The Invisible Hand: What Do We Know?1

Brigitte Falkenburg

Abstract: Adam Smith’s metaphor of the “invisible hand” and its analogue in classical physics are investigated in detail. Smith’s analogue was the mechanics of the solar system. What makes the analogy fail are not the idealisations in the caricature-like model of the rational economic man. The main problem rather is that the metaphor does not employ the correct analogue, which belongs to thermodynamics and statistics. In the simplest macro-economic model, the business cycle has the same formal structure as the heat flow between two heat reservoirs and a business cycle of growing efficiency works like a refrigerator: it pumps money from the poor to the rich. More complicated models do not give a friendlier image. Due to technological push, an economic system behaves like a thermodynamic system far from the equilibrium, showing chaotic behaviour and developing into unpredictable states.

Up to the present day, defenders of absolutely deregulated markets employ Adam Smith’s metaphor of the “invisible hand”. Here, the metaphor and its analogue in classical physics are investigated in detail. The original analogue of Smith’s was the dynamical link between the bodies of celestial mechanics and their order in the solar system. However, what makes the analogy fail are not the idealisations in the caricature-like model of the rational economic man. Today it is known that the metaphor just does not employ the correct analogue, which belongs to thermodynamics and statistics rather than to the mechanics of a many-body system of a small number of bodies. In the simplest macro-economic model which spells out the analogy, the economic cycle has the same formal structure as the heat flow between two heat reservoirs. In this model, a business cycle of optimal efficiency works like a refrigerator: it pumps money from the poor to the rich. More complicated models do not give a friendlier image. In particular, due to technological push an economic system behaves like a thermodynamic system far from the equilibrium, showing chaotic behaviour and developing into unpredictable states.

1. Rationality from an Invisible Hand?

Following Adam Smith's often evoked metaphor of the invisible hand markets evolve as if God was guiding them to the better, i.e., to a desirable equilibrium of supply and demand, if only all producers and consumers were eager to serve their own purposes. The metaphor of the invisible hand is up to these days linked to the idea that selfish economic action, which is solely orientated on personal advantages, finally will, as if following a law of nature, add to the well-being of all individuals of a society. This idea is actually based upon a deep-rooting analogy between classical economics and classical physics. Already Adam Smith had this analogy in mind, but like many defenders of the free market today, he did neither have insight into its formal import nor into the conditions under which it does hold. 1 Translated from German by Vanessa Cirkel.

1

In Smith's work there is no systematic discussion of the analogy. The metaphor of the invisible hand just shows up in a few scattered passages and stands in a number of quite different contexts. Those passages that are often referred to even today are to be found in the moral philosophy as well as in the economic theory. There, Smith gives incisive examples of how individual economic action of human beings leads to a form of welfare which affects all society, without the individual actors intending to do so. So, according to Smith, the rich enhance the produce of the soil to such a degree, that finally the poor profit from the enhancement as well:

„The produce of the soil maintains at all times nearly by that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own convenience, though the sole end which they propose form the labours of all thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplications of the species.“ 2

The context of this passage from the Theory of Moral Sentiments is not the relation between morality and economy, but a chapter on the human love of beauty and system. The chapter deals with the usefulness of the strive for beauty, of the need of harmony and of organising principles for the general well-being. Close to some illustrative material from the field of architecture and the aforementioned example of economy Smith points out, that aestheticism and orderliness advance, among other things, the foundation of social institutions:

“The same principle, the same love of system, the same regard to the beauty of order, of art and contrivance, frequently serves to recommend those institutions which tend to promote the public welfare.” 3

Behind the metaphor of the invisible hand there seems to be the following basic idea: The selfish struggle for luxuries is not so much due to the account of vicious inclinations like avarice as rather on behalf of the human strive for beauty. This is the reason why egoistic economic actions should finally have a positive effect on all society. The human aestheticism ensures that selfishness serves social welfare. To put it differently: between self-centred economic ambition and social welfare there is some kind of pre-established harmony; because the selfish striving of the individual is subject to the same principles of harmony and order as society in general.

Something like a doctrine of virtue, asking people to restrict their selfish needs according to a moral principle of frugality, becomes unnecessary from this point of view. The needs of human beings are rather structured in such a way that their economic actions serve an aim

2 Smith 1761, 184-185. 3 Cf. ibid., 185.

2

not intentionally pursued, the increase of public welfare. But the self-interest of men is not unlimited. Because, for Adam Smith public welfare also contains the legal order, which functions as a framework condition for the fulfilment of people’s needs. Quite contrary to what is often purported, his metaphor of the invisible hand does not imply the development of totally deregulated markets towards an equilibrium but rather market development under legal conditions.4 The pre-established harmony of individual needs and public welfare does therefore not only include the development of the market towards an equilibrium, but also the system of laws which constrains the dynamics of the market. Concerning the topic of investment in the domestic economy, Smith put this teleological thought in The Wealth of Nations the following way:

”As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. [...] 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. [...] By pursuing his own interest he frequently promotes that of the society more effectually than when he really want to promote it.” 5

Is the invisible hand, which is supposed to be at work here, supposed to be the hand of God? Or is Smith just using a metaphor, indicating that from his point of view there are law-like relations between the motives of the individual's actions and their collective effect? Both readings are arguable. Due to the theological overtone that accompanies the modern concept of law in physics, one might even understand them as belonging together. Galileo, Kepler, and Newton wanted to decipher the mathematical laws which are written in the book of nature. To them, this book was the work of God and the laws of nature the mathematical expression of the divine order. Smith on the other hand was interested in the law-like connections of natural things as much as he was interested in the socio-economic organising principles and the laws of human society. In the essay about the history of astronomy he shows the historical development which led to the formulation to the laws of celestial mechanics by Kepler and Newton.

And there he makes use of the metaphor of the invisible hand once more. This time it appears in the following context. Smith emphasises the deep contrast between modern astronomy and physics on the one hand and ancient natural philosophy on the other. He stresses this contrast especially regarding the understanding of the laws of nature. Ancient natural philosophy invoked the moods of quite a number of different gods to explain irregular

4 Mestmäcker 1978, 160 pp., shows this under the nice title “Die sichtbare Hand des Rechts” (The Visible Hand of Law”); cf. ibid., 164: „Die Vereinbarkeit des egoistischen Handelns mit dem öffentlichen Interesse wird nicht dadurch gesichert, daß der einzelne vorgibt, im öffentlichen Interesse zu handeln, sondern dadurch, daß er sein Eigeninteresse in den Grenzen des Rechts verfolgt.“ 5 Smith 1776, 456. Here, Smith attributes to the protagonists particular selfish motives which in the age of globalisation do no longer work like this. Today, the flight of capital in the form of foreign accounts and shares is possible due to missing international laws.

3

natural phenomena and wonders. However, it did not employ the invisible hand of Jupiter, but rather the essence of the things themselves in order to explain the law-like occurrence of natural phenomena, for example the well-known facts about fire, water, and bodies:

“Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters.” 6

From a modern point of view all natural phenomena are in contrast dynamically related by immaterial links respectively forces, what Smith calls an invisible chain. Modern physics (that Newton had still called natural philosophy) is concerned with recognising the principles of order and coherence in nature, which link all individual, seemingly chaotic natural things:

“Philosophy is the science of the connecting principles of nature. Nature, after the largest experience that common observation can acquire, seems to abound with events which appear solitary and incoherent with all that go before them [...] Philosophy, by representing the invisible chain which binds together all these disjointed objects, endeavours to introduce order into this chaos of jarring and discordant appearances [...].” 7

Smith is full of admiration for Newton’s system of general gravitation which makes this invisible chain between the natural phenomena visible with so far unknown perfection.8 The expression “invisible chain” is something like a secularised (or rather naturalised) version of the metaphor of the invisible hand. The emphasis is now only on the physical effect, but no more on divine action. Yet the religious background is still present, when Smith marks off modern understanding of nature from ancient natural philosophy. There, in the polytheistic framework the action of one unique invisible hand is not assumed in order to explain regular, consistent natural phenomena.

Against that background the metaphor of the invisible chain (which links all natural phenomena) does not express anything fundamentally different from the metaphor of the invisible hand (which presides over economy). Both metaphors are typical of the rationalist thinking of the 17th and 18th century. Rationalism established close connections between the laws of nature and the actions of God within the world. Smith regards the organising principles of socio-economic systems and the laws of physics as analogous. And this means that he sees powers and laws at work in nature as well as in human society. From his point of view, in both cases these organising powers are responsible for the organisation of the individuals’ behaviour to a stable system, or rather: they make that the individual behaviour of the system's elements generate a well-controlled system as a whole. Like the celestial bodies form Newton’s general system of gravitation and thus create the solar system, so do the single actors in a socio-economic system by creating collective order through individual strive for beauty and harmony. Because the individuals are provided with aestheticism and

6 Smith 1795, 49. 7 Smith 1795, 45-46. 8 Smith 1795, 104-105.

4

orderliness and act under the constraints of a system of laws, they increase the public welfare with their selfish actions.

Here, Smith anticipates a formal analogy between the behaviour of physical and socio-economic systems, which nowadays can be spelled out in mathematical terms; even though not in the way he may have expected! From his point of view, the physical universe and the human society are comparable the following way: Like the single celestial bodies due to their masses form the overall system of gravitation, so the human needs fit in a system of economic action. Thereby the order of the planetary motions in the solar system equals a well-regulated socio-economic system which develops in favour of the social welfare. In order to make this analogy plausible, Smith attributes men in his Theory of Moral Sentiments with a need for beauty, harmony and order. In contrast thereto the image of man in the neo-classical economics does no longer include any moral properties or principles. However, the conditions under which the analogy between physical and economic systems holds are neither made explicit in the work of Adam Smith nor in neo-classical economics. With them, the validity of the metaphor of an invisible hand which brings order into the system remains unquestioned.

2. Physics and Economics: The Correct Analogue

Neo-classical economic theory links the levels of the individual actors and economic system with the help of two central concepts. The instrumental or purpose-oriented rationality of economic action is expressed by an abstract model of men – the model of the rational economic man, who is conceived as egoistically maximising his own benefit. The expedience of the whole is in the micro-economics covered by the concept of Pareto efficiency. An economic unit works Pareto efficient if no individual in this unit can enhance his or her position without worsening somebody else's position. It is striking that both concepts understand rationality with respect of human purposes merely in the sense of profit maximisation. In the model of the rational economic man the concept of a person is reduced to the abstraction of the purposeful actor, whose actions only aim at maximising his benefit.9 For the sake of generality this is abstracted from all other motives, including the aestheticism and orderliness according to Smith. Of course this is an ideal-typical model in Max Weber’s sense, resting upon idealisation. It still has to be examined how far it can be applied to human behaviour. In the ideal case, if the conditions of being adequate and applicable are fulfilled, the model of the rational economic man will correspond to the actual economic action of men, at least statistically or in the average.

Only under such general, ideal conditions the behaviour of the rational economic man becomes thus calculable. What is calculated, i.e. given the form of a mathematical model, is his producer and consumer behaviour: the number of products he may produce and sell or is willing to buy; the money that he may invest; the prices he fixes his goods at or he is ready 9 The model traces back to Bentham and Mill; cf. Hottinger 1999.

5

to accept; and finally, the monetary benefits or economic profits he thus is trying to maximise. With this method one may model markets with the help of operational research. The solving of mathematical extremum problems is particularly of interest. The producer and consumer behaviour is defined under the assumption that everyone may maximise his or her benefits; as a solution results in an equilibrium state. In this model supply and demand regulate each other like according to a law of nature. The consumers' demand determines the supply on the part of the producers and vice versa: an equilibrium of the market is reached. Smith's metaphor of the invisible hand is up to the day willingly used for pointing out the law-like development of a market towards an equilibrium state. Nevertheless, it is all too often forgotten that Smith himself thought only of market mechanisms set under legal conditions.

Actually, here applies a socio-economic law that has an exact formal analogue in physics. So one is absolutely entitled to speak of market mechanisms, as far as the model of the rational economic man is justified by social reality. In this ideal case markets behave exactly like many-particle states which obey classical statistical mechanics or the kinetic theory of gases. A free market can be compared to a many-particle state, with unbound particles; or: to an ideal gas with freely moving molecules. The individual decisions of producers and consumer corresponds to the inertial motions of the molecules.

A good that is produced and consumed on the market, has a (relative) value for producers; for consumers it has an average utility; and this matches the price they are ready to pay. In contrast to modern economics Adam Smith still had a theory of the "absolute" value or labour value that makes the "natural" price of a good.10 Smith's "natural" price, to which in modern economics corresponds the average utility or relative value of a good, is analogous to the average kinetic energy of the gas molecules or to the temperature of the gas. The market price then fluctuates around the relative value which is averaged over all consumers and producers or the "natural" price. This is comparable to the fluctuation of the molecules' energy around the mean value. Each of both variables, the average market price or the average energy of the molecules, then formally acts as a parameter of an optimisation problem. In economics the utility function is maximised, in kinetic gas theory it is the probability of the molecule velocity (respectively the entropy). If there is an equilibrium between supply and demand, the economic utility function becomes optimal. Analogously, in the thermal equilibrium the molecules of an ideal gas are distributed according to the Maxwell-Boltzmann-equation.11

10 Cf. Smith 1776, 48 pp. 11 The optimisation problem consists in maximising the Lagrange function of a system under a side condition whose components are independent of each other except for the side condition. In the kinetic gas theory the temperature functions as a Lagrange parameter, in the theory of the market the (natural) price. In the case of the ideal gas, the side condition is that the total energy of all molecules is conserved. The analogous conserved quantity at the market may be considered to be the altogether available money supply, as far as one abstracts from flight of capital, stock exchange stock, inflation etc. So the analogy has to be taken with caution. It is spelled out in Mimkes 1999 in many details; to what extent it holds, however, is not discussed there. For several competing markets, the economic correlate of the temperature is the mean income of a society, i.e. the standard of living. See also Mimkes 2000.

6

Thus markets tend to the same kind of equilibrium of supply and demand like an ideal gas tends to the thermal equilibrium of the molecules. Both dynamics follow the same formal law. This dynamics actually fits the understanding of the metaphor of the invisible hand outlined above: If all producers and consumers indeed are only particularly concerned about their own profits, all markets develop for the better, namely to an equilibrium state where the benefits for all consumers and producers are maximised. The equilibrium state is Pareto efficient, i.e. no one can achieve a better position without manoeuvring someone else into a worse position. To what extent this equilibrium state realises social justice, however, is a different question.

From this kind of economic modelling thus results a concept of economics which is exactly modelled after the ideas of classical physics. The analogies between economic and physical modelling have indeed far-reaching consequences. Beginning with the abstract description of an ideal individual whose actual individual properties, however, are neglected by the model itself: here it is the mass point of classical mechanics; there it is the rational economic man. In both cases the behaviour of the ideal individual is basically seen as calculable and statistical laws predict what kind of collective state will most likely occur, due to the actions of the individuals.

Physics: The single mass point moves along a trajectory according to the law of force, thus corresponding to the principle of least action. In an ideal gas the trajectories describe the inertial motions of the molecules. The molecules interact through collisions. In a collision they exchange kinetic energy. If the motions of the particles initially are non-correlated, in course of time they assimilate to the statistical average and the whole system develops towards thermodynamic equilibrium. This corresponds to the state of maximum entropy.

Economics: Rational economic man acts according to the principle of profit maximisation. Producers and consumers produce and consume independently. Only during the process of purchase they get into contact. There, money is exchanged and the market tends to an equilibrium of supply and demand. Interactions just take place via the market mechanism, where supply and demand mutually balance. As a result a Pareto efficient equilibrium state is reached, with optimum utility for all market participants.

Additionally, the analytic-synthetic view upon natural processes can also be found in the modelling of economics. This view is characteristic for modern physics. It assumes e.g. the decomposability of forces in single components. It is assumed that such components can be measured separately and that summed up they explain the motion of a mechanical body. Similarly, the dynamic properties of a composite many-body system as a whole are assumed to sum up from the dynamic properties of its parts. In case of economics, the whole is the market. It is modelled as a composite system, its structure, here: its equilibrium state, being explained by the sum of the economic decisions made by all the individuals. Moreover, economics make use of ideal-typical explanations for certain economic situations; after analysing the structure of a concrete economic system they have to be combined in order to

7

finally apply them to the whole system. 12

Up to this point, the analogy between statistical physics and neo-classical economics seems exactly to be teaching what economic liberalism has been claiming for a long time, referring to the metaphor of the invisible hand: Compared to all economic systems, the untamed free-market economy works best. On the long run non-regulated markets enhance the welfare of all participants.

Unfortunately this is not the whole truth. The question of whether and how the market mechanism works in each particular case has to be solved out considering the particular market conditions prevailing at that moment. Here the conditions of adequacy concerning economic theory formation come into play. Which idealised assumptions have been made and to what extent are they justified in the specific case? Or: under which non-negligible boundary conditions do supply and demand balance? According to Adam Smith, the legal order under which the market mechanism works has to be taken into account. Absolutely deregulated markets with uncontrolled growth strictly speaking do not exist according to the author of the metaphor of the invisible hand.13 Besides: what kind of equilibrium state is expected to be reached by such uncontrolled growth?

3. Society Atomised

Neo-classical economics is based on an atomistic model of society. Everyone acts selfishly and thinks only of maximising his or her profits. The basic idea about the rational economic man is: He does not consider others when acting; no social bonds are taken into account. All peculiarities in the behaviour of single individuals are as well neglected as altruistic acting in favour of others which establishes relations between the individuals. As one does with molecules in the kinetic gas theory, one abstracts from the actual properties of the individuals as well as from their dynamic interactions or binding forces. The correct analogy between economics and statistical physics holds for an atomic society without any social bonds. In this society the market mechanisms function as an analogue to the laws which hold for an ideal gas in thermodynamics and statistical physics.

To what extent is this ideal socio-economic model justified? How is it related to socio-economic reality? On first sight it appears as if it was way afar from social reality; therefore it was already criticised in the philosophy of science for being a caricature due to its invalid abstractions.14 Concerning the validity of the model, however, one has to divide the individual from the collective level. Certainly, the rational economic man is in many respects just a blurred image of the single actor in an economic system. But when taking into account the statistical aspects of modelling it becomes evident that the neo-classical model describes the socio-economic reality of free market economy under capitalistic conditions just all too

12 Cf. Eucken 1950, 162 pp. 13 Cf. my above remarks and Mestmäcker 1978, 164. 14 Cf. Morgan 1997.

8

realistic. The atomic society is, from an economic point of view, the reality we do live in. Its market mechanisms function merciless, whether we do approve them or not. That is why for a good reason moderate economic liberals stand in for a social market economy, in which the market develops in the framework of a social and legal order. From a formal point of view, in a social market economy the laws of the market function under the boundary conditions put by of a system of laws.

At the level of individuals the economic modelling is clearly inadequate. For example, it neglects all irrational ways of behaviour of the actors. Though there are impressive examples of purpose-oriented rational actions in every day life in the sense of the economic image of man,15 strictly spoken no one in reality acts like the rational economic man. The simple model deviates in many aspects from economic reality. The actual economic behaviour of producers and consumers might be very complicated depending on the very case. Human beings quite often act irrationally in such a way that they violate the economists’ axioms. They are not consistent in their preferences, i.e. their tendencies to prefer certain goods at a given price do not necessarily form a coherent whole. Men often act even inevitably irrationally. They have to make their decisions while their knowledge is limited and they are fully aware of that fact.16 An excellent example for this is the investment behaviour when being faced with the stock price which can rather never be based on sufficient knowledge of the market. Moreover the basic concept of rationality is one-sided. Human beings do not only tend to selfish but also to altruistic behaviour and they have good reasons to do so. All this is based on emotions like empathy and our moral ideas. Those who follow altruistic principles in their actions do not maximise their own, but somebody else’s benefit.

From a statistical point of view, such deviations of the real producer and consumer behaviour from the rational utility maximisation of economic modelling do not play a decisive role. The individual ways of behaviour are neglected, in the legitimate expectation that they have no or just a small effect at the collective level. It is assumed that the individual peculiarities of the actors only have a negligible effect on the economic conditions under which the equilibrium of the market is reached. Modelling is based on the idea that individual deviations from the intentional rational behaviour mutually annihilate in the statistic average. But this assumption does clearly not hold for two rather common cases:

1. if individuals follow trends, i.e. if their individual deviations from the rational consumer behaviour all tend into the same direction; and

2. if reflexivity is involved, i.e. if the development of a market is influenced by the theoretical prognoses of this very development, like it happens especially in the case of financial markets. 17

15 Friedman 1996. 16 In economics one tried to take this into account by theories of bounded rationality; cf.Simon 1992. 17 Cf. Soros 1998.

9

In both cases the simple model drawn here obviously fails. Trends shift the equilibrium state, reflexivity causes fluctuations. Adequate modelling becomes more complicated in these cases. That it is still not impossible though, is shown by the new physics of socio-economic systems, having some impressive successful explanations in store, e.g. concerning the variations of the stock price. However, there are no useful quantitative predictions.18

This becomes fatally clear at the statistical level: the correct physical analogue to the market mechanism is not, like Adam Smith assumed, the mechanics of a manageable and stable system of a few celestial bodies, but rather described in terms of classical thermodynamics and statistics. Today we know that according to the mechanics of a many particle state even the stable orbits of the celestial bodies of the solar system rather are the exception from the rule. The behaviour of complex systems is generally chaotic. Just under very special boundary conditions they develop stable states. The correct analogue to the functioning of the market mechanism is the dynamics of a thermodynamic system beyond the equilibrium. Whether the market mechanism leads to socio-economic conditions which, on the long run, add to the well-being of all participants, is, according to the analogy between physics and economics, not at all self-evident. The dynamic development of the market towards a stable, Pareto-efficient equilibrium cannot be guaranteed at all, as soon as a number of markets are considered that compete under different socio-economic conditions. The same holds for the development of the markets in the case of a gain in productivity, due to technological push.

And it is rather not the case that those idealisations are responsible which go into the model of the rational economic man. More treacherous are the transitions from the so far modelled micro-economics to the macro-economics. They have to take into account several additional factors, especially concerning trade, unemployment and inflation. In the best case a system of markets develops in analogy to a reversible thermodynamic process close to the thermodynamic equilibrium. But if technological innovations come into play, the correct physical analogue to the circular flow of the economy is the behaviour of a complex system far-off from equilibrium. According to all we know from non-equilibrium thermodynamics, it is mere luck whether such a system behaves totally chaotic or whether it tends towards a stable state; and if so to which one.

Already when leaving technological innovations aside, the analogy between physics and economics leads to quite embarrassing insights. The analogy between an ideal gas and a society of the selfish, who maximise their own profits, makes it possible to bridge the gap between the models of micro- and macro-economics. Due to the laws of combinatorics it follows that social justice in the atomised society is as improbable as a uniform distribution of the kinetic energy of the molecules. Even if the households' incomes scatter around a mean value (Poisson distribution), the most probable distribution of wealth will form a capitalist

18 In principle, known deviations from the behaviour of the rational economic man, just like the legal frame of the markets, can be taken into account by maximising the utility function under side conditions.

10

model, with few owning much and many owning few (Boltzmann distribution).19 Additionally the business cycle may be considered regarding the interaction of two markets which belong to social systems with a different standard of living. The thermodynamic analogue of this case is the heat exchange between two heat reservoirs of different temperature.20 The business cycle is in this case the exact formal analogue of the Carnot cycle of thermodynamics. This simple model teaches us that the efficiency of the business cycle increases right then when the profit is gained in a one-sided way, i.e. if more profit is gained on the rich market.21 This leads naturally to an ever increasing inequality instead of an oscillation around a socio-economic equilibrium. This happens especially in the trade of two markets evaluating human labour differently; like in the case of production by international companies in a low wages country, when the products are sold on the expensive market of another country, without the profits flowing back to the low wages market. Here the economic cyclic functions as a heat pump, pumping the heat from a colder into a warmer reservoir, i.e. like a refrigerator: it produces capital by pumping the profits from a poorer into a wealthier area. This means, however, that it works like a refrigerator.

The production in countries with low wages, like it is typical for the current process of globalisation, does not follow the simple model of the free market at all. It is far from establishing a desirable socio-economic equilibrium like established from God’s invisible hand. In contradistinction to what Smith had supposed, the poor do not profit sufficiently from the striving for luxuries of the rich. The markets of the globalised world do not make up a system of needs which are in pre-established harmony.

Instead the simplest socio-economic model predicts, if spelled out correctly in analogy to thermodynamics: A business cycle with a growing efficiency, thus gaining ever higher profits, always makes the poor even poorer and the rich even richer, exactly like the opponents of globalisation argue. Smith may have objected in favour of his metaphor that these conditions of globalisation depend on the lack of legal framework conditions. There is no international system of laws which might prevent the consequences predicted in the simple refrigerator model. In the atomic society, however, due to the missing social bonds those who make the profits do not care about all this. But if the business cycle is regulated by political and legal constraints, its efficiency will be constrained as well; exactly like the advocates of an

19 Mimkes 2000, section 4. and Mimkes 1999, 43 pp. Both distributions do well agree with the German data (from the years before the reunification) which shows Mimkes. In the statistical model, a uniform distribution only results from the capital when nobody has anything. 20 Mimkes 1999, 72 pp. 21 Ibid., 78 pp., and Mimkes 2000, section 4. The quasi-thermodynamic model forecasts four possible mode of actions of the market mechanism: A. Colonialism: The profit is distributed in the richer society whose standard of living grows at the expense of the poorer society; the efficiency of the economic cycle increases. B. Booming economy: If the economy profit flows back to the poorer society, the living standards tend towards being equal; the efficiency of the economic cycle decreases. C. Fair deal: The trading partners share the profit, doing justice to each other; the economic cycle proceeds with constant efficiency and the standard of living grows in both societies. D. Two class world: The colonialist market mechanism works in the domestic market; an originally homogeneous society splits up into the poor and the rich.

11

unrestricted market economy argue. Evidently, there is not much cause in the thermodynamic analogy to trust in the blessings of the market mechanisms.

If technological innovations are added, the resulting image is not much friendlier. Technological push enhances the productivity. This makes labour cheaper and destroys jobs on the respective sector of production without creating new ones to the same degree. Neo-classical economics reacted thereto with the theory of Kondratieff cycles, predicting long-term variations of the economic situation due to technological innovation, lasting for decades.22 The economic theory predicts long-term variations around the economic equilibrium states; and that these variations appear again and again, combined with periodic growth (– here an analogy to the biological concept of dynamic equilibrium seems likely). Also the relapse into recession that might appear now and again can be taken into account in the quasi-thermodynamic model.23 The thermodynamic analogue then teaches us that rationalisation through innovation increases the efficiency of the business cycle, while political measures to increase the employment rate decrease it in turn. The theory of the Kondratieff cycles matches the empirical fact that thus society re-organises itself totally every few decades. But how may that be any help for the unemployed of today, already being to old or ill educated for nowadays' innovations, if in about 30 to 40 a great number of fundamentally new jobs will develop, while then their children will be unemployed?

4. What Do We Know?

One may reproach the refrigerator model of the global, deregulated business cycle for simplifying in an undue way. That is in fact the case. Two objections can be immediately made. Both are linked to the idealisations of the model. On the one hand the interactions between more than two markets soon become unmanageable. Generally they make sure that that the profits that have been gained flow back into markets, at least partially, at whose costs they have been made. If the low wages employees do not profit sufficiently from that, this is often caused by lacking social equality inland the very country; and this is a political problem. On the other hand the analogy to thermodynamics close to equilibrium (like thermodynamics itself) holds only for closed systems. But most certainly global economy is no closed system. On the international financial market assets emerge from nothing and elapse into nothing. Additionally there are territorial, social, and political side conditions, making globalisation and mechanisation have very different effects in different regions. And we do know much more about the dynamics of complex physical systems than we know about the economic cycle in the globalised world – thus making the analogy very misleading.

But does this not hold especially true for the analogy that is behind the metaphor of the invisible hand? And is it not admissible to replace one concise image of the internal

22 Schumpeter 1939. For recent considerations of the economic theory of technological push cf. e.g. Hall 1994. 23 Mimkes 1999, 80.

12

dynamics of economic development, based on a misunderstood physical analogue, by another concise image that at least brings this analogy to bear correctly.

However: The analogy between physics and economics does not argue for a doctrine of bare economic liberalism – rather on the contrary. The analogy holds for the ideal model of an atomised society without any social bonds or legal restrictions. In this model individuals act absolutely free, in the sense of freedom being not much more than mere arbitrariness. Their individual decisions are determined through arbitrary needs and are not justified by social norm nor ruled by legal order. The fulfilment of their needs is only limited by economic necessities. Their individual behaviour is uncorrelated. Individual decisions are subject to statistical laws and show only coincidental deviations from the mean value.

But at the same time one has to be aware of the following fact. Unfortunately, human needs are not of that kind that socio-economic equilibrium is reached automatically, if all individuals pursue their own benefits. Rather our consumer behaviour takes on a life of its own due to the plasticity of human nature. In atomised society our needs tend towards unlimited growth. Those who are on top of the income- and property-scale may follow these tendencies undisturbed; those who are at the bottom of the scale have to restrict themselves. Yet, not only the simple thermodynamic analogy, but also the experience of the last decades, teaches us that in a globalised world the gap between the rich and the poor diverges increasingly in many places. 24

Economists dislike being confronted with such embarrassing truths. Though macro-economics is also based on cyclic models which are modelled according to examples from physics. However, the original idea of an economic cycle is not based on the aforementioned analogies to 19th and 20th century physics.25 It still derives from the ideas of Renaissance to understand nature as an organic whole.26 The cyclic models of modern macro-economics therefore link an early modern, organic idea with the mechanical analogies from classical physics. The basic idea is in both cases similar to Adam Smith's metaphor of the invisible hand: the state of equilibrium in economy is natural; any deviations tend to go back to equilibrium. Above it has been pointed out that already Adam Smith did not believe that this was all happening outside some legal framework; and moreover, that this idea is not justified for the ideal of nature in general. Like the modern theory of self-organisation teaches us, is the tending of a complex system towards equilibrium rather the exception from the rule. This holds especially true for the equilibrium between economy and nature, if the effects of the

24 For an opposite opinion cf. Norberg 2003. The book primarily cites India and Asia. Norberg’s main thesis is that the globalisation is not due to poverty and mismanagement but to the hindrance to the global free market economy by over-regulation and bureaucratisation. His remarkable plea for liberalism demonstrates the limitations of the thermodynamic analogy discussed here. 25 The first economic work which takes the analogy to thermodynamics into account is Georgescu-Roegen 1971; it treats the embedding of the circular flow of the economy into the ecosystem. Daly 1996 discusses this revolutionary work and its to this day far too low reception in standard economics. Mirowski 1988, 1989 presents a related philosophical account. 26 Cf. the discussion of baroque mercantilism, as represented in the work of Johann Joachim Becher, in Falkenburg 2004.

13

former on the later cannot be neglected any longer. The idea of an organic circular flow between man and nature, or: the economy and the environment, is only taken up again in modern ecology and in ecological economics. Here, the requirement of looking at economics in a different way is discussed, namely to consider the economic system no longer to be isolated but to be a partial system of the ecosystem.

At this point of my considerations, not only the confidence in the market mechanisms which allegedly tend to an equilibrium state on deregulated markets led by an invisible hand should be shaken. In addition it finally should have become clear what stands behind this confidence. It is the early modern age idea of a natural circular flow which will always make the results of our collective economic and technical behaviour turn out in the positive.27 For centuries, the faith in the beneficial effects of technological progress has come hand in hand with the confidence that the economic development always serves the public welfare. Adam Smith's metaphor of the invisible hand is grounded in this faith. However, in view of the relations between technology and economy today such a blind faith means to hide one’s head in the sand.

Literature

Becher, J.J., 1686: Närrische Weißheit Und Weise Narrheit. Franckfurt: Zubrodt.

Becher, J.J., 1688: Politischer Discurs. 3.Au°. Franckfurt: Zunner.

Daly, H.E., 1996: Beyond Growth. The Economics of Sustainable Development. Boston, Mass.: Beacon Press.

Eucken, W., 1950: Die Grundlagen der Nationalökonomie. Berlin: Springer 1950.

Falkenburg, B., 2004: Wem dient die Technik? In: J.J.Becher-Stiftung Speyer (ed.), Johann Joachim Becher Preis 2002: Die Technik – Dienerin der gesellschaftlichen Entwicklung? Baden-Baden: Nomos.

Friedman, D., 1996: Hidden Order: The Economics of Everyday Life. HarperBusiness U.S.

Georgescu-Roegen, N., 1971: The Entropy Law and the Economic Process. Cambridge, Mass.: Harvard University Press.

Hall, P., 1994: Innovation, Economics and Evolution. Theoretical Perspectives on Changing Technology in Economic Systems. New York: Harvester Wheatsheaf.

Hottinger, O., 1999: Die Grundlagen der ökonomischen Nutzentheorie und des homo oeconomicus. In: Horizonte ökonomischen Denkens. DIALEKTIK 1999/3, hg. von

Mestmäcker, E.-J., 1978: Die sichtbare Hand des Rechts. Baden-Baden: Nomos.

Mimkes, J., 1999: Script zu Politik und Thermodynamik. http://fb6www.un-paderborn.de/ag/ag-mim/publikationen.htm

27 Becher 1689 carried this idea from natural philosophy into economics, even though he already emphasised the ambiguities of technology between progress and failure in Becher 1686. Cf. Falkenburg 2004.

14

Mimkes, J., 2000: Society as a Many Particle Sysrtem. J.Thermal Anal. 60 (2000)

Mirowski, P., 1988: Against Mechanism. Totawa: Rowman and Littlefield.

Mirowski, P., 1989: More Heat Than Light. Cambridge University Press.

Morgan, M., 1997: The Character of `Rational Economic Man'. In: B.Falkenburg and S.Hauser (eds.), Modelldenken in den Wissenschaften. DIALEKTIK 1997/1, Hamburg: Meiner, 77-94.

Norberg, J., 2003: Das kapitalistische Manifest. Warum allein die globalisierte Marktwirtschaft den Wohlstand der Menschheit sichert. Frankfurt am Main: Eichborn.

Schumpeter, J. A., 1939: Business Cycles. A Theoretical, Historical and Statistical Analysis of the Capitalist Process. 2 Volumes, New York and London 1939.

Simon, H., 1992: Economics, Bounded Rationality and the Cognitive Revolution. E.Massimo and M.Egidi (eds.). Aldershot: Elgar.

Smith, A., 1761: The Theory of Moral Sentiments. The Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. I. Oxford: Clarendon Press 1976.

Smith, A., 1776: An Inquiry into the Nature and Causes of the Wealth of Nations. The Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. II. Oxford: Clarendon Press 1980

Smith, A., 1795: Essays on Philosophical Subjects. The Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. III. Oxford: Clarendon Press 1980.

Soros, G., 1998: The Crisis of Global Capitalism. Open Society Endangered. New York: Public Affairs.

15