Adam Smith's Invisible Foot  

Posted by T. Greer in ,

This week's "intriguing passage" comes by way of Ashwin Parameswaran's blog on macroeconomics, Macroeconomic Resilience. In his post "Evolvability, Robustness, and Resilience in Complex Adaptive Systems" Parameswaran finds reason to quote economist Joseph Berliner's book, The Innovation Decision in Soviet Industry. Said Berliner:


“Adam Smith taught us to think of competition as an “invisible hand” that guides production into the socially desirable channels….But if Adam Smith had taken as his point of departure not the coordinating mechanism but the innovation mechanism of capitalism, he may well have designated competition not as an invisible hand but as an invisible foot. For the effect of competition is not only to motivate profit-seeking entrepreneurs to seek yet more profit but to jolt conservative enterprises into the adoption of new technology and the search for improved processes and products. From the point of view of the static efficiency of resource allocation, the evil of monopoly is that it prevents resources from flowing into those lines of production in which their social value would be greatest. But from the point of view of innovation, the evil of monopoly is that it enables producers to enjoy high rates of profit without having to undertake the exacting and risky activities associated with technological change. A world of monopolies, socialist or capitalist, would be a world with very little technological change.”

To maintain an evolvable macro-economy, the invisible foot needs to be “applied vigorously to the backsides of enterprises that would otherwise have been quite content to go on producing the same products in the same ways, and at a reasonable profit, if they could only be protected from the intrusion of competition.”

The technological growth of the last two centuries has been championed as one of capitalism's greatest triumphs. Technological innovation, however, is dependent on the invisible foot. But what invisible foot can be found in a world full of firms "too big to fail?" 

"Too big to fail" is attractive in the short term. On a longer scale it does not fare so well. The lost innovation on the future may cost society much more than temporary economic instability today.

This entry was posted on 01 September, 2010 at 10:11 AM and is filed under , . You can follow any responses to this entry through the comments feed .

3 comments

At the risk of pedanticism, you and Parameswaran have the wrong economist. Adam Smith's invisible hand is not about competition, it is more about spontaneous order and perhaps specialization.

The "Invisible Hand" puts dinner on Mister Smith's plate, even though each of the vendors is focused on his own occupation.

You're looking for Joseph Schumpeter. His "gales of creative destruction" is close to the foot.

September 1, 2010 at 1:20 PM

Berliner recognizes this, I think. To quote him again:

Adam Smith taught us to think of competition as an “invisible hand” that guides production into the socially desirable channels….But if Adam Smith had taken as his point of departure not the coordinating mechanism but the innovation mechanism of capitalism he may well have designated competition not as an invisible hand but as an invisible foot

Adam Smith saw a hand because he focused on the 'coordinating mechanism' self interest provides; had his focus instead been on the innovation prompted by this same self-interest he would reached conclusions similar to Schumpeter's - in other words, have seen an invisible foot.

This is how I am reading it, at least.

September 1, 2010 at 1:49 PM

The invisible hand is a static metaphor focused on the impact of positive incentives while the invisible foot is a dynamic concept focused on the impact of negative incentives. And yes, Schumpeter is one of the main contributors to an evolutionary, dynamic view of economics. This quote from Rawski on China http://lsb.scu.edu/~kmitchener/currentcourse/Econ%20137/Rawski_China%20Reform.pdf explains it quite well:
"Monetary incentives are the bedrock of any market system. Markets reward hard work, successful anticipation and productive innovation (as well as blind luck) with large financial payoffs. Adam Smith's "invisible hand" connects private greed with social betterment. The link between effort and reward creates powerful motivations for effort and entrepreneurship.
But market systems also punish the absence of effort, anticipation, innovation and luck. Such negative incentives are no less important than positive rewards, for the proportion of daring entrepreneurs in any population is small. Motivation for the non-entrepreneurial majority comes from Joseph Berliner's "invisible foot", which market systems apply "vigorously to the backside of enterprises that would otherwise have been quite content to go on producing the same products in the same ways...if they could only be protected from the intrusion of competition."

Berliner's work was a study on why a lot of the artificial positive incentive programs instituted in the Soviet Union did not solve the innovation deficit there because of the absence of negative incentives e.g. the ability of a client to take his business away from you.

Burton Klein argued that unlike the static view dominant in economics which took such inefficiencies to be a one-time loss, lack of dynamic competition was a continuous drag on growth and economic development.

September 1, 2010 at 2:40 PM

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