Adam Smith’s Theory of the Invisible Hand, when analyzed with Kohlberg’s Theory of Morality, the Social Learning Theory, case studies of real world examples and Smith’s own Theory of Moral Sentiments, must be reconstructed.  Smith’s own conclusions and writing indicate that he did not believe that the Theory of the Invisible Hand would work without business morality, this morality must be included as part of the reconstructed theory.  Since beneficence cannot be enforced, more democratic power must be given to all individuals involved in business in order to help promote morality.  Companies must be stripped of the right to control elections through donations and other influence in order to restore what Smith intended.  The way in which public companies are financed must be changed in order to avoid abuses of a laisse faire system.

If the Theory of Moral Sentiments is correct, then it should be added to Smith’s Invisible Hand Theory.  Smith’s writing (Theory of Moral Sentiments etc.) indicated that the three virtues were needed in order for the Theory of the Invisible Hand to work properly.  For a laisse faire system to work it depends three factors (Peery 183) on prudence: the sensible desire of each party involved to be looking out for their best interest, justice: a system that provides laws and remedies for unfair business practices and beneficence a concern for the welfare of others.  If this is correct then these three areas must be added to the theory for it to function.  Beneficence is the most neglected of these three areas based on current economic systems.  Without beneficence, Smith believes that a good society is not possible and that, at best, it would be a society consisting of cold, mercenary exchanges.

If beneficence cannot be forced (Peery, 184) then it must be encouraged.  Beneficence can be encouraged and nurtured through democracy (class lecture, Kohlberg).  According to the Social Learning Theory, democracy encourages improved morals and moral learning because it combines the opinions of both moral and immoral people and allows them to learn and create a system that is greater than their separate parts.  Milgrim’s experiment showed this by illustrating that people in democratic groups were more likely to question unjust orders.  A democratic structure of this kind increases the Kohlberg stage that people make decisions at and promotes better morals.  One problem with undemocratic groups and rule by minority is that it encourages low-level Kohlberg thinking, examples include past South Africa and Al Dunlop at Scott where people were afraid to speak with him because of an undemocratic management style (in class lecture, Running With the Bulls video.)  When you concentrate power you end up with powerless people avoiding you.  An even more extreme example than Mr. Dunlop is with Sadam Hussein who had such concentrated power that he was not given correct information and, in time of crisis, was unable to lead his country. 

Part of Smith’s Theory of the Invisible hand working depends on fairness in the way companies operate.  If companies must be regulated by the government in order to operate fairly and the government is run by corporations through donations, campaign funding and other influences, then the system must be changed to avoid this conflict of interest.  Companies now have human rights such as the right to free speech which makes it difficult for them to be stopped from activities like campaign financing (class lectures).  Companies, by nature, are not beneficent.  The individuals within the company versus the company itself need to be given more democratic power in government in order to foster a fair model of what Smith intended.  Kohlberg states that there are six stages of development (Kohlberg / Lesko).  In order for companies to operate at a level beyond the first two or three stages (self interest), they must not be given the governmental power to setup such legal self interest and must be managed in a democratic way designed to foster advanced stage morality.  Having the power to shape the very laws that govern them is purely focused on self interest and practically forces companies to operate at the low stages of Kohlberg’s chart.  The thoughts of the decision makers of companies in this situation are based on conformity and self interest rather than analysis and thought based on self interest versus social interest and the overall good of the company and society.

The way in which public companies are financed today, the offering of stock to the public, creates some problems with Smith’s theory.  Greed, when unchecked, can be detrimental to a society such as in the case of Castro’s rise to power or the problems of Ford (early class lectures).  When public companies have a structure that allows outside shareholders to have voting power in can leave the opportunity for those shareholders to act based on greed rather than beneficence or even based on the best overall plan for the company.  Running With the Bulls showed the story of mutual fund manager Michael Price and his manager Al Dunlop who together could raid companies and make layoffs and divestures based on short term gain and short term benefit to the share price without concern for the long term.  As a public company, the shares owned by Price could be sold at any time, leaving him or individuals like him to have the ability to make a greed based decision that could adversely effect the long term future of the company.  The current financing structure for companies is responsible for the creation of greed-based, short-term opportunists like Price and Dunlop.  An even more extreme example is the situation with Louis Jordan and Valu Jet.  Jordan, as CEO of the company supported dangerous tactics in the name of short term profit appearance.  It can be strongly argued that this type of focus would not have occurred if not for the emphasis by Wall Street on short term gains, in the case of Valu Jet, this greed cost lives.  Aside from the tragic loss of life, from a purely economic standpoint, the Valu jet case was not good for business and not an ideal fit in Smith’s overall theory, the company was disbanded and the industry as a whole suffered.  Greed, even if equated with prudence, would, at most make up only one of the three factors needed for Smith’s Theory of the Invisible Hand to be successful.   Beyond greed, another drawback of the current structure relates again to the democratic morality issues, when a Michael Price or Al Dunlop controls 66% of a company, a dictatorial, self interest based structure arises where the lead voices control all.  In a more democratic system it would be extremely interesting to see the likes of Dunlop or Price having equal voice and legal voting power as Charlie from the shop floor or Sheila the secretary.  Although these exchanges would at first be exasperating to Price and Dunlop, there is little doubt (based on Milgrim’s theory, in class discussions, Peery, Kohlberg etc) that the result would be superior moral judgment that helps all and is profitable, thus using theory to create a true win-win situation for all involved.

Overall, Smith’s Theory of the Invisible Hand has been a sound theory but is in need of some revision.  The fine tuning represented here allows a mechanism to encourage beneficence, the most lacking part of the theory in today’s world.  The simple American bargain of being able to work for a company in exchange for a living and of companies and entrepreneurs being able to profit and thrive as the laisse faire system is designed to foster can only work if all aspects of Smith’s theory are implemented.  Just as government is needed to ensure a fair marketplace, revision to the theory is needed to have the Invisible Hand work as intended.

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