The Economy

The Beauty of Invisibility

The author of a new book on global capitalism praises the &spamp;ldquo;invisible handshake.&spamp;rdquo;
CFO StaffApril 15, 2012

What is a programmer doing when he spends his personal time improving open-source software? Or an enthusiast of the Bauhaus school when she modifies a Wikipedia entry on art history? Authors Christopher Meyer and Julia Kirby say each of those actions amounts to an “invisible handshake.” “Invisible” because there’s no transaction recorded in the economic accounts, and a “handshake” because there’s an expectation that some unknown person will make a contribution of greater value, with no negotiation needed.

Meyer elaborates: The invisible handshake is a reference to Adam Smith’s insight that competitors pursuing their own success drive down prices, and in the process push the weakest competitors into other occupations. The result would be the lowest prices for all, and resources applied to their highest and best use for the economy, allocated “as if by an invisible hand.”

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Later, Alfred Chandler described the “Visible Hand,” an economy in which the property of increasing returns to scale and experience leads to inefficient resource allocation, slower innovation, and higher prices.

Today, the economics of information change the game again. Information has unique properties: near-zero cost of reproduction and highly positive returns to sharing. So individuals have begun to engage in a new behavior: The Invisible Handshake. They share their knowledge and skills, trusting that someone they will likely never meet will gain value from it, and that a community of people doing likewise will create a collective good that more than rewards the effort. In the long run, this will be fantastic, but to get there the global economy will have to endure a series of battles that started with music publishers suing Napster, and is about to break out in the drug industry as Indian and Chinese manufacturers prepare to sell cancer drugs at perhaps 20% of their U.S. prices.

For more, see Meyer and Kirby’s Standing on the Sun: How the Explosion of Capitalism Abroad Will Change Business Everywhere (Harvard Business Review Press, February 2012).