Even Adam Smith Didn’t Trust the Invisible Hand, with Thomas Piketty

Economist Thomas Piketty delves into several common misconceptions about free market economics and argues that strong public institutions are necessary for market regulation.

Thomas Piketty: A very optimistic view of how the market works, which sometimes is associated to Adam Smith, is the view that you have self-regulation of the market and that the natural forces, natural market forces can take care of everything, and in particular can ensure that inequality will never increase to such an extent that it becomes socially and economically and politically useless or even dangerous for that matter. Now I think, in fact if you reread Adam Smith or if you try to look at the economic developments throughout history, you see that you cannot expect everything from the market. You cannot just rely on natural forces to solve all problems.

And I think one of the conclusions from the history of political economy and the history of economic growth and inequality is that you need strong public institutions in order to put these powerful market forces in the right direction. Market forces can produce a lot of innovation, a lot of incentives for inventions and entrepreneurship and this is very positive. But it would be a mistake to rely and count on these natural forces to sort of self-regulate themselves. And if you look in particular at the period going up to the financial crisis of 2007/2008, you have a very large concentration of economic gains into a relatively small group of the population. And I think everybody agrees today that this has contributed not only to the stagnation of median household income, but also to the rise of household debt, which in turn put pressure on the financial system and probably did contribute to fragilize the financial system with the consequences that we know in terms of financial crisis, recession, unemployment, which we are now starting to get out of this, but there has been many years of lost growth and a lot of social suffering because of this.

So we need strong public institutions in order to regulate these market forces. And sometimes there's really excessive faith in these forces. There are cycles over history. Probably after the Great Depression, after World War II, people realized that market forces need to be strongly regulated. And then starting in the '70s and the '80s with Reagan and cultural revolution and even more so after the fall of the Soviet Union, we entered in the 1990s and 2000 in a new cycle of sometimes unlimited phase in the self-regulation of markets. And to a large extent we are still in this phase. And I think there's a reaction, a policy reaction to the financial crisis of 2007/2008 has been too limited so far. And this could happen again. We've asked a lot to our central banks in the U.S. and in Europe. And of course it's easy to print billions of dollars or billions of euros to avoid complete bankruptcy of a financial system, which is what happened in the 1930s and which ended up in a complete catastrophe. So it's better to avoid that. But at the same time printing money is not enough to solve the central problem that we need to solve. So the good news is that we avoided a complete bankruptcy and complete depression, but the bad news is that we did not really solve the structural problems which might in the future create new crisis.



In this Big Think interview, economist Thomas Piketty delves into several common misconceptions about free market economics. Piketty argues that strong public institutions are necessary for market regulation. So-called "natural forces" of self-regulation commonly associated with the writings of Adam Smith cannot be relied on to maintain a healthy economic climate. An example of this is the heavy trend toward deregulation that spurred the 2007/2008 financial crisis. Piketty warns that the tepid regulatory response to the Great Recession could very well come back to bite us.

Thomas Piketty is the best-selling author of Capital in the Twenty-First Century.

​There are two kinds of failure – but only one is honorable

Malcolm Gladwell teaches "Get over yourself and get to work" for Big Think Edge.

Big Think Edge
  • Learn to recognize failure and know the big difference between panicking and choking.
  • At Big Think Edge, Malcolm Gladwell teaches how to check your inner critic and get clear on what failure is.
  • Subscribe to Big Think Edge before we launch on March 30 to get 20% off monthly and annual memberships.
Keep reading Show less

This is the best (and simplest) world map of religions

Both panoramic and detailed, this infographic manages to show both the size and distribution of world religions.

(c) CLO / Carrie Osgood
Strange Maps
  • At a glance, this map shows both the size and distribution of world religions.
  • See how religions mix at both national and regional level.
  • There's one country in the Americas without a Christian majority – which?
Keep reading Show less

Why are so many objects in space shaped like discs?

It's one of the most consistent patterns in the unviverse. What causes it?

  • Spinning discs are everywhere – just look at our solar system, the rings of Saturn, and all the spiral galaxies in the universe.
  • Spinning discs are the result of two things: The force of gravity and a phenomenon in physics called the conservation of angular momentum.
  • Gravity brings matter together; the closer the matter gets, the more it accelerates – much like an ice skater who spins faster and faster the closer their arms get to their body. Then, this spinning cloud collapses due to up and down and diagonal collisions that cancel each other out until the only motion they have in common is the spin – and voila: A flat disc.