The global crisis has put two of the tenets of capitalism to a test—one they seem to be failing. Those tenets are 1) that supply and demand balance themselves, and 2) that by working in one’s own interest, an individual actually benefits the public. To pinpoint the issue let’s return to the origins of capitalistic thought.
In his 1776 book, The Wealth of Nations, Adam Smith wrote, “As every individual ... endeavors 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 labors to render 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 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.
“Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” [34]
For this reason, adds Smith, “The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. The increase of revenue and stock is the increase of national wealth.”
Smith’s assumption that supply and demand balance themselves through an “invisible hand” created the rule that leads capitalistic thinking to this day—that the individual’s goal to maximize profits leads to maximum profit for the entire society. However, the primary development of contemporary economic thinking—as a necessary precondition for an efficient free market—is free competition. The market must include an unbounded number of manufacturers and consumers, all of whom posses all the relevant information, none of whom has any effect on the prices in the market, and the cost of transportation of goods is inconsequential in relation to the trade itself.
Those conditions were supposed to manifest in the most ideal manner in our global world. The development of global trade increased the number of manufacturers and consumers in the market, and significantly lowered the cost of transportation of goods. The Information Revolution via the internet contributed significantly to an increase in competitiveness. It also presented the required information to manufacturers and consumers.
Given these developments, one would expect that we would be experiencing the free market economy in its glory. How, then, did we end up in a global crisis that we can’t seem to resolve?
The reason for the emergence of the global crisis is this: while globalization increases the chances of certain classical assumptions to manifest, it also helps undermine another supposition, the one regarding the connection and mutual effect of the elements in the market. In a world where the free market is behaving according to Smith’s ideal, people work in their own interest and are neither affected by others nor affect their well-being. Yet, people do not live in an isolated bubble. They are social beings whose well-being is interdependent with that of others, and that interdependence is experienced today more than ever before. This influence of social relationships introduces an element that is seemingly missing from Smith’s theory.
Multiple studies describe the social integration that the world is currently undergoing, all part of the process of globalization. Among the most noted is the study of Dr. Nicholas A. Christakis and Professor James Fowler, made famous in their book, Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives—How Your Friends’ Friends’ Friends Affect Everything You Feel, Think, and Do. They conclude that “The spread of influence in social networks obeys what we call the Three Degrees of Influence Rule. Everything we do or say tends to ripple through our network, having an impact on our friends (one degree), our friends’ friends (two degrees), and even our friends’ friends’ friends (three degrees). ...Likewise, we are influenced by friends within three degrees.” [35]
Thus, our health, wealth, and happiness are largely a function of what people three degrees of remoteness from us think and do.
In a similar vein, Professor Ludger Kühnhardt, director of the Center for European Integration Studies in Bonn, stated, “The 21st century, unlike the period after the Congress of Vienna, is no longer a zero-sum game of winners and losers. Rather, it is a century of multiple networked nodes.” [36]