Quoth Adam Smith, "Oops, my bad"

Doing the hand jive ... -- Picture courtesy of Wikipedia

by blogSpotter
In 1776, English economist Adam Smith penned The Wealth of Nations in which he described capitalism as an "invisible hand" that magically tunes and calibrates the market place. Nothing more than the simple rules of supply and demand played a role in the economic mechanism he described. In the centuries since he wrote his book, we've seen the excesses that happen with "Robber Barons"; we've also seen the bad consequences of lax government oversight for banking, investing and tax collection. It turns out that power does corrupt and people are only human. We can't have it solely Adam's way without dire economic consequences, even in freedom loving countries like the USA. Thus -- the invisible hand needs to wear a glove and operate within a set of rules.

Now recently we have an example where Adam Smith's invisible hand jerked mightily upward and doubled oil prices in the space of a year. There is debate whether speculation, manipulation or simple supply-demand dynamics are responsible for this amazing swing of prices. In recent weeks, oil went from $126/barrel to $145/barrel and all the way back down. This all happened in the space of 3 months. Apparently there is price-wise both a financial and psychological "breaking point" where wild things transpire. We appear to have reached that @ $140/barrel. This "Freaky Friday" yielded these results that can't be revoked anywhere as fast as the oil price deflated:

o GM and Ford are shuttering several plants; switching from trucks and SUVs to light cars
o Airlines are laying off pilots, trimming flight schedules, charging for one bag and oh yes -- some are going bankrupt
o Oil's influence on the supply chain as caused food prices to soar
o Local municipalities have given grants and tax allocations to light rail and mass transit
o AMTRAK is getting new grants

Now, it's as if Adam Smith's hand had a spastic movement, stirred the air and now he says, "Oops. My bad. Oil should only be $120/barrel". The problem is that the mechanisms of "das kapital" and government already responded with heavy redirection of resources. Adam would've played a very bad practical joke if it turned out that oil's long term price should settle at $120 or less. It would be senselessly destructive to the national economy.

Here is something to consider. Communist China is building more highways and airports than any nation on earth. India is quickly coming from behind, even producing some of its own preeminent auto companies (Tata Motors makes the world's least expensive car). It may be that Adam Smith was sending us a warning signal from beyond -- not so spastic after all. One might liken it to a "last call for alcohol" at 1:45AM, aimed at drunkards who need one more cocktail. What we might take away from it is that our reactions were warranted. If you drive a gas guzzler, you'll have a momentary reprieve but ultimately you need to heed the warning -- this is giving Mr. Smith the benefit of the doubt. If the movement was just a "one off" then we are in fact victims of a very perverse capitalism.

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