Buffet and the Invisible Hand

Stephen Dubner of Freakonomics fame recently posted on his blog a piece entitled “Warren Buffet Swats the Invisible Hand”. In the post, Dubner proclaims:

But I was particularly captured by one sentence that Buffett said last night on The Charlie Rose Show. He was explaining why he wanted to give so much money to a foundation that mainly tries to alleviate poverty. “A market system has not worked in terms of poor people,” Buffett said.

Coming from Buffett, this statement isn’t much of a shock. But it certainly is an indictment—of the free-market system that has made so many people like Buffett very, very rich (though not as rich as him), of the system that so many economists and businesspeople and politicians and journalists believe in on so many dimensions, including its ability to help poor people stop being poor.

This revelation is not an indictment of the free market system at all. Adam Smith explained that by each individual acting in their own interests, it was as though an invisible hand promoted a beneficial end. The idea of an invisible hand has never claimed to eliminate the existence of poor people. And, in fact, it is because of the invisible hand that Buffet has the means to donate to the charity.

Through pursuing his own interests, Mr. Buffet has become a quite wealthy man. This has benefited those who have used the services of his companies as well as those employed by them. Now, Buffet is using his wealth to donate to a charity that helps the poor. His donation does not represent an attempt to fix a market failure, but rather an example of the free market at work.