Isaac Newton (1642-1727) discovered the natural laws of motion which provided the final piece to the puzzle to explain why the Earth revolves around the sun. Newton refashioned the world governed by an interventionist God into a world crafted by a God that designs along rational and universal principles. These principles were available for all people to discover, allowed people to pursue their own aims fruitfully in this life, not the next, and to perfect themselves with their own rational power the understanding of the world. Newton was aware of specific problems in the solar system that his laws did not explain which included the fact that Saturn was moving away from the sun while Jupiter was moving closer. To account for movements not able to be explained by his formula, Newton proposed the hand of God to guide the planets in various circumstances – providing long-term stability to the universe. The Age of Enlightenment celebrated men turning from religion to reason and science to find answers.
During the Enlightenment, as each new idea spread across Europe, it was debated and challenged by other thinkers. David Hume (1711-1776), the skeptic, rejected the scope and power of reason in decision-making that Newton’s work had released. Hume thought that our passions and our affections naturally lead us to perform certain actions with reason acting only as a guide. In his early career Kant (1724-1804) had studied Newton’s ideas, but upon reading the philosophy of David Hume, he claimed he awoke from his dogmatic slumbers spending 12 years looking for answers posed by Hume’s skepticism, resulting in Kant’s efforts to combine components from both camps. Adam Smith’s efforts to discover the general laws of economies were directly inspired and influenced by the example of Newton’s success in discovering the natural laws of motion and Hume’s idea that passions (feelings and emotions), not reason, are at the centre of human nature.
In both of his mature writings, Theory of Moral Sentiments, and Wealth of Nations, Adam Smith (1723-1790) makes reference to the invisible hand. In his first significant work, an ‘invisible hand’ passage occurs in a discussion of a rich man with a sense of entitlement to what ever he wishes yet with a stomach of limited capacity, so that he eats only as much as a poor man. It is in this sense, Smith observed, “[the rich] are led by an invisible hand to make nearly the same division of the necessaries of life, which would have been made, had the earth been divided into equal portions among its inhabitants, and thus without intending it, without knowing it, advance the interest of the society.” Smith’s concept of the invisible hand (in this instance), as an indirect intervention (under Providence) into the mechanism of social life, is based on the instability of human reason to achieve social harmony by itself.
The invisible hand passage in Wealth of Nations, Smith’s classical introduction to economics, appears in a section during a discussion on foreign trade. Smith notes, while greater risk and profits were possible with investment offshore, investing capital in domestic industry increases domestic capital and revenues and, as if led by an invisible hand, has the unintended consequence of helping others they do not even know by increasing the wealth of the nation. This is the ‘invisible hand’ quote that Milton Friedman championed and incorporated into the ideology of trickle down economics.
Behavioral economics, part of microeconomics today, is not about how people would behave if they were perfectly rational, but how they actually behave. For example under the influence of passions people tend to overreact to new information, care disproportionately about what others do, and respond to the way choices are presented. Behavioral economics deals with myopic passions – people do not make rational, long-term choices but rather, shortsighted, choosing smaller rewards today rather than a larger one later.
During the 1980s promoting self-esteem to protect children from failure became an important part of the education system. This self-esteem movement has had a significant impact on the school system – in order to ensure positive self-esteem, education standards were lowered, creating a milieu for extreme individualism. The world would be saved from crime, drug abuse and under-achieving through bolstering self-esteem. However, when there is too much self-esteem there are problems of self-tolerance, entitlement, and narcissism. The cult of self-esteem has now created a pool of individuals with an exaggerated sense of entitlement in the workplace. These people view the world from an emotional rather than a rational perspective – this allows personal feelings to override the distinction between right and wrong. The cult of self-esteem created a group who make decisions based on emotional factors for short-term gain.1
Individuals in the financial services industry, with self-tolerance and a sense of personal entitlement, manipulated the market for short-term gain, creating the instability that brought on the economic debacle of 2008. Reforms need to counter the power of the banking oligarchy and provide the tools to the regulatory agencies to ensure good decision-making accountability of the players. These political decisions will launch the required processes to return back to a democracy from a plutocracy (government by the wealthy).
1 Horsman, Greg The Narcissist’s Vocation and the Economic Debacle. (p 39-43)