Slapping Down the Invisible Hand

Change may be in the air. Conor Friedersdorf, subbing for Andrew Sullivan at the Atlantic, decided it was time to quote Eric Hoffer in The True Believer:

When people are ripe for a mass movement, they are usually ripe for any effective movement, and not solely for one with a particular doctrine or program. In pre-Hitlerian Germany it was often a tossup whether a restless youth would join the Communists or the Nazis. In the overcrowded pale of Czarist Russia the simmering Jewish population was ripe both for revolution and Zionism. In the same family, one member would join the revolutionaries and the other the Zionists… This receptivity to all movements does not always cease even after the potential true believer has become the ardent convert of a specific movement. Where mass movements are in violent competition with each other, there are not infrequent instances of converts – even the most zealous – shifting their allegiances from one to the other. A Saul turning into a Paul is neither a rarity nor a miracle. In our day, each proselytizing mass movement seems to regard the zealous adherents of its antagonists as its own political converts.

That was written in 1951, but Friedersdorf says that America right now “is ripe for a mass movement that upends our political landscape” – although he hedges his bets:

I don’t mean anything as radical or nefarious as what happened in turn of the century Russia or pre-war Germany. I’m imagining something like The New Deal or The Reagan Revolution – a movement that has a new and identifiable constituency, that strongly challenges the elite consensus, and that transforms or even replaces one of our political parties. I say this not because I can identify any present mass movement that I regard as a plausible success, but because there are several factions in American life that each resembles mass movements in their own way, though their leadership meditates against their ever fully realizing their potential.

But something is up – he cites the folks “who rallied around Ron Paul during the last presidential election” (you remember how they invoked Guy Fawkes). And he cites “the subset of Obama supporters who misidentified him as a transformative president rather than an ambitious, politically cautious establishmentarian” – a common enough mistake on the left. And there are the devoutly religious evangelicals in love with Sarah Palin – and he notes that the orthodox Catholics have been encouraged to reconsider their political alliances. And of course there is Sarah Palin, the woman herself, somehow now floating above both parties. And one must not forget environmentalism as religion. We live in odd times, and Friedersdorf argues in an age where anything can happen:

Obviously a lot separates these groups, and it is hard to imagine a single movement that encompassed them all. Even so, given the structural changes in American politics over the last decade – I am mostly thinking about the ease of organizing people and soliciting money on the Internet – it seems as though some coalition, perhaps a surprising one, could assemble greater support than Ross Perot managed to garner during his first presidential bid, particularly if America’s current economic woes (or unexpectedly quick climate change or radically increased economic competition from abroad) breeds increasing dissatisfaction with the status quo in coming decades.

He sees our two political parties on shaky ground. But he may be thinking too narrowly. Our whole economic system may be on shaky ground. It’s not just the ongoing, rolling collapse of the economy, it’s that when McCain and Palin and most everyone on the right invoked the word socialism – Obama was one of those – most everyone shrugged.

Not so long ago there was that Rasmussen poll – only fifty-three percent of Americans believe capitalism is better than socialism. With those under thirty there was a three-way tie. Thirty-seven percent prefer capitalism, thirty-three percent socialism and thirty percent are undecided (discussed in some detail here). No wonder the Republicans are having a hard time gaining traction with their opposition to healthcare reform – all that scary talk about socialized medicine and rationing, and Stalin and the French and whatever it is they can throw against the wall. Nothing much is sticking, even if the Democrats whimper and cower and whine that, no, no, they aren’t socialists, really they’re not. They need not bother. No one seems to care.

In fact, if there is change in the air, people seem to be angry at, or laughing at, the Invisible Hand – Adam Smith’s concept that everyone selfishly competing for the most profit for their own personal good will efficiently produce the greatest good of the greatest number, as they won’t make money if they offer a shoddy product at an absurdly high price. The for-profit insurance industry seems to make a joke of that.

In fact, Tom Tomorrow offers a wonderful cartoon that captures that whole problem – meet Doctor Hand (click on the link, as posting it here would raise any number of copyright issues).

But the way we handle healthcare does get absurd, as you have the Blue Dog Democrats seeming to make this assertion – that a strong public option in healthcare reform would be “unfair to private insurers.” Well, the fiscally conservative wing of the party are an odd bunch, but arguing that being fair to a poorly performing and massive profitable corporation is more important than people’s health is a stretch. Of course they, like all politicians, need campaign contributions.

But something is up. Consider the former CIGNA executive, Wendell Potter, appearing on Bill Moyers Journal:

In his first television interview since leaving the health insurance industry, Wendell Potter tells Bill Moyers why he left his successful career as the head of Public Relations for CIGNA, one of the nation’s largest insurers, and decided to speak out against the industry. “I didn’t intend to [speak out], until it became really clear to me that the industry is resorting to the same tactics they’ve used over the years, and particularly back in the early ’90s, when they were leading the effort to kill the Clinton plan.”

Potter began his trip from health care spokesperson to reform advocate while back home in Tennessee. Potter attended a “health care expedition,” a makeshift health clinic set up at fairgrounds, and he tells Bill Moyers, “It was absolutely stunning. When I walked through the fairground gates, I saw hundreds of people lined up, in the rain. It was raining that day. Lined up, waiting to get care, in animal stalls. Animal stalls.”

Looking back over his long career, Potter sees an industry corrupted by Wall Street expectations and greed. According to Potter, insurers have every incentive to deny coverage — every dollar they don’t pay out to a claim is a dollar they can add to their profits, and Wall Street investors demand they pay out less every year. Under these conditions, Potter says, “You don’t think about individual people. You think about the numbers, and whether or not you’re going to meet Wall Street’s expectations.”

You can watch the interview here, and it includes this:

BILL MOYERS: We obtained a copy of the game plan that was adopted by the industry’s trade association, AHIP. And it spells out the industry strategies in gold letters. It says, “Highlight horror stories of government-run systems.” What was that about?

WENDELL POTTER: The industry has always tried to make Americans think that government-run systems are the worst thing that could possibly happen to them, that if you even consider that, you’re heading down on the slippery slope towards socialism. So they have used scare tactics for years and years and years, to keep that from happening. If there were a broader program like our Medicare program, it could potentially reduce the profits of these big companies. So that is their biggest concern.

This isn’t about political parties per se – it’s about free-market capitalism itself. And we don’t want to be like the French, with a moribund, calcified economy, where for-profit healthcare is an add-on you may choose to purchase, not the core method of delivery. And they’re system isn’t that good. Or maybe it is:

Some researchers, however, said that study [from the WHO, proclaiming French health care the best in the world] was flawed, arguing that there might be things other than a country’s health care system that determined factors like longevity. So this year, two researchers at the London School of Hygiene and Tropical Medicine measured something called the “amenable mortality.” Basically, it’s a measure of deaths that could have been prevented with good health care. The researchers looked at health care in 19 industrialized nations. Again, France came in first. The United States was last. …

“There are no uninsured in France,” says Victor Rodwin, a professor of health policy at New York University, who is affiliated with the International Longevity Center. “That’s completely unheard of. There is no case of anybody going broke over their health costs. In fact, the system is so designed that for the 3 or 4 or 5 percent of the patients who are the very sickest, those patients are exempt from their co-payments to begin with. There are no deductibles.”

Matthew Yglesias offers perspective:

Now in the current American status quo you might be able to sign up for Medicaid (socialism!) or else go to the ER and get some unpaid-for health care once your condition deteriorates enough. But it is worth being clear that the free market solution to someone being poor and sick is for them to die.

If you’re too poor for HBO, you go without watching True Blood. If you’re too poor for a MacBook Pro, you make do without one. And if you’re too poor for statins you get a heart attack. And if you’re too poor to get your heart attack treated you die.

Whether or not anyone in the United States actually wants to implement such a system isn’t clear to me, but that would be what a free market health care system looked like – like free markets in other things.

It seems people get that – seventy-two percent are fine with a strong public option – but none of them have careers financed by corporate contributions. If there is going to be an upheaval, as Friedersdorf senses, it won’t be a shift from one political party to the other, or the rise of a third or fourth party. It will be a rejection of the whole stupid political system. There is such a thing as rational self-interest, and when it’s a matter of your own life and death, being fair to CIGNA and all the rest seems an absurd concern.

And it may be more than a rejection of the political system. It may be a rejection, in this one case, and maybe more, of key elements of free-market capitalism itself.

In fact, recently, in the New York Times, Robert Frank argued that people may come to find that Adam Smith was all wrong, or thinking too narrowly, and Charles Darwin was the one who was onto something:

Darwin, renowned for the theory of evolution, was a naturalist, not an economist, and his view of the competitive struggle was different from Smith’s in subtle but profound ways. Growing evidence suggests that Darwin’s view tracks economic reality much more closely.

Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative – one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.

But first you have to understand Doctor Hand:

Smith’s basic idea was that business owners seeking to lure customers away from rivals have powerful incentives to introduce improved product designs and cost-saving innovations. These moves bolster innovators’ profits in the short term. But rivals respond by adopting the same innovations – and the resulting competition gradually drives down prices and profits. In the end, Smith argued, consumers reap all the gains.

Darwin was a tad more subtle:

The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith’s account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species.

In other cases, however, traits that help individuals are harmful to larger groups. For instance, a mutation for larger antlers served the reproductive interests of an individual male elk, because it helped him prevail in battles with other males for access to mates. But as this mutation spread, it started an arms race that made life more hazardous for male elk over all. The antlers of male elk can now span five feet or more. And despite their utility in battle, they often become a fatal handicap when predators pursue males into dense woods.

If so, then, Frank argues, Adam Smith’s invisible hand is little more than an interesting special case – “Competition, to be sure, sometimes guides individual behavior in ways that benefit society as a whole. But not always.”

Here’s how to think of it:

Individual and group interests are almost always in conflict when rewards to individuals depend on relative performance, as in the antlers arms race. In the marketplace, such reward structures are the rule, not the exception. The income of investment managers, for example, depends mainly on the amount of money they manage, which in turn depends largely on their funds’ relative performance.

Relative performance affects many other rewards in contemporary life. For example, it determines which parents can send their children to good public schools. Because such schools are typically in more expensive neighborhoods, parents who want to send their children to them must outbid others for houses in those neighborhoods.

So it seems that “relative incentive structures undermine the invisible hand.” And the evidence for that is overwhelming:

To make their funds more attractive to investors, money managers create complex securities that impose serious, if often well-camouflaged, risks on society. But when all managers take such steps, they are mutually offsetting. No one benefits, yet the risk of financial crises rises sharply.

Similarly, to earn extra money for houses in better school districts, parents often work longer hours or accept jobs entailing greater safety risks. Such steps may seem compelling to an individual family, but when all families take them, they serve only to bid up housing prices. As before, only half of all children will attend top-half schools.

It’s the same with athletes who take anabolic steroids. Individual athletes who take them may perform better in absolute terms. But these drugs also entail serious long-term health risks, and when everyone takes them, no one gains an edge.

This is revolutionary talk. And Darwin provides the rationale for the regulation modern societies accept – Frank cites “steroid bans in sports, safety and hours regulation in the workplace, product safety standards and the myriad restrictions typically imposed on the financial sector.” Frank doesn’t go so far as suggesting that we move closer to European-style Democratic Socialism, but the seed is there.

Frank will only go this far:

The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.

The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.

But you have the Blue Dog Democrats and all the Republicans, on healthcare, and on the stimulus program, and on any number of economic issues, telling is that big antlers are good, and it would be unfair to be mean to the alpha-males who somehow grew them. The American public listens. They roll their eyes.

Conor Friedersdorf senses change in the air. He doesn’t know the half of it. There is such a thing as the commons – “multiple individuals acting independently in their own self-interest can ultimately destroy a shared limited resource even when it is clear that it is not in anyone’s long term interest for this to happen.”

If you believe that, a real revolution is coming.

About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
This entry was posted in America Becoming French, Americans and Socialism, Americans Have No Problem with Socialism - Rasmussen Poll, Healthcare Reform, Socialized Medicine, The End of Capitalism and tagged , , , , , , , , . Bookmark the permalink.

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