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.

LinkedIn meets Tinder in this mindful networking app

Swipe right to make the connections that could change your career.

Getty Images
Swipe right. Match. Meet over coffee or set up a call.

No, we aren't talking about Tinder. Introducing Shapr, a free app that helps people with synergistic professional goals and skill sets easily meet and collaborate.

Keep reading Show less

In a first for humankind, China successfully sprouts a seed on the Moon

China's Chang'e 4 biosphere experiment marks a first for humankind.

Image source: CNSA
Surprising Science
  • China's Chang'e 4 lunar lander touched down on the far side of the moon on January 3.
  • In addition to a lunar rover, the lander carried a biosphere experiment that contains five sets of plants and some insects.
  • The experiment is designed to test how astronauts might someday grow plants in space to sustain long-term settlements.
Keep reading Show less

A world map of Virgin Mary apparitions

She met mere mortals with and without the Vatican's approval.

Strange Maps
  • For centuries, the Virgin Mary has appeared to the faithful, requesting devotion and promising comfort.
  • These maps show the geography of Marian apparitions – the handful approved by the Vatican, and many others.
  • Historically, Europe is where most apparitions have been reported, but the U.S. is pretty fertile ground too.
Keep reading Show less

Love in a time of migrants: on rethinking arranged marriages

Arranged marriages and Western romantic practices have more in common than we might think.

Culture & Religion

In his book In Praise of Love (2009), the French communist philosopher Alain Badiou attacks the notion of 'risk-free love', which he sees written in the commercial language of dating services that promise their customers 'love, without falling in love'.

Keep reading Show less