Another mistake in John Cassidy’s ditty on externalities is the claim that Pigou “was reacting against laissez faire — the hands-off approach to policy that free market economists, from Adam Smith onwards, had recommended. Such thinkers had tended to view the market economy as a perfectly balanced, self-regulating machine.” Forget that the British Classicals, Adam Smith in particular, were far from “hands-off” types. Note instead that Cassidy provides no textual evidence of unnamed “free-market economists” viewing the market system as a “perfectly balanced, self-regulating machine.” How could he, when no sensible economist ever wrote or thought such a thing? The free-market economists — actually, virtually all sound economists — have maintained that the market economy works remarkably well, given the limits of human knowledge, our devious character, the brutality of nature, and so on. Paris gets fed, as Bastiat noted, and that is a miracle. Government intervention into markets inevitably makes things worse, the economists argued, not because the market system is “perfect,” whatever that means, but because men are fallible, and giving coercive power to fallible men is — to borrow P. J. O’Rourke’s metaphor — like giving whiskey and car keys to teenage boys. Cassidy’s caricature shows how little he understands what free-market economics is actually all about.Smith would not have seen the market economy as a perfectly balanced, self-regulating machine. He knew of the imperfections of markets but also knew that within the right institutional framework, markets were a natural, organic-like process which lead not to chaos but to social harmony. Smith also knew of the dangers that government over interference in the market process could bring. As Eamonn Butler has briefly summarised it:
He [Smith] realised that social harmony would emerge naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest need not lead to chaos, but - as if guided by an 'invisible hand' - would produce order and concord.
They would also bring about the most efficient possible use of resources. As free people struck bargains with others - solely in order to better their own condition - the nation's land, capital, skills, knowledge, time, enterprise and inventiveness would be drawn automatically and inevitably to the ends and purposes that people valued most highly.
Thus the maintenance of a prospering social order did not require the continued supervision of kings and ministers. It would grow organically as a product of human nature. To grow best and to work most efficiently, however, it required an open, competitive marketplace, with free exchange and without coercion. It needed rules to maintain this openness, just as a fire-basket is needed to contain a fire. But those rules, the rules of justice and morality, are general and impersonal, quite unlike the specific and personal interventions of the mercantilist authorities.