The Visible Hand

I wrote this piece about a month ago as the Welcome for Make: 16, which will be on the newsstand soon.

As I write this, there is panic on Wall Street despite Washington’s $700 billion rescue attempt. The crisis is not contained by U.S. borders, but extends to Europe and Asia. Like many people, I’m incredulous. How could this happen?

Wall Street hired the best and the brightest, paid them handsomely, and gave them unlimited resources and technology. It turns out they were building enormously complicated castles made of sand. A great wave washed them away, astounding all the smart people who devoted their lives to speculation, not production. Their models based on historical data predicted future profits, not collapse. Few people saw this coming until it hit.

“It was the triumph of data over common sense,” said reporter Adam Davidson on the excellent episode of This American Life called “The Giant Pool of Money.” Economist Michael Lehmann in the San Francisco Chronicle called it “the triumph of ideology over common sense.” It’s obvious both common sense and the common man have taken a beating.

It’s hard to stomach that our government must bail out Wall Street. It really means we’ve bet our future on the same people who created the present situation. To paraphrase a joke I’ve heard: It’s like going to a casino in Vegas and rooting for the house. One New York Times reader expressed the frustration that many feel: “Why can’t we take half of the $700 billion and just build something?”

These events shake our belief that free markets work to the benefit of all. The fundamental tenet of capitalism is the “invisible hand”: Adam Smith wrote that “by pursuing his own interest [each person] frequently promotes that of the society.” This year, Nobel Prize-winning economist Joseph Stiglitz said: “In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism — it tells the world that this way of economic organization turns out not to be sustainable.”

A headline in the Christian Science Monitor says: “With finance crisis, hands-off era over.” Government will need to be more assertive in regulating Wall Street. But I think it goes beyond that. I wonder if we, as individuals, have been living in our own era of hands-off. Have Americans become so disengaged that we’ve become dependent on some invisible force to provide what we need? Have we gotten used to leaving important matters to experts, until they turn out to be wrong?

Isn’t it time for us to become hands-on again?

We, the people, face enormous challenges. Apart from the economic mess, we know fundamental changes are coming because of global warming. Our dependence on fossil fuels is not sustainable. Change is coming, whether we want it or not.

Better we meet the challenges head-on rather than hide. New York Times columnist Thomas Friedman summed it up: “We need to get back to making stuff, based on real engineering not just financial engineering. We need to get back to a world where people are able to realize the American Dream — a house with a yard — because they have built something with their hands, not because they got a ‘liar loan.’ … The American Dream is an aspiration, not an entitlement.”

We have to believe it starts with each of us — not some faceless government or corporate bureaucracy. It’s time for us, individually and working together in business, to reconsider what it means to be productive, not just profitable. It’s time for us to reengage in how our government sets priorities for education, health care, housing, and transportation.

The DIY mindset celebrated in this magazine must again become an essential life skill, rooted once again in necessity and practicality. Our future security lies in knowing what we’re capable of creating, and how we can adapt to change by being resourceful.

A challenge this great can bring out the best in us. We need everyone, because every person has something to contribute. We need a showing of all hands.

tags: ,
  • Jack Repenning

    But, the people responsible for this debacle *did* build something: personal wealth. One of them even built himself a job as Secretary of the Treasury, where he could further the wealth building by another trillion dollars. Entrepreneurialism is alive and well in Wall Street. It’s only the 99 44/100% of the rest of us who’re missing out.

    Adam Smith’s “invisible hand” imagery described a world where no one had unbridled power over anyone else, where many many small acts added up to a general welfare. If, as seems apparent, we prefer to concentrate the power of wealth into the hands of a few, then we must also guard that the few, “pursuing their own interest,” do not sabotage ours.

  • bowerbird

    > These events shake our belief that
    > free markets work to the benefit of all.

    did you _really_ believe that?

    why didn’t you realize that
    the tragedy of the commons
    directly contradicted that?

    don’t you feel silly now?


  • Pure capitalism and pure communism sit at opposite ends of a spectrum, and both extremes are insane ways to structure a society. Today, America has lurched to far to the right. 80% of the wealth is owned by the top 10% of the population, and 40% of the wealth by the top 1%. This isn’t sustainable. For small businesses to prosper their customer base needs some capital. But the capital is being funneled upwards towards the elite. This bail out to Wall Street has only attempted to re-inflate the credit bubble, and to preserve this status quo. But the only real solution is to get capital back into the hands of the working class so that they can start paying off their mortgages and credit cards, and so they have so extra money to start spending on main street. Because of this, I’m hoping for new deal style public work projects and more progressive taxation.

  • bex

    The language of finance is explicitly designed to increase confusion, and prevent thought.

    This is similar to the language behind the law, and politics. All 3 are vibrant, fascinating fields… but because of a fundamental lack of clarity in language, along with a drive to “let the experts handle things,” scares people away.

  • Tony

    Bex – totally agree. I’d love to see a movement in government that’s all about simplicity… the refactoring the laws and the tax code.

  • Holy crap, Dale, is there any sensible person out there who thinks markets are in any sense unregulated? Or even *less* regulated than they were ten years ago? I’ve seen an estimate that Sarbanes-Oxley will cause two trillion dollars worth of destruction (by consuming otherwise-productive effort) for U.S. businesses.

    Anybody who claims that free markets have failed needs to compare the American banking system to the Canadian banking system. Heard any bad news out of Canada? Hint: it’s less regulated than ours. They didn’t have any (ANY) bank failures during our Great Depression.

  • Ari

    “Nothing is really lost or created; it’s all about transformation” said the 18th century French scientist Antoine Lavoisier. The point of one of this modern chemistry’s founding father was: there’s nothing magic with chemistry …

    The same applies to economics: how could we believe that financial economy could generate wealth form nothing ? This is the most ‘toxic’ paradigm of our present world! Money doesn’t generate money per se. Those profits actually come from somewhere through complex and often cynical mechanisms (e.g. “speculate on raw materials” means “taking the money of those who are starving”).

    As a direct consequence of Lavoisier’s principle, the financial economy starts to be a ‘boodsucker’ on the back of real economy when the profit rates are bigger than the real economy’s growth. Therefore,the Tobbin Tax could be an essential tool to ‘pump back’ excessive profits in the real economy. Doing so will give to modern capitalism its initial meaning : to reward those who took the risk to invest in productive and innovative activities.

  • Why can’t we build something indeed.

    Why not, instead of “bailing out”, add a few strings to the bailout. Take GM for example. We can bailout their debt, but it doesn’t fix the reason they got into it. People don’t want to buy their cars.

    An “Executive Mashup” should be a condition of their bailout. GM should partner with Steve Jobs to build something. In this case, the iCar.

    More on my blog:

  • This is my hope by doing all the transparent govt w open data standards.

    So that we can DIY our government someday… mashups for all is my rallying cry :-)

    thanks for the post and sharing your thoughts!

    – Silona

  • The idea that our current financial system is an unregulated market is false.
    I think the problem is less one of more regulation… than smart regulation and transparency.
    Innovation and invention should be allowed to flourish on Main Street and Wall Street just like it does in Makers and hackers’ basements and garages.
    Who hasn’t had a project blow up every once and awhile? And it can be painful.
    (I took a model rocket to the back of my head once.)
    But, you get up. Get learning. And get inventing.

  • Tien Gow

    Adam Smith’s “Wealth of Nations” was first published in 1776. Garett hardin’s “The Tragedy of the Commons” (1968) explains why the “invisible hand” does not work.

  • Sandy Olson

    It is disturbing that them that got us here are going to profit temporarily from their own demise. Strange concept… But what is more disturbing is that they are willing to take us all down with them for their own shortlived greed.
    We need to look further to see the depth of the delusion. Our entire food production system,commonly known as agribusiness, is teetering on the brink. We have bet on a system of food production based on petrochemicals which is lowering our yields, bankrupting our soils water and farmers, and poisoning us both slowly and quickly. Is this starting to sound familiar? oh yeah, it is about to come tumbling down. We need to eat even more than we need to own our own homes and our food system is failing. We have sold off our best farmland for developments which are now in foreclosure. The best and cheapest thing we can do is bulldoze them and start farming again. Give the money to farmers not bankers. Get the economy real again.