No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Two: Fundamentals of Economic Behavior 56 GREAT ECONOMISTS IN HISTORY ADAM SMITH 1723-1790 Adam Smith is the most celebrated name in economics, and rightfully so. He was the first social philosopher to provide a systematic overview of the nature of human action in the marketplace. His most famous book, An Inquiry into the Nature and Causes of The Wealth of Nations, was an economic tour-de-force, published in the fantastic year of 1776. It’s interesting that this manifesto for economic freedom was written the same year as another manifesto for freedom (political freedom): the Declaration of Independence! (Coincidence?) His Wealth of Nations is arguably the greatest defense of free markets ever written; suggesting that economic freedom in exchange is a powerful force to channel man’s naturally occurring self-interest into a socially beneficial result. In contrast to the critics’ claim that capitalism celebrates a creed that greed is good, Smith noted that man’s natural self-interest caused him to effectively serve his neighbors. While compassion and charity had their place in Smith’s model, he noted that “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 self-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.” He also saw that man’s natural pursuit of his own self-interest frequently served broader social goals much more effectively than those acting in pure benevolence. While very supportive of free markets, Smith was not an unapologetic defender of business. He noted that it is not unusual to find business conspiring against the interests of the consumer, usually in some effort to raise prices by restricting free markets. In Smith’s day, the prevailing economic system that he was attempting to overthrow was one of Mercantilism. Mercantilism held that the key to wealth for a nation was to gain increasing amounts of gold. So policies were put into place to increase exports and maintain high employment through a “favorable” balance of trade. Mercantilists lobbied the government for monopoly power, especially in colonial trade. Thus in Smith’s day, the great harm to consumers’ interests was government policies favoring business—in many ways not unlike today. Smith was the first and greatest of the classical economists, but his theory was certainly not complete. He was never able to answer the diamond-water paradox of value, and clung instead to a labor theory of value. It would await the triumvirate of Carl Menger, Leon Walras, & Stanley Jevons to answer this question a century later with subjective value based on marginal utility. Despite this flaw, every economist today stands on the shoulders of this first economic giant—appropriately named Adam. Profile etching of Adam Smith (public domain) 3