Hand-Over-Hand

I think I’m becoming too contrarian.

On many occasions, I have asserted that I no longer believed in Adma Smith’s ‘invisible hand’, arguing that even if it still existed (as I think it does), it no longer acts freely and independently and can be and is being channelled by corporate managers and public policymakers (which subverts the concept entirely). In fact, many a time I’ve made policy suggestions which focus on manipulating Adam Smith’s hand. I might not have articulated it as so before, but the point is that this ‘hand’ is now a ‘visible’ one now.

Now this idea is filtering into the mainstream, and I’m abandoning it. OK, that’s a bit strong. But I’m certainly moving away from it, back to the original ‘invisible hand’. By and large because I realised I was stuck in 20th century thinking.

I’ll explain it bit by bit. First, why I rejected the ‘invisible hand’ previously.

In Adam Smith’s time, markets ran on the craft economy. Businesses were small-scale, goods and services were produced ad hoc and often with the same craftsman working on every stage of its production. Mass orders did not happen because no one could afford them, the notable exception being the military during a war, and that spawned an entire body of military study on how to manage and mantain arms supplies.

So for Adam Smith, the whole idea of the ‘invisible hand’ worked perfectly. Small producers, small consumers, weak regulation and lack of information infrastructure made moot by the small reach of the market anyway; if the only folks buying their pots at the ones living in the same small town as you are, word of mouth is generally sufficient to facilitate market activity.

That economy also had fantastically low barriers of entry for most businesses. In fact, the low capital costs required then meant that the only real barrier to entry was the skills set; the biggest obstacle to opening a smithy was acquiring the necessary smithing skills. Capital investment was much lower.

Smith however, got one thing wrong, drastically wrong. He simply considered such skill sets, such knowledge, as labour costs on the assumption that one can simply hire the necessary craftsmen. Perhaps in his time the lack of a distinction made negligible difference, but I’m starting to think that the oversimplification regarding labour and capital costs as the main categories is starting to turn out to be a problem in our modern time.

But first, mass production in the post-Industrial Revolution era. The first breakdown of conventional Smith economics: mass production means that it is far easier to vary production quantity instead of price in order to command a greater market share. In fact, that would invent the concept of market share. The nature of mass production, with its factories and orders and deliveries and deadlines and massive logistical reach necessitated the creation of the management class in any sizable corporation, such corporations themselves a new invention of the era. I will put aside for today the question of whether information dissemination kept up with the massively expanding trend of goods reaching all corners of the world; it is a good discussion topic but presently just a distraction.

The task of the management was mirrored in military developments of that time, in particular the creation of the general staff to handle day-to-day affairs. Management had to oversee production processes, as well as plan for the future to avoid over- or under-producing.

But the human drive to succeed and surpass the competition meant that management soon went one step further: the seeking of a sustainable comparative advantage. And what is that but seeking and locking in a high barrier of entry to the competition? Mass production requires economy of scale, and by commanding and locking in such scale, the early corporate empires found their sustainable comparative advantage and dominated the world.

Right up to the late 20th century corporate types continued to dominate economies and direct markets, subverting the ‘invisible hand’ by second-guessing it, and like Heisenberg trying to measure a photon, deflecting the hand each time. (If you haven’t realised by now I’m simply rushing this bit of the post and not bothering to elaborate you shouldn’t be reading at all.)

And so management invented the sustainable comparative advantage, and continues to wield it against each other.

Why do I call it 20th century thinking? Because in the 21st century, a world of technology and the Internet, we’ve gone back (at least part of the way) to the days of Adam Smith.

There is very little to be had of the sustainable comparative advantage on the Internet. The ‘invisible hand’ worked on the premise that if there is a new niche in the market, producers will quickly fill the demand and compete with each other in a regular fashion. That was subverted after the Industrial Revolution which severely curtailed upstarts and disadvantaged new names trying to cross the barrier of scale.

But on the Internet, Smith’s premise works. If there is a new demand and a new need, innovators will flood the gap and compete with each other. Barriers of entry do not exist. Or rather, the only barrier is the necessary skills set. What they call a ‘knowledge economy’ is simply conventional economics from the days of its progenitor.

I’m sorry that this is such a rush job but I’ll have to lay off here. Perhaps another time I will elaborate more, but I think I’ve put the gist across.

Piaroh-Cze:

Circular motion.

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