Adam Smith is considered one of the founders of the study of economics. One of his best-known contributions to economic theory is the “invisible hand.” Under this theory, people will act in their own self-interest, and will therefore create maximum benefit to their society as a whole.
According to Smith, the “invisible hand” will move resources among competing uses in a way that gives people what they want to have, at a price that they can afford to buy it. Signals sent by the market will resolve shortages or surpluses by moving inputs where consumers can purchase the goods and services that they want the most.
Other economists have used the term “laissez faire” to describe this system of letting the free market allocate goods and services. “Laissez faire” can be translated very simply as “let do.” Free market economists feel that allowing individuals and businesses to “let do” as they wish, without interfering in their decisions, provides the greatest amount of benefit to everyone involved.
There appears to be a very heavy — some might say clumsy — glove on the market’s invisible hand at the present time. By this, I mean that government forces are interfering strongly with free-market signals. One glaring example is the price of soybeans. For the past decade, American farmers have increased production of soybeans. A primary driver for this higher level of production has been desire by the Chinese government to upgrade the diet of its citizens. This has meant greater demand for protein feeds from China, so that Chinese people can have access to more beef, pork and poultry.
The glove that has encumbered the operation of the soybean market is the trade conflict between the United States and China. In spite of the Chinese government’s desire that its people be able to consume more meat, it has imposed restrictive tariffs on imports of U.S.-grown soybeans. These tariffs, of course, are in retaliation for import restrictions that the United States has put on Chinese goods flowing into our country.
I believe that if Adam Smith were watching these two governments today, he might pop a blood vessel. Chinese people want to eat more meat, so they buy more American soybeans to feed their livestock. Higher prices inform American farmers that they should grow more soybeans. The invisible hand has worked nicely for several years. Both the Chinese consumer and the American producer have responded to signals from the market, and they were better off for doing so.
But today, for reasons mostly unrelated to meat demand in China and soybean acreage in the U.S., the soybean market has taken a severe hit. The “glove” of intervention by both countries’ governments is the obvious reason.
Farmers need to recognize that the soybean market is part of a complex trading system that is more “glove” than it is “invisible hand.” Intervention into markets is constant, and it is pervasive. Farmers and anyone else that engage in international trade need to recognize that every decision they make can be undermined by decisions completely unrelated to the product that they grow or make. Free-market, laissez faire, “invisible hand” economics are more theoretical than real, and farmers or consumers should not act surprised when markets are upended by a government that is supposed to be working to support them.
This column was submitted for consideration in The Forum's search for "the next great columnist."