Adam Smith's Invisible Slap

I have an internet-chat friend who lost his job in Milwaukee last year. He worked for Master Lock for 12 years before the factory closed down. His plant's closing wasn't due to a lack of efficiency, union problems or low sales. In fact, MasterBrand Industries, the parent company of Master Lock, has been making record-profits for years! So why did the factory close? Because Wal-Mart representatives told Master Lock that unless they lowered their prices, the retail giant would switch to a competitor. The only way Master Lock was able to slash costs enough to satisfy Wal-Mart was to open a factory in Mexico, where the labor pool is cheaper.

I asked my internet-chat friend if he was mad at Wal-Mart for being the primary reason that he lost his job. I saw his shoulders shrug on the web-cam as he wrote:

"I'm not going to hold that against them. I learned in school that Adam Smith proved that the Invisible Hand would ensure a net gain in wealth for the economy overall. ... I'm going to keep shopping at Wal-Mart because I need their low prices now more than ever. Besides, I'm sure that there is another job out there that I can fill."

He is still unemployed.

I was shocked when I heard how his misunderstanding about macroeconomics justified, in his mind, his treatment at the hands of the Wal-Mart. Talk about victim mentality! Here was a man who was advertising the services of a corporation that had helped put him on the unemployment line in the first place! His blind, religious faith in Adam Smith's "invisible hand" would have made the most radical fundamentalist blush. What makes this especially ironic is that Adam Smith would have feared Wal-Mart more than the most hardened anti-globalization activist.

To quote Noam Chomsky: "Adam Smith is the guy we are all supposed to love, but not supposed to read." Conservatives love to use Smith to justify Darwinian-style, international globalization. In reality, Smith's famous "invisible hand" comment, when taken in context, shows that he put his faith in local economies, not international corporations, for long-term prosperity.

Adam Smith only used the term "Invisible Hand" ONCE in his 500 plus-page epic tome, "Wealth Of Nations."

"...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." (emphasis added)

Smith goes on later in his book to predict that global corporations destroy local economic ecosystems to the detriment of the larger economy. In other words, we consumers think we are saving money, but the long term consequences are disastrous for the nation. If Adam Smith were alive today, he would be a pro-union Democrat!

So what happened to the benevolent invisible hand that would sustain local economies and protect us from Wal-Mart's predatory practices? The reason that the invisible hand seems to be, well, invisible, is that it has been temporarily short-circuited by two factors:

1) The removal of protective tariffs, thus allowing large corporations to out-source manufacturing jobs to countries with low wages and weak environmental safety laws.

2) Foreign dictatorships that prevent their people from demanding a living wage.

Please note that both of the above factors are temporary political realities; the tariffs that once protected the American manufacturing base were removed after intense lobbying by the corporate elites who wanted to exploit the slave labor in Asia and Mexico. Yet, history shows us that tyrannical governments do not make good long-term partners; the locals in those countries will eventually rise up to overthrow their oppressors, be they political dictators or corporate executives. Even if a foreign revolution doesn't happen in the foreseeable future, Wal-Mart's business plan is doomed because eventually Americans will not be able to buy goods from them if they don't have jobs.

Thanks to the shortsightedness of politicians and corporate elitists who have gutted the protections needed for a sustainable national economy, the invisible hand has become a low wage fist that is pounding workers into the unemployment line. There is simply no way the average American can compete against a foreign labor pool that only needs to be paid $50 per week. This problem is best summed up in the final paragraph of the article: "The Wal-Mart You Don't Know" by Charles Fishman (2003).

"It's Wal-Mart in the role of Adam Smith's invisible hand and the Milwaukee employees of Master Lock who shopped at Wal-Mart to save money, that helped shove their own jobs right to Nogales, Mexico. Not consciously, not directly, but inevitably.

'Do we as consumers appreciate what we're doing?' Randall Larrimore, CEO of MasterBrand Industries, asks. 'I don't think so. But even if we do, I think we say, Here's a Master Lock for $9, here's another lock for $6--let the other guy pay $9.'"

Americans must learn that when we choose Wal-Mart's low prices, we become accomplices in the dismantling of the local economy. Every dollar spent in a Wal-Mart equals another dollar the federal government will have to spend on unemployment checks when Adam Smith's invisible hand finally slaps us across the collective face.

--end--

November 2003