PELAKITA.ID – In the history of modern economic thought, Adam Smith is often recognized as the pioneer of free-market ideas that underpin the capitalist system.
Through his monumental work, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith introduced the concept of the “invisible hand”—a metaphor for how individual self-interest in a free market can indirectly benefit society as a whole.
This idea emphasizes that government intervention in the market should be minimized. Smith believed that competition, individual freedom to conduct business, and private property rights would lead to efficiency, innovation, and optimal distribution of goods and services. In this narrative, the state is limited to maintaining order, security, and basic infrastructure.
Although Adam Smith’s social and political context was 18th-century Europe, his core ideas have spread widely—even reaching Southeast Asia, including Indonesia.
The question is: how were the concepts of the invisible hand and free trade translated into Indonesia’s economic policies? One of the most significant phases of Smithian thought adoption in Indonesia took place during the New Order era (1966–1998), under the leadership of President Soeharto.
The New Order: Political Stability and Economic Liberalization
Following the economic and political turmoil during the Guided Democracy era (1959–1965), the New Order regime aimed to restore national stability, with economic development as a top priority. Within this framework, Soeharto’s regime distanced itself from the statist and nationalist economic models of the previous era.
A group of economic technocrats, known as the “Berkeley Mafia,” played a pivotal role in shaping development policies rooted in economic liberalism—a pragmatic adaptation of Adam Smith’s ideas.
Guided by economists educated at the University of California, Berkeley—such as Widjojo Nitisastro, Emil Salim, and Ali Wardhana—Indonesia’s economic policy was directed toward macroeconomic stabilization, market deregulation, and state-owned enterprise privatization.
The government opened the economy to foreign investment, reduced trade barriers, and positioned the private sector as the main engine of growth. State intervention in economic activities was gradually reduced, aligning with the free-market spirit believed to foster efficiency and prosperity.
The deregulation and debureaucratization policies of the 1980s were concrete examples of the application of the “invisible hand” principle.
The government eliminated cumbersome licensing requirements, reduced import tariffs, and promoted exports as drivers of growth. The manufacturing industry flourished, and the financial sector expanded to stimulate domestic investment.
Free Trade and Structural Inequality
However, despite Indonesia’s impressive economic growth during the New Order—averaging 7% annually from the 1980s to early 1990s—the application of free-market principles did not escape criticism.
One key concern was that economic liberalization was not accompanied by institutional strengthening, accountability, or equitable benefit distribution.
In practice, the “invisible hand” was often overshadowed by the grasp of oligarchic hands—elites who exploited policy loopholes to consolidate power and accumulate capital exclusively.
Many policies favored large business groups, particularly cronies of the regime, leading to severe structural inequality. Wealth and economic access became increasingly concentrated in the hands of a few elites—an outcome of liberalization unaccompanied by principles of social justice.
For example, the supposedly open financial sector was dominated by a few conglomerates, while large infrastructure projects were awarded to business groups closely aligned with those in power. Meanwhile, the agricultural sector—which supported the livelihoods of the majority of Indonesians—was neglected in development priorities.
Reflection: Rethinking the ‘Invisible Hand’
Indonesia’s experience in interpreting Adam Smith’s ideas shows that a free market does not automatically guarantee widespread welfare. Without fair regulation, transparency, and policies that favor vulnerable groups, the market can become a tool of exclusion rather than inclusion.
Following the 1997–1998 economic crisis, Indonesia’s development policies gradually shifted. The role of the state was strengthened—especially in providing social safety nets and investing in strategic sectors.
At the same time, the principles of efficiency and productivity were maintained, reflecting a new search for balance between state and market.
Thus, Adam Smith’s ideas were not outrightly rejected but reflected upon and reinterpreted in a local context. The “invisible hand” of the market remains relevant—as long as it is accompanied by the watchful eyes of the state and civil society, ensuring that development proceeds inclusively and justly.
(Internet Source)
