Thursday, January 4, 2018

Invisible Hand? Or Government Intervention?

Most Economists are true believers in Adam Smith's notion that economy's are best run by the "invisible hand" of the market.  In Economic theory as the unemployment rate drops, wages should rise as workers become more in demand.  That hasn't happened since the Great Recession.  Even as unemployment has dropped steadily to near historic lows, workers wages have stayed stagnent.

Believers in the infallability of the invisible hand, noting that wages have ticked up slightly in the last few months, started arguing this is the invisible hand reflecting the fact the economy is starting to pick up.

I wonder.  For the last couple years local and state governments, in the absence of federal action, have been enacting gradual scheduled increases in the minimum wage within their jurisdictions.  The jurisdictions enacting gradual minimum wage increases include many of the largest and most dynamic areas of the country.  Does the economic data the Economist's are relying on showing an uptick in wages control for increases resulting from government mandated increases in the minimum wage?

It makes me also wonder if the high productivity and low income inequality from the mid-1950's through the early 1980's reflect the "invisible hand"?  Or did it reflect Democratic control of Congress for 24 straight years with fairly regular increases in the minimum wage and strong support for Labor Unions?  Once the Reagan Republican revolution, hostile to Labor Unions, wrested control of Congress from the Democrats wage growth slowed and inequality began rising - which it has done ever since.

Not to suggest Labor Unions are a great thing.  They tend to evolve into organizations that are antithetical to efficiency and productivity.  But Labor Unions are really just an extension of the "invisible hand".  They evolved from individual members of the economy banding together to stop management from exploiting their lack of power as individuals.  For the first decades of the labor movement, government action tended to protect management.  Even in the heyday of Labor Unions government was acting more as a referee than a planner - government never attempted to find a way to balance the power of management and labor that aligned both interests rather than making them opposing forces.

At it's core modern economic theory, including the "invisible hand", is simply survival of the fittest carried over into economic transactions.  Our evolving civilization has the demonstrated the ability to use our creativity and growing knowledge to modify "survival of the fittest" - recognizing that even in matters of self-interest cooperation is usually better than confrontation.  Economic's needs to catch up.

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