Eyre Lines

There’s another of a set of articles looking to provide an alternative “Invisible Hand” to the one we currently allegedly have on Evonomics. The idea behind it is sort of sound, given that it imposes a cost on externalities which companies generally ignore such as environmental degredation, though frankly this is something which a well-functioning government should be doing (and that might be a local government rather than a national one).

My trouble with this approach, tweaks to the system so that “Invisible Hand” actually works, is that I’m convinced the concept is very fundamentally broken.

It is correct, as far as I’ve seen in a lot of years dealing with modest commercial entities, that this system works in a competitive environment of medium-sized companies dealing in wholesale goods, which is really what Adam Smith had in mind when he wrote “The Wealth of Nations”. It is, after all, pretty much what he saw, looking at a very early industrial revolution Britain from a position somewhat divorced from the realities of life at the bottom. We hadn’t, for instance, yet had time for the free market approach to produce massive corporations with monopoly power (or effective cartels of companies, with the same effect) in a lot of the economy. However, that is what is generally agreed as the end-point of free market capitalism, and as Smith remarked “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Once you have that monopoly power, there is no constraint on prices via bargaining, because there can be no bargaining.

A further negative of this inevitable end-point is that while the “free market” is lauded as a better alternative to a command economy (centralised planning) – it is regularly pointed out by conservatives that we have seen a lot of command economies, chiefly in countries nominally communist, and they have failed miserably (the five and ten year plans beloved of Stalin and Mao are cases in point) – when you get multinational companies economically more powerful than many countries, they are practising their own form of command economics; they are all going to plan centrally. This, I would argue, gives you all the negatives of a command economy without the positives of at least nominally acting in the interest of the people or of having elections with a wide franchise which can change their leadership and policy, and, these days, an ethos focused entirely on “shareholder value” – which assumes that shareholders are only interested in the very short term (because that’s how stocks and shares are traded these days, with little or no transaction cost and no incentive to retain them long term). It isn’t even very sound self-interest, as that would argue that the company should look to its long term future, not just the next quarterly return.

There’s another really major fault in the “Invisible Hand” assumption when it comes to retail sales. Whereas if you’re buying millions (or even tens of thousands) of pounds worth of goods, you are going to bargain strongly if you can, it is just not worth the effort to bargain in the same way for a loaf of bread at the supermarket. I’ve certainly bargained that way on sales and purchases for myself – a house, a car, even (once) a pair of Moroccan carpets (in a bazaar in Tangier), but not when it comes to smaller things. There isn’t really the opportunity where I live, and although in Tangier people were bargaining hard over small items, if I were to go out for a basket of shopping it would take me all day to negotiate for the best price there, whereas it takes half an hour in my local Tesco. (From my point of view, you haven’t bargained hard enough unless you’ve walked out of the negotiation at least once – it took me well over an hour to bargain for the carpets, and should have taken longer had I wished for the best price, but I was constrained by needing to rejoin my guided tour… and yes, I did walk out once, but should have walked out twice of three times. Nonetheless, they cost me about a quarter of what they’d have cost in a carpet shop near my home, so I wasn’t too unhappy!).

It has to be a supermarket, because the smaller traders in town can’t compete on price (which a true invisible hand economy would allow them to) – they also suffer from the fact that the negotiation costs (in time) are the same if you’re buying £100 of goods or if you’re buying £100,000, and from the lack of weight which that huge purchasing power gives the supermarkets. Yes, there is some competition between the available supermarkets, but on the whole they tend to standardise their prices (not that I’m alleging a cartel, you understand), and the “discount supermarkets” tend to be unattractive for one or more of the reasons that they lack choice (economies of scale), are in locations which are difficult to access (lower land prices…) or have huge queues at the checkouts (economies of staffing) – plus, there is a cost in my time, petrol and patience in having to go round several places comparing prices (there’s still a cost even if all the information is online) and then round them again to make the actual purchases. Yes, there is some invisible hand effect – if one of them were overall significantly more expensive than the others, I would go elsewhere – but they can fairly freely overprice some items which will then slip into my basket because it would be too much effort (and expense, in time at the least) to go to somewhere else to buy just that item. I do know people who do split their shop between multiple places, but not all that many – and I strongly doubt that there are enough of them to have the overall effect which the “Invisible Hand” demands.

That, of course, is where I live. In a larger town, there might be more supermarkets closer together, and things might work rather better. In a smaller town, there might be only one supermarket, and the only constraint on its prices would be the threat of an independent retailler setting up in competition. I actually live just outside my town, and sometimes shop at the small Tesco which is in my village – and the prices there are fairly consistently higher than those in the big Tesco in town. Not by enough, in every case, to persuade me to go further, but significantly – and I tend to drive. For someone on foot, there would be even less competition.

And don’t get me started on the idea that the “Invisible Hand” has ever operated as economists describe in labour markets…

The trouble is, as this article tends to confirm, economics has to have an Invisible Hand as a matter of faith – it has to be a faith issue, as it’s never worked in practice outside the limited scope I described at the beginning of this post. So, if their God seems to be malfunctioning, they need to tweak him. Personally, I think that God is dead. But you won’t easily prise the concept out of the minds of economists – perhaps out of their cold, dead, Invisible Hands?