If you have read Adam Smith's The Wealth of Nations or one of the hundreds of books that comment on that classic, you'll probably know the term "the Invisible Hand". This term references the outcome of a fully open free-market society that is driven by self-interest.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
Adam Smith - The Wealth of Nations
Smith's primary point is that when people work for their own interest in a fair, open market, they contribute to the overall good of society in the process, not through their own cooperation with others towards that overall good -- but by virtue of the economic process, the good comes about as if by virtue of an "Invisible Hand" guiding things.
In modern "short speak", if you look out for yourself, that's gonna help everyone.
Well, there are a few huge problems with that notion -- not operationally, but philosophically ... problems that don't go into maudlin morality or any other such notion -- but simply outline that the Invisible Hand requires what I call transparency.
In the movie Wall Street, the character Gordon Gecko says the famous line "Greed is good."
As any novice investor or trader will tell you, greed and fear are the enemy when it comes to managing your portfolio -- they cause you to make emotional decisions that undermine your overall return. So, in essence, (as we all know from our 2nd Grade Teachers), Greed actually is not good.
But what happens when a society, having been educated to the very valid concepts of competitive advantage, and even Ricardo's comparative advantage -- get it wrong and begin to equate Greed with self interest?
What happens if, after reading two paragraph synopses of Smith's ideas, an entire community, like the Investment Community, gets it in their heads that Smith has created some sort of license to be a jerk, and cheat the next guy -- since the process of looking out for yourself makes all nasty maneuvers justified? We end up with the sort of debacle that's been happening over the last 6 months.
Transparency, in my nomenclature, does not simply apply to the pedantic demands by wounded civilians that the corporations open their books, share the emails of their CEOs and allow us to see what they were thinking. I present, instead, the idea that risk itself has an opacity -- a quality that requires us to ensure that what we know is everything necessary to be known. You cannot work for your own self interest if you do not understand what that self interest is. In the old saying, if you can't see the sucker at the poker table, it's you.
Consider the example of the driver who does not know the bridge is out. He is driving along, safely at the speed limit, when his wife calls and informs him that she is going into labor and he should race home so he can be with her as the baby is born. In his mind, it is suddenly in his best interest to get home quickly, so he makes the choice to accelerate -- thus giving himself no opportunity to respond to the missing bridge in time and soon he's swimming to the far side, hoping to call his wife from a soggy cellphone.
Risk cannot be completely removed, and as he accelerates, the driver increases the possibility of that risk -- but he is oblivious to that relationship -- he has driven on this road a thousand times, he is a careful driver -- and while yes, driving faster is a higher risk, it's a calculated risk he is willing to take.
So, the question becomes -- how does one make the situation more transparent for him, so that he can better recognize the choices he is making and truly make decisions in his own best interest? Such a question becomes the focus of regulators -- the point of the exercise -- and that opacity is their job to conquer.
There are 5 places that the opacity against self interest can originate. The first and most likely unavoidable is random chance. We cannot rule out random chance - it will always be the Scepter of God -- wielded at his Will and impervious to our attempts to control it.
The second most important one is our own ignorance. If we do not understand what we are doing, we are that driver blindfolded or refusing to read the signs by the side of the road. There will always be lunatic drivers out there -- call them day traders and gambling speculators -- but for the most part, if we can generate a better and simpler methodology for enabling ourselves to see clearly -- but also to understand the details.
If our driver sees a sign in Chinese, or is illiterate -- what will he do? He will act in perceived but inaccurate self-interest, eventually hurting us all in the process.
The third source of danger is the ignorance of others. That also would be remedied by the same things that would save us. Others, presumably working in their own best interests, may advise us to our own detriment. The man's wife told him to move quickly -- she was also ignorant of the bridge.
The fourth source of confusion is the intentional act of others but not directly intended -- there is the drunk driver who drove over the sign in a stupor -- didn't know what that bang was, and drove on. That driver did something to confound us, but didn't know it. That's the largest group of people who interfere with the transparency of the invisible hand.
Finally -- for the sake of this post -- the fifth source of confusion is the intentionally evil person. Sadly, many people are equating "getting over on the next guy" with self interest -- which is foolish. If you make the world blind so you can be the one-eyed king -- you will surely starve.
So -- the question of my study becomes ... how to control the transparency -- and how to know when you are truly seeing a transparent situation, and not just a mirage?
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