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Hidden Hand vs Invisible Hand

One of my commenters, Amyclae, commented on my Industrial Prosperity and Safety yesterday. It was an outstanding comment and included this link.

It’s a very interesting paper dealing with industrial development in the third world. My main takeaway, even though there is a lot in it, and you should definitely read it, is that “sh*t happens”. By that I mean that you get going on a huge development project, he talks about a pulp mill in Pakistan and a Hydropower dam in Egypt. In the case of the pulp mill, the proposed bamboo crop that was supposed to provide the feedstock died, and in the case of the dam, the market didn’t materialize. In both cases they were able to figure out something else but it took a while.

Still, that strikes as a normal development cycle, although perhaps a bit more catastrophic than most. Has anybody ever been involved with a project that went as planned? I sure haven’t.

But here’s the thing, in the cases he’s talking about, the government or NGOs are involved, the flexibility and adaptability of the free market and those of us who work in it, take this as normal, bureaucrats tend to panic, rant and rave at this.

The rest of Amyclae’s comment is germane here:

To often government technocrats drink too much of their own Kool-Aid. The market is perfectly rational, all the time every time! So, to make sure that happens, they interject a little ‘oversight.’ Got to keep everything safe and equal! Quantifiable!

The problem is that oftentimes the very irrationality of the actors contributes to great outcomes. Hirschman wrote and coined the phrase of the ‘hiding hand’ to describe how the ignorance of future obstacles, sometimes a purposeful ignorance, allows me and you to undertake projects that require absurd amounts of creativity to overcome the obstacles. He points out how surprisingly widespread this is. Trying to remove all the creativity from the process will inevitably produce worse outcomes because, quite simply, it’ll prevent people from 1.) getting into a situation where they can undertake a battle-against-the-odds 2.) if we do get into that situation here comes buckets of cash. Creativity need not apply.

Exactly

The other thing is, especially historically, private capital has started with smaller scale things and as the capital became available scaled things up, and that’s not always easy either. In the old days of the cold war the US military had a saying, “Quantity has a quality all its own”. That’s true in industrial/commercial/agricultural processes as well.

Not to mention it’s one thing to “bet the farm” It’s critical for that farmer but not the industry, or the country. It’s another matter to bet production agriculture in Nebraska, lose that one and even the United States would have catastrophic problems. And that too is part of the problem, governments, especially ones with too much control like the one big solution. It was one of the causes of the demise of the Soviet Union, because ordering it done, doesn’t get it done, somebody has to fix the errors of the (oh so gifted) central planners (Solyndra, anyone?)

One of the things that Secretary Schultz talked a bit about yesterday is the deleterious effects of too many layers of management. They are all too real, and one of the major reason why even American companies like General Motors are forever running to Washington for protection, it is not that good people don’t work for GM, many do. It’s that they can’t get their ideas and/or voices heard at a high enough level.

You see the thing is, Adam Smith’s “Invisible Hand” works just fine, on the firing line. If my livelihood depends on getting something to work, given somewhat reasonable resources, I’m very likely to get something to work, it may be temporary, or suboptimal or just plain weird but it will work while I figure out how to improve it. But if I have a guaranteed job and work 9-5 with 2 weeks vacation and no penalty for failure, well why would I work that hard. What’s in it for me? Probably resentment and trouble. That’s called negative feedback, and it pretty much guarantees that I’ll never do it again.

The example I like is this. Thomas Edison founded General Electric based mostly on his incandescent light bulb, and some ancillary equipment, like the dynamo, but the bulb provided the market, the rest came later. The thing is, he worked 18 months to get the bulb right. Does anybody think a company like GE would have carried him 18 months with all the overhead that Menlo Park had to perfect a product for a nonexistent market?

Yeah, me neither.

And that’s the wonder of an entrepreneurial small business, when it wins, it can be a fundamental game changer.

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Categories: Business, Capitalism, Finance

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4 replies

  1. The “Invisible Hand” and the “Hidden Hand” will work when they are given a chance. It is part of the nature of the Free Market System. Although it can be messy at times, it can produce great wealth for all. The problem is that liberal thinkers don’t want it to work because they consider it a slam against them. It is difficult to justify their positions and the perks that go with them. They have to be involved deeply in the project(s) or they will never amount to much. Liberals do not trust human nature. They cannot understand how people can automatically can take care of themselves and in so doing take care of the society. More importantly, when the situation works essentially on its own, there is little political power for them which is what they crave. Only the complexities of an ever-growing government can guarantee success in a venture. Sadly, history shows that Liberalism does not work too well.

    • All true, and given the way we are using the terms, the invisible hand will work better, because there are two many player with ego involved in the hidden hand. But it works too, just not as well.

  2. Amen! We can abbreviate: The market is economic; government is political and never the twain shall meet in the real world…

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