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Case01_06

Adam Smith's 1776 work, 'An Inquiry into the Nature and Causes of the Wealth of Nations', argues that market economies, guided by an 'invisible hand', serve the public interest by aligning individual self-interest with societal benefits. While advocating for minimal state intervention in the economy, Smith also acknowledges the potential drawbacks of unregulated markets, such as monopolies and conspiracies among firms. The document also includes an activity suggestion for debating the merits of free markets versus government intervention.

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3 views

Case01_06

Adam Smith's 1776 work, 'An Inquiry into the Nature and Causes of the Wealth of Nations', argues that market economies, guided by an 'invisible hand', serve the public interest by aligning individual self-interest with societal benefits. While advocating for minimal state intervention in the economy, Smith also acknowledges the potential drawbacks of unregulated markets, such as monopolies and conspiracies among firms. The document also includes an activity suggestion for debating the merits of free markets versus government intervention.

Uploaded by

krihan1801
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Case 1.

6
Adam Smith (1723–90)
and the ‘invisible hand’ of the market

Many economists would argue that modern economics dates from 1776. That was the year in
which Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations was
published – one of the most important books on economics ever written.
Adam Smith was born in 1723 in Kirkcaldy, a small coastal town north of Edinburgh.
His father died when Adam was just a baby, and for most of his life he lived with his mother:
he never married. After graduating from Glasgow University at the age of 17, he first became
a fellow of Balliol College Oxford, but then returned to Scotland and at the age of 29 became
professor of moral philosophy at the University of Glasgow. At the age of 40 he resigned and
spent three years touring the continent where he met many influential economists and
philosophers. He then returned to Scotland, to his home town of Kirkcaldy, and set to work
on The Wealth of Nations.
The work, in five books, is very wide ranging, but the central argument is that market
economies generally serve the public interest well. Markets guide production and
consumption like an invisible hand. Even though everyone is looking after their own private
self-interest, their interaction in the market will lead to the social good.
In Book 1, Chapter II, he writes:
Man has almost constant occasion for the help of his brethren and it is in vain for him to expect
it from their benevolence only. He will be more likely to prevail if he can interest their self-love in
his favour, and show them that it is for their own advantage to do for him what he requires of
them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that what I
want, and you shall have this which you want, is the meaning of every such offer; and it is in
this manner that we obtain from one another the far greater part of those good offices which we
stand in need of. 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 own necessities, but of their
advantages.
Later, in Book 4, Chapter II, he continues:
Every individual is continually exerting himself to find out the most advantageous employment
for whatever capital he can command. It is his own advantage, indeed, and not that of the
society, which he has in view. But the study of his own advantage naturally, or rather
necessarily, leads him to prefer that employment which is most advantageous to the society …
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. Nor is it always the worse for the society
that it was no part of it. By pursuing his own interest he frequently promotes that of society
more effectually than when he really intends to promote it.
He argued, therefore, with one or two exceptions, that the state should not interfere
with the functioning of the economy. It should adopt a laissez-faire or ‘hands-off’ policy. It
should allow free enterprise for firms and free trade between countries.
This praise of the free market has led many on the political right to regard him as the
father of the ‘libertarian movement’ – the movement that advocates the absolute minimum
amount of state intervention in the economy (see Case Study 8.5). In fact one of the most
famous of the libertarian societies is called ‘The Adam Smith Institute’.
But Smith was not blind to the drawbacks of unregulated markets. In Book I, chapter
VII, he looks at the problem of monopoly:
A monopoly granted either to an individual or to a trading company has the same effect as a
secret in trade or manufactures. The monopolists, by keeping the market constantly under-
stocked, by never fully supplying the effectual demand, sell their commodities much above the
natural price, and raise their emoluments, whether they consist in wages or profit, greatly above
their natural rate.
Later on he looks at the dangers of firms getting together to pursue their mutual
interest:
People of the same trade seldom meet together, even for merriment or diversion, but the
conversation ends in a conspiracy against the public or in some contrivance to raise prices.

Activity: debate
Debate the following motion:
Free markets have led to huge increases in prosperity over the decades and government
intervention should thus be kept to the bare minimum.
This could be a formal debate with two speakers on each side and questions from the floor.
There could be a vote at the beginning and at the end to judge how many people had been
persuaded by the arguments on either side.
Alternatively it could be conducted along the lines of BBC Radio 4’s Moral Maze, with a
panel questioning representatives of different points of view, one at a time. There could be
three or four students on the panel and three of four different students being questioned.
Alternatively it could take the form of a more informal discussion within groups (say in
seminars), with each group producing a brief report summarising the arguments on both
sides. These reports could be presented to the rest of the seminar or posted online.

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