Read any text supporting 'free' market neoliberalism and you will, sooner or later, come across the name of an 18th Century Scotsman whose book The Wealth of Nations has been conscripted as its bible.

The central platform on which it rests is Adam Smith's concept of "The Invisible Hand":

In "The Wealth of Nations" Adam Smith argued that the pursuit of self-interest must lead inexorably to the benefit all:

"Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.

...

"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.

...

"In civilized society he [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.

"In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature.

"But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.

"Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages."

Thus, interference with markets is an interference with the "invisible hand".

It is easy to take a cynical view of this argument, but Adam Smith based his view on certain assumptions which most of us no longer share.

In his book "The Theory of Moral Sentiments", "the invisible hand" is linked with "Providence".

And to the 18th Century mind Providence - the "natural order" - means God.

Adam Smith was a Deist, a belief that God created the universe - and with it rule "by a few lordly masters" - but then retired taking no further part in His creation.

This extract from "The Theory of Moral Sentiments" is a window into an essentially feudalistic view of the relationship between rich and poor, and one in which the plight of the dispossessed was, quite naturally, attributed to "Providence":

The produce of the soil maintains at all times nearly 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 conveniency, though the sole end which they propose from the labours of all the 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, which would have been made, 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 multiplication of the species.

When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces.

In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.

From these arguments, bodies like the Adam Smith Institute take the view that "greed" and "self-interest" are two quite different things:

For today’s critics selfishness has been replaced by reference to greed and if that is not sufficiently colourful - “crass greed”. “Greed is good” is even said to be the creed of the proponents of free markets and in today’s universal media distribution this has gained widespread currency.

Such negative perceptions of the market economy have the potential to undermine its moral foundation and therefore its general acceptance. In this publication, as Richard Morgan highlights, Smith believed that a free market economy does not depend on greed; indeed, Smith’s central notion of self-interest is quite different to greed.

Now its possible to argue that in clarifying the self-interest of a rational person, the interests of others - and the planet - would be incorporated, to arrive at enlightened self-interest.

Under this heading, it would become a matter of enlightened self-interest to pay taxes towards programmes that ameliorate the effects of poverty, as, for example, these might tend to lower the crime rate, and, more importantly, offer the prospect of more fulfilling lives to people who might otherwise have remained among the 'excluded'.

It's equally possible for people like Sir Philip Green to persuade themselves that offshore tax avoidance schemes are a matter of self-interest, and that it is his "right" to avoid paying tax if he can. [Tax]

The borderline between self-interest and greed turns out not to be as simplistic as the Adam Smith Institute would like. Greed is still greed however you dress it up:

"Greed really has become a part of America’s value system.

"Get as much as you can, while you can, and don’t worry about the other guy.

"Corporate greed often exploits the poor for greater profits.

"Political greed makes promises never meant to be kept in order to achieve position.

"Personal greed sets us free from a sense of responsibility to the community, and establishes love of self as the greatest commandment." [Joe Thorn]

The policies of The Adam Smith Institute suggest an agenda even more right-wing than Margaret Thatcher's:

For an indication of the attitudes underlying these policies, Richard Pipes' book Property and Freedom is a good point of reference.

Pipes argues against any form of taxation which is redistributive.

In the parlance of the right, this is "social engineering", and also a form of theft.

One of his reviewers, on Amazon.com, sums it up: "It's Quite Clear: No Property, No Liberty!"

Pipes' ideas spring from an early American romantic ideal of a nation of landowners which would, presumably, have been without a proletariat/working class.

This finds an echo in President Pinochet's claim that, with Milton Friedman's help, he would:

" ... make Chile not a nation of proletarians, but a nation of entrepreneurs."

In the quest for economic growth, free market ideology has been embraced around the world with a near religious fervor. The beliefs espoused by free market ideologues are familiar to anyone conversant with the language of contemporary economic discourse.

• Sustained economic growth, as measured by Gross Domestic Product, is the path to human progress.
• Free markets, unrestrained by governments, generally result in the most efficient and socially optimal allocation of resources.
• Economic globalization, achieved by removing barriers to the free flow of goods and money anywhere in the world, spurs competition, increases economic efficiency, creates jobs, lowers consumer prices, increases economic growth, and is generally beneficial to almost everyone.
• Privatization, which moves functions and assets from governments to the private sector, improves efficiency; lowers prices, increases consumer choice, increases economic growth, and is generally beneficial to almost everyone.
• The primary responsibility of government is to provide the infrastructure necessary to advance commerce, maintain public order, protect property rights, and enforce contracts.

These beliefs are based on a number of explicit, underlying assumptions imbedded in the theories of neoclassical economics.

• Humans are motivated by self-interest, which is expressed primarily through the quest for financial gain.
• The action that yields the greatest financial return to the individual or firm also yields the most benefit to society.
• Competitive behavior is more rational for the individual than cooperative behavior and ultimately more beneficial for society.
• Human progress and improvements in well-being are best measured by increases in the aggregate market value of economic output.

To put it in harsher language, these ideological doctrines assume that:

• People are by nature motivated primarily by greed.
• The drive to acquire is the highest expression of what it means to be human.
• The relentless pursuit of greed and acquisition leads to socially optimal outcomes.
• The interests of human societies are best served by encouraging, honoring, and rewarding the above values.

THE MORAL JUSTIFICATION OF INJUSTICE

The moral philosophers of market liberalism perpetrate a serious distortion by neglecting the distinction between the rights of property and the rights of people.

Indeed, they equate the freedom and rights of individuals with market freedom and property rights. The freedom of the market is the freedom of those with money.

When rights are a function of property rather than personhood, only those with property have rights.

It is a basic premise of democracy that each individual has equal rights before the law and an equal voice in political affairs--one person, one vote.

We can rightfully look to the market as a democratic arbiter of rights and preferences only to the extent that money and property are equitably distributed.

Although a market can allocate efficiently with less than complete equality, when 358 billionaires enjoy a combined net worth of $760 billion--equal to the net worth of the poorest 2.5 billion of the world's people--the market is neither just nor efficient and it loses all legitimacy as a democratic institution.

For Friedrich Hayek the invisible hand has lost its providential content. In centrally planned economies, such as the USSR:

... an individual or a select group of individuals must determine the distribution of resources, but ... these planners will never have enough information to carry out this allocation reliably.

But under free market conditions ...

... the price mechanism serves to share and synchronize local and personal knowledge, allowing society's members to achieve diverse, complicated ends through a principle of spontaneous self-organization. ...

Thus the price mechanism is a "spontaneous order" ...

" ... which is the result of human action but not of human design."

The coming to power of General August Pinochet, in Chile, in 1973 offered Milton Friedman and his "Chicago Boys" the opportunity to put free market theories to the test. They ...

... implemented a set of economic reforms that included deregulation and privatization. They abolished the minimum wage, rescinded trade union rights, privatized the pension system, state industries, and banks, and abolished taxes on wealth and profits. Pinochet justified such reforms by promising to "make Chile not a nation of proletarians, but a nation of entrepreneurs."

Friedman even argued that these reforms led directly to the "democratic society" which eventually replaced Pinochet!

However, one message that could also be extracted from Pincochet's "Miracle" is that markets can only ever be totally unfettered where governments have been deprived of any economic function, and where trades unions have been neutered.

Margaret Thatcher's battle with the NUM in the 1980s remains emblematic of her determination to make similar changes in the UK.

However the golden age of free markets, as envisaged by Adam Smith and Friedrich Hayek, has turned out to be a chimera.

Quite simply put, Adam Smith would never have envisaged today's monolithic corporations with their power of patronage, sponsorship, and predatory pricing; practices which are much closer to monopoly and mercantilism than to anything envisaged in "The Wealth of Nations".

The need to combat capitalism's natural tendency towards monopoly was well understood in, of all places, the USA, where Trust Busting dates back to 1890, and the passing of the Sherman Act.

Even as late as 2000, this legislation was being used against Microsoft.

Those lining up against "trust busting" include such luminaries of the globalised paradise as Alan Greenspan and Milton Friedman.

Free markets?! George Monbiot delivers the knockout blow:

SIR – Although I am now retired, I always made sure that I exposed my students to the ideas of Mr Friedman when I was a college professor of economics. Unfortunately, he had a narrow view of how monopolies come about and seemed to argue that they are only created by governments that hand out licences or quotas or some other type of market-entry restriction. Nothing could be further from the truth. As demand thresholds increase and firms enlarge through mergers and acquisitions to enjoy economies of scale and dominate global markets, the monopolisation of markets is obvious. Indeed, the real test for 21st century capitalism will be what to do with the global phenomenon of giant corporations with vast profits, higher executive compensation and the ever-increasing unequal distribution of income. In this regard, there will be a role for government and one that Professor Friedman missed.

David Enns

Cornwall, Canada

The Economist | December 16 2006