sabato 3 gennaio 2015

The invisible hand

In my opinion, Invisible Hand must be taken for what it is and nothing more. It is the most efficient “mechanism” we know to achieve maximum efficiency and optimal resource allocation in very complex economical dynamics. It is the mechanism that, given a demand curve and an offer curve, we may best rely to bring us at the interception point. And we are not discussing about the very simple pepper and tomato example in our lesson but about the hyper-complex economic environment we are every day submerged with billions of products at shelves; billions of factories that produce them, companies that trade, advertise and move them; billions of workers involved and billions of households that freely decide to buy them. And then we need to speak about financial markets, commodity markets, etc…

We don’t know about any other most effective alternative. Planned Economies, as we know, have failed dramatically. Maybe in the future someone will propose a huge “big brother” computer that has crunching power enough to decide what our economy must produce, when and how in order to satisfy humanity needs in a sustainable way. Sincerely speaking I am horrified by such a perspective (but this is not a scientific statement but a truly personal and emotional one) because I strongly believe in individual freedoms.

Having said that, Invisible Hand has nothing to do with Welfare and with Social Justice. There are various flaws:
- Negative Externalities are very much a problem. See pollution, healthcare costs and many more, ….
- There are winners and losers and this is a huge moral issue.
- In reality information is always asymmetric and incomplete
- There are human behavioral biases
And of course each of these opens new and very interesting threads of discussions

Now, immediate (I would say natural and instinctive) reaction is always to call in for stronger government interventions. And my opinion (again absolutely non-scientific but personal and I would say moral) is that this is necessary to protect environment, health, to punish free riders and all kind of cheaters, to take care of losers and redistribute wealth.
But we must not fall in the opposite mistake. And we need to keep in mind that any top-down intervention has always consequences and I would like to introduce two elements of discussions.

 - We may not like Invisible Hand but let’s never forget how powerful it is. When we fix low prices we always create shortages and black/parallel markets; when we force high prices we end up with warehouses piled up and waste; when we exceed in subsidisies we undermine productivity, etcc.. We need to be cautious… very cautious … and smart !!!
- At the beginning of this thread we have seen the Tobacco Example, but let’s think about Cocaine. We banned it, we fight it, we struggle globally and then result is that, since we are not able to modify the demand curve, we see products of a plant processed at marginal costs that are sold in our cities at margin surplus that goes straight into mafia’s pockets.
My point is that very often the problem is in the Demand Curve and not in the invisible hand.
If people is willing to buy dot-com shares or tulip bulbs at crazy prices, Invisible hand will drive their prices at a crazy “interception point”.

Changing Demand Curves is the real cultural battle of our tomorrow. Let’s not eat meat (or less meat), let’s drive low-consumption cars and take the bike whenever is possible; let’s be conscious of our personal carbon footprint; let’s eat healthy food; in general let’s get more information about products we buy, where and how are manufactured; let’s spend more time with our children; let’s use internet and new media tools in a smart way; let’s fight for gender parity everywhere in the world; etc, etc, etc…

Invisible hand is neutral and may work also at our side. I don’t want a bunch of burocrats to decide for me…

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