and property. Greenspan writes, "The presumption of individual property ownership and the legality of its transfer must be deeply embedded in the culture of a society for free-market economics to function effectively."
Both John Locke and Adam Smith lived in England during roughly the same era. Unfortunately neither pointed out that property ownership was not open to everyone. It was held principally by the peerage, the upper class, so that Locke's natural rights were hardly universal. When he advocated government that protected the natural rights of life, liberty, and property, he was advocating government which protected the wealthy from the poor. And although notions of property have been expanded over succeeding centuries, the basic principle has not. The principle is what explains the bifurcation of economic activity into the two classes of legitimate and illegitimate. The illegitimate economy is subject to control merely to protect the property of haves from the property-less, and the legitimate economy is scantly regulated so the haves can pick the pockets of the have-nots. That sentence defines the essence of a free-market economy. (1/16/2008 - John Kozy)
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