Adam Smith’s ‘invisible hand’ is meant to represent the ‘negotiation’ that goes on in the free-market where suppliers and consumers – through consideration of only their own self-interest – ultimately settle on the most efficient price.  As an invisible, immeasurable, and purely benevolent force the ‘invisible hand’ has been elevated to the status religion.  The Republicans are especially fond of this economic liberalism known as the unfettered free-market.  But show me an unfettered force in nature that does not have a destructive dark-side.

The unfettered free-market advocates (most of whom are Republicans) would have us believe that regulation is that dark-side, plain and simple.  The ‘invisible hand’ is not a force of destruction; if left alone it will deliver us freedom and prosperity.  Sure, occasionally there is destruction, they concede, but it is small-scale ‘creative destruction.’ 

Well, I’m not buying it.

Left alone, natural forces have a capacity for terrible destruction.  Rivers flood -- destroying property and life.  Diseases spread -- becoming epidemics.  And economies crash -- ruining families and livelihoods.  In spite of their praising the ‘invisible hand,’ the Republicans appreciate the scale of the potential disaster.  So now we have the $700 billion Republican bailout plan.  Clearly, the Republicans understand the sinusoidal nature of the unfettered free-market.  Their approach, however, is a reactionary one.  The Federal Reserve trims the top off of the booms via interest rate manipulation and the taxpayers get to bailout the busts via loans and infusions of cash.  This is the best we can do?  Let the ‘invisible hand’ reign until it’s around our neck? 

I’m still not buying it.

Applying a reactionary model to rivers, we would demonize any attempt at flood control – dams, levees, planned flood plains.  If the flood comes we’ll just sandbag, bail water, and if necessary rebuild.  In healthcare, we would belittle public health and prevention, favoring the idea that we can treat the epidemic when it comes.  This reactionary approach is lunacy.  The application of human intellect and ingenuity in a prospective manner has mitigated human suffering for millennia.  Public health initiatives have saved far more lives than any high-tech surgery ever will, and at much lower cost.

Let’s take a look at the unfettered free-market’s dark-side over the last several decades.  Ronald Reagan took office in January of 1981 and immediately began his signature policy of deregulation.  Eight years later – the Savings and Loan Crisis.  In 1989 the federal Resolution Trust Corporation took over 747 Savings and Loan Firms at a cost of $394 billion.  Subsequent analysis suggests that the ultimate cost of this bailout was $160 billion. 

Using a website maintained by a group of reputable economists – www.measuringworth.com – we can calculate these S&L figures in 2007 dollars.  There are many ways to do this calculation (giving us a range), but I will use Purchase Power Parity (using a consumer bundle).  The initial cost of the S&L bailout in 2007 dollars was $714.5 billion (range:  $600.9 to $991.9 billion), and the ultimate cost was $290 billion (range:  $244 to $402.8 billion).

George W. Bush took office in January 2001, and the policy of deregulation accelerated.  Late 2008 – almost eight years later – we’re facing another $700 billion bailout.  Can this be a coincidence?  Or is it the cost of letting the ‘invisible hand’ have free reign?  For another example, Richard Nixon relied on the elimination of the gold standard in 1971 as a sort of bailout.  In Nixon’s case the bill was largely footed by foreign investors, as opposed to Reagan and Bush’s bailouts that were paid for by the taxpayers.  Nonetheless, this was certainly a hundreds of billions to trillions of dollars worth of bailout.

Looking at the empirical evidence, letting the free-market run unfettered – giving the ‘invisible hand’ free reign – seems to require a $700 billion infusion of cash every 8 or so years.  That’s $87.5 billion per year.  Eventually, in the case of the S&L Crisis we recouped 60% of the $700 billion, and, with luck, the same will be true of this bailout.  In the meantime, however, there is market turmoil, increased budget deficits, increased unemployment, and increased inflation.

Regulating the markets, as one might regulate public health or regulate the flow of rivers requires intellect and ingenuity.  This is what human progress relies upon.  Does it work in the free-market?  Can we proactively prevent the ‘boom and bust’ cycles of the market that cause so much harm?  I think the Democrats deserve another shot at it. After all, where is the big crash and $700 billion bailout on the Democrat’s watch? 

How many Republican sponsored bailouts do we need to witness before the ‘invisible hand’ is seen as both a force of good and a force of destruction?  We can do better than spending the equivalent of $87.5 billion a year to avert disaster.  And let’s not forget, that this outlay of cash is for the bigwigs in the economy.  The small businesses, the Mom-and-Pop shops, the people out of work or out of a home are not getting bailed out.  They have to figure out how to start again.

Bob Herbert of the NYT writes in his recent column:

 “The question voters should be asking John McCain is whether he has stopped serving his party’s economic Kool-Aid, which has taken such a toll on working families, and is ready to change his ways. Is his sudden populist transformation the real thing or just a mirage?

In the gale force winds of a full-fledged economic hurricane, it’s fair to ask Senator McCain whether he still considers himself a conservative, small government, anti-regulation, free-market zealot. Or whether he’s seen the light. “

 ( http://www.nytimes.com/2008/09/30/opinion/30herbert.html?ei=5070&emc=eta1 )

Yes.  We could also ask whether we should start preparing for the ‘invisible hand’ to reach into our wallets again in 2017 to extract another $700 billion?

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Disclaimer:  I’m not an economist, but I can recognize trends and see parallels with my own specialty.  I defer to the economists to know just how and what to regulate.  I know that there are plenty of pro-regulation economists out there.

In addition to the references above, inspiration for this blog came from:

Conversations with Abe Youssef, M.D. and Zakhour Youssef, Ph.D.

Recent “BOHICA it’s the Invisible Hand” conversations with Major David Grundy, M.D.

John Atlas’ recent Open Salon Blog “The Bush Bailout: A Chance for Progressive Banking Reform”

Kent Pitman’s recent Open Salon Blog “Stop the Cycle of Republican Ideological Bulimia”