ABSTRACT
Up until the 1970s, Keynsian economics 1 had proved remarkably successful at helping economies to grow and smooth out the extremes of the traditional boom–bust cycle. But in the 1970s, through a range of factors including the Organization of Petroleum Exporting Countries (OPEC) oil crisis, 2 Western economies were faced with a serious challenge. By the late 1970s and early 1980s, many economies were faced with both a stagnant economy but high inflation, what economists call stagflation. Many saw this simplistically as a failure of Keynesian economics. The crisis of stagflation in the 1970s and the fall of the Soviet Empire in 1989 have led economic policy to shift to more laissez-faire approaches which have idealized the market whilst belittling the role of government and the need for regulation. This sentiment was summed up by Bill Clinton in 1996 in his 27 January radio address on CNN, when he said that: ‘The era of big government is over’. The most ardent free market proponents believe that the market is the best way to address environmental degradation, unemployment and issues of social inequity, arguing that the market and innovation on their own will solve these problems and that governments would best get out of the way as much as possible. Behind this is a belief in unfettered or unregulated markets. Adam Smith, the author of Wealth of Nations, in 1776, was credited with supporting this belief on the basis that he wrote about an invisible hand that works through the markets. No idea has had more power than that of Adam Smith's invisible hand. It is said that free markets, as if by an invisible hand, lead to the most efficient, and fair, allocation of scarce resources and that each individual in pursuing his or her own self-interests, advances the greater good. The relevant passage is probably the most famous (and selectively cited) passage in Smith's classic The Wealth of Nations.
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, endeavours as much as 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 labours to rend 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 bydirecting 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 no part of it. By promoting his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, p572 (First published in 1776 and republished in 1999)