Famous Scottish philosopher and celebrated economist, Adam Smith propounded the ‘Theory of the Invisible Hand’, or the laissez-faire economy, in 1776.
In his book, Smith says
Self-interest guides the most efficient use of resources in a nation’s economy, with public welfare coming as a by-product. State and personal efforts, to promote social good are ineffectual compared to unbridled market forces.
According to the “invisible hand” theory, self-interests like, making profits (for the seller) and getting the best quality goods at a reasonable cost (for the buyer), make the most efficient use of national resources and thereby motivate economic growth. He further states that,
State and personal efforts to promote social good are ineffectual compared to unbridled market forces.
In other words, according to the theory, government and individual efforts are feeble and incompetent in bringing about larger social good as compared to unrestricted and free market forces. This seems grossly overstated and woefully unreal in the 21st century. In light of the current global as well as regional socio-economic and environmental problems, rampant poverty, and social injustice, the Invisible Hand Theory is found wanting of sustainable and inclusive growth for the humanity.
Historical Consequences Of Laissez Faire
The Invisible Hand theory germinated in the late 18th century when Industrial revolution was not even a quarter of century old. Many corporations were getting set up with the sole aim of taking advantage of high rate of technological innovation and large scale production. The need of the hour then was to have easy access to hitherto undiscovered markets to sell these products, based on potential to make maximum profit. This trend continued and led to rapid globalization that we see today. Globalization relies of free trade and easy flow of capital, sometimes without much regard to local considerations of stability and development.
Increased Economic Inequality
As more and more countries across the world started getting intertwined in the global financial system in the 20th century, international institutions like the IMF and World Bank began gaining global dominance. They forced many poor and developing nations to open their markets to international trade and capital in lieu of financial aid. This resulted in several transnational corporations making profits at the cost of local populations thus leaving them poorer than before.
Financial Globalization has resulted in the two largest financial meltdowns in the history, Asian crisis of 1997 and sinking of Lehman Brothers in 2008. Unbridled profit-making and asset bubbles were primarily responsible for the 2008 crisis.
To achieve profits in the short term, corporations exact a “social and environmental price” and that price is high and rising.
Lack of access to basic healthcare & education, absence of sustainable livelihood for marginalized communities, gender inequality, humanitarian crisis, de-forestation, global warming are some of the pressing issues globally which still have not been addressed effectively. The laissez-faire economy with free market forces has not and cannot solve these problems by itself. Today, operating a business, centered on self-interests or pure profits is not wholesome and may prove to be harmful to society and the environment. Monopolistic thinking is defunct. What we need today is a social good focused approach to business combined with the positives of the laissez-faire market forces to create sustainable development. We need business leaders to take into account financial, economic and social progress while making decisions. We need Capitalism 3.0.
Government intervention in the form of reforms and policy-making is proving to be vital in fostering social change by providing an incentive for Social Innovation to entrepreneurs through a ‘Profit with a Purpose’ model. Various initiatives launched by the Government of India furthers this vision of bringing ‘Profit with a Purpose”.
The Skill India Movement by Indian Prime Minister, Narendra Modi lays emphasis on imparting skill training to youth in various sectors to make them competent for employment opportunities in domestic as well international markets. This, in turn motivates corporations like Transvahan Technologies to impart specialized training to their employees and youth to improve employment opportunities.
Similarly, the Stand-Up India Scheme, launched by the Indian Prime Minister to promote entrepreneurship among rural and BOP community by providing working capital loans between INR 10-100 lakh. This has enabled private banks like ICICI to impart these facilities at the grass root levels.
The theory of Invisible Hand, although a valid one in the 18th century context, has run its course. Ignoring or underestimating the role of government in facilitating social innovation that can bring about social good is frankly very naïve and undesirable. New age social entrepreneurship is the next vehicle of change.