The Invisible Hand of Incentive: Free Markets vs. Government Intervention

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I write to forget

2 months ago

The ‘invisible hand’ (coined by Adam Smith in the first book in economics ‘The wealth of nations’) is an allegory illustrating incentive as the greatest predictor of human behavior. Voluntary interactions between free individuals competing for value are governed by the incentive to offer value before receiving value. Competition optimises this process so that both parties in any transaction get the maximum value for each other with the least cost for each other. This results in win-win scenarios and the creation of wealth. This process works only when it is left alone without intervention, hence the ‘invisible hand’ guiding it. Problems only arise when an authority (the state) intervenes to restrict certain transactions, or to grant exclusivity in supply to a select few who bribed said authority to create oligopolies and monopolies that put buyers in a disadvantaged position.

Businesses in a free market without government intervention have an incentive to offer value so that they can compete against competitors, which is the only way for them to thrive. Similarly, consumers understand that they need to have some transactional power so that they can exchange value for value. Two parties can reach mutually beneficial win-win outcomes if they are left alone to conduct free negotiations, and if they know they have other options to choose from.

Adam Smith (probably)

Even government, which is a monopoly, has an incentive to give people what they want they. It is guided by an invisible hand to at least pretend to serve the people, even though it is a monopoly, and people don’t get a choice to switch governments, except for meaningless staged elections between two identical candidates every few years.

Imagine, even the ultimate unopposed monopoly of violence (the state) still has an incentive to keep people happy. Yet most people still imagine that they need government to enforce order through threats of violence instead of incentive. This is what most people want, so this is what we get.

People assume that fear creates order more than incentive, so fear is what we get.

If enough people understood that we can get more efficient and more moral outcomes without government, then government would cease to exist, and we would achieve better more meaningful social order without government enforcement.

How I know this?

Because incentives are a greater predictor of human behavior than threats. With a threat, you can reluctantly submit people to pretend to obey until they know they won’t be caught, or until they backstab you. With incentives, you can be certain for most people how they will choose to behave. And for those people who aren’t governed by incentive, threats won’t work either. How is that war on drugs going, by the way?

The free market can solve all economic problems better than any government could because incentive is a greater (and more moral) tool than threats when it comes to motivating people.

Even today, most people understand that they can extract more value from society if they voluntarily exchange value for value. This is how the invisible hand guides our professional life. We don’t barge into an office and demand a money or a raise without offering value. No. We use the violence of the state to enforce minimum wages or to give us subsidies forcibly takes from others through taxes. And it is precisely these government interventions that suppress and decelerate the economy enough to cause unemployment, which then puts workers at a negotiating disadvantage with employers, since fewer job positions that available employees means employees have no leverage to negotiate better wages.

It is government. Government is why you have to work long hours just to pay bills.

All of our personal relationships are based on the principles of free market competition, and an invisible hand guiding us into optimal relationships. You understand that you need to offer value as a friend if others are to offer value to you too, otherwise, they invest their time and energy elsewhere.

No government regulates personal relationships, at least not yet. Imagine the hell that would emerge from that. Yet it’s not too far away, since certain ideologies and religions preach the state and theocratic regulation of personal relationships. Imagine being in a forced relationship with someone whom you can’t ever choose to leave. What incentive would he have to be kind to you?

Without incentive, we get the inefficiencies and immoralities of government.

But what about violent insane people who don’t understand the morality and efficiency of government? What about people whose only incentive it violence and power projection? Then the free market, without government-enforced monopoly, can create insurances private policing to secure our rights and safety, from property and the environment to children’s rights and health standards. This is a topic I have written extensively about: