How Adam Smith's economic philosophies apply in today's world
A sketch of Adam Smith, circa 1790.
The rich "consume little more than the poor, and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species." "The Theory Of Moral Sentiments," Part IV, Chapter I, pp.184-5, para. 10.
Think back -- way back -- to the days of Econ 101. The basic tenets of capitalism as we know them today were spelled out pretty clearly: supply and demand, division of labor, pursuit of self-interest. And if you strain a little more, you might just remember the man behind the theories: Adam Smith.
Written in 1776, "The Wealth of Nations" continues to be one of the most important economics books of all time. But do the lessons Smith spelled out in his text all those years ago still apply today?
P.J. O'Rourke has read and written extensively on the man and his books. He came up for air to give us a lesson in how Smith's ideas matter for consumers today -- and how they can't solve all of our problems.
"Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer." "The Wealth Of Nations," Book IV Chapter VIII, v. ii, p. 660, para. 49.
The idea that the purpose of production is consumption wasn't a common thought at the time Smith was writing, points out O'Rourke.
"There was this idea that the purpose of production was to build up treasure... or something," he says. "The idea that it was for the sake of consumers just hadn't occured to the human brain before Adam Smith."
What he meant by "consumption," of course, isn't exactly what we think of as consumption today.
"By consumption, he really meant that the purpose of all production is to make something that's useful," argues O'Rourke. "He was not thinking about buying a whole mess of t-shirts from a shady factory in Bangladesh, or consumer electronics. The word had a different nuance at the time."
"Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." "The Wealth Of Nations," Book IV, Chapter II, p. 456, para. 9.
So, as the definition of consumption has evolved, can we still rely on Smith's thoughts about consumers to still be true? Can all of us pursuing our own self-interest really mean a greater common good?
"If you talk to most businessmen, they'll say that what they do is for the public good, but you know they're just greedy," says O'Rourke, "and consumers are just consuming for the sake of their own greed. But Smith pointed out that the system actually produces some very good things. And we wouldn't have any of those good things if we didn't have this system of pursuit of self-interest."
"The natural effort of every individual to better his own condition...is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations." "The Wealth Of Nations," Book IV, Chapter V, Digression on the Corn Trade, p. 540, para. b 43.
As we all pursue our own self-interest in today's world, consumers pile on debt until they can't see past it. At the same time, businesses do what they need to do to continue to push those products onto consumers. We've come a long way from fulfilling a need, and into the territory of creating wants.
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages." "The Wealth Of Nations," Book I, Chapter II, pp. 26-7, para 12.
"What Adam Smith was trying to do was explain how economic progress happens," O'Rourke argues. "Adam Smith's huge failure was the fact that he did not foresee the industrial revolution."
Still, he understood that not everything capitalism produces is necessarily good. When it comes to the follies of the system, Smith saw the problems of debt in his own time, and what happens when banks collapse.
"As even the smartest among us has," adds O'Rourke, "he had his blind spots. So I wouldn't say that anything Adam Smith had to say has been superseded. But of course, a whole lot of situations have arisen that Adam Smith could not very well forsee all those years ago -- and we have to come with answers."
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