The visible hand

I am playing with an idea which I call ‘the visible hand’ in homage to Adam Smith. If I remember correctly, Smith argued that in certain situations the activities of individuals, all working in their own interests, can produce a society that works for everyone: the greed and striving of individual merchants can produce general prosperity.

I am thinking of situations where this does not work. For example, what the countries of Europe are trying to do now is cut costs internally, through cutting wages and benefits for working people. This will reduce the cost of their goods, which they can then export, and the revenue coming back into their countries will fuel economic recovery.

However, for every successful exporter, there has to be another country that imports. China is able to sell because the US (and other countries) are willing to buy. There have to be nations with trade deficits, if there are going to be nations with a positive balance of trade. It is not possible for every country to export its way to prosperity.

Or put another way, what works for an individual does not work for the group. This is the visible hand.

One theory is that all European countries believe they can export their way to prosperity. Another theory — which Michael Hudson sets forth — is that European governments plan to impoverish their working classes, presumably because they want to break the power of ordinary people, make them so miserable that they will be unable to demand anything.

I know there are third world countries which have a rich ruling class, a small middle class and a vast underclass of desperately poor workers and peasants. Most of these countries are not heavily industrialized. Instead, they export raw materials. Their wealth comes from the needs of industrialized societies and the large groups of consumers in industrialized societies. If you turn all countries into third world countries, who will buy the raw materials?

In addition, countries with these vast gaps between rich and poor and often unstable, prone to coups d’etat, revolutions and civil war. They are often police states or failed states, with no working government.

I can imagine a world like this, and I can imagine how effectively it will face global warming and environmental collapse.