George Friedman
Adam Smith defined how we think about free markets. His guiding principle was, famously, the invisible hand – a mystical force or the hand of God, but the idea that the pursuit of individual interests in economic life would inevitably produce an optimized and predictable economy. The theory rested on the assumption that individuals were rational in understanding their needs and thus in their economic actions. Government intervention would, therefore, disrupt the functioning of natural economic intercourse. For Smith, no overarching and or well-intended intervention in the free market could optimize the outcome of the economy; optimization is achieved only through freedom of action. Collectively, individual actions rationalized the system, propelled society forward and, crucially, provided predictability such that the irrational whims of the few had little impact on the whole.
The problem – one that Smith was keenly aware of – was that humans were part of nations, and that economies depended on the viability of nations. The desire of citizens to maximize their wealth drives nations, but wealth is only one dimension of a nation. The internal passions within nations – the differences in geographic regions, cultural values or educational levels – spark tensions within nations that weaken the invisible hand because wealth could be accumulated in such a way that classes might be formed that would use political power to disrupt the free market. But Smith was aware that inequality in economic outcomes could destabilize the nation and thus weaken the economy. He never addressed the problem of how to stabilize a system if the wealth of nations was concentrated in the hands of the few. Nations could be wealthy, but their citizens could be poor. Thus the mixed economy worked with the state manipulating the economy, accepting a disruption of the invisible hand in favor of maintaining the stability of the state.
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