Adam Smith's Revenge: Some Elementary Principles of Self-Interest and Political Economy

James Rolph Edwards

One of the most intriguing questions of modern times concerns why the Western intellectual class is antagonistic to the market system. Indeed, the hostility of intellectuals as a class to market institutions literally permeates Western art and literature./1/ For decades it has expressed itself in everything from the reflexive and vitriolic condemnation of anyone who attempted active opposition to Communism, to the dismal "Dallas" view of business and businessmen presented in television and movies, to the technophobic anti-Capitalism of the modern environmental movement./2/

This set of attitudes is puzzling to one who believes that, to the greatest extent possible, people's interactions should be voluntary, and who sees, both from a theoretical and historical perspective, great virtue in market institutions which, more than any other form, embody that principle. Who can deny, for example, that free market systems have delivered the goods, in terms of raising the living standards (including lifespans) and increasing the options of the ordinary person? For hundreds of years the world stagnated in the grip of feudal institutions. These included authoritarian monarchies, hereditary occupations, and (in later periods) mercantilist economic systems characterized by pervasive state grants of monopoly, detailed economic regulation, and international trade restrictions./3/ Sustained economic growth as a normal condition began precisely when authoritarian power was replaced with democratic government, private property replaced communal property, state monopoly and regulation were drastically curtailed, and the market price system emerged as the primary method of resource allocation. It is very difficult to believe that this was an accident.

Indeed, the lesson is currently being repeated. Many "third world" states are still trying to emerge from backward conditions. The massive starvation now occurring in Africa and elsewhere is testimony to the failure of attempts to accomplish economic growth through authoritarian and totalitarian methods. In contrast, Pacific Rim states such as Taiwan, Hong Kong, and Korea, which adopted market economies, have achieved such enormous growth in recent decades as to virtually lose their third world status./4/ Other nations such as Indonesia and Thailand are rapidly following the same path.

Except for a brief period in the 18th and 19th centuries, however, none of this has ever convinced the Western intellectual class. Adam Smith (writing in 1776, by a serendipitous coincidence the year of the American Declaration of Independence), who was perhaps the greatest advocate of laissez-faire, may have stated its virtue best. He pointed out that individuals pursuing their self-interests in competitive markets are led as if "by an invisible hand" to pursue socially beneficial ends which were no part of their intent. Indeed, they are so led without even realizing it./5/ I may here state the matter even more starkly. The market is the only known economic system which does not rely on its primary decision makers acting on altruistic motives in order to generate good performance.

Competitive independent provision of privately-owned goods and services (including labor) is the most powerful social disciplining mechanism ever devised. It provides enormous pressure for people intent on attaining their own well being to be courteous and pay strict attention to the needs and desires of others, since those who do not do so quickly lose customers to those who do. The effect is to motivate quick shifting of resources in accordance with market price signals from employments in which consumers value them less to where they value them more, and to produce the rapid innovation of products and productive processes that generates economic growth.

Alternative socioeconomic and political systems all have the central defect that, since they allocate a much larger fraction of resources through coercive governmental decision, they do rely crucially on primary decision makers having altruistic motives in order to generate good results. The hereditary monarch, whose power within the polity is relatively unrestricted, will, beyond the basic provision of security, probably benefit society only if he is one of Plato's Philosopher Kings, and there is no guarantee of that. Communism? The nature of the Communist state is that--in deliberate rejection of Smith's doctrine that diffuse individual decision making coordinated through the impersonal competitive market is best--all production of both economic and political goods is controlled by a single group, the party, which rigorously maintains its monopoly. If the party really is altruistic in its motives and the fount of wisdom about correct resource use, utopia is at hand. For some decades a large portion of Western intellectuals supported that claim. Events since 1989 have shown the folly of that intellectual affectation. Adam Smith has had his revenge.

Democratic Socialism? This is surely an improvement over its totalitarian cousin, precisely because it attempts to apply the market principle of competition to the political sphere. To the extent that we are speaking of serious Democratic Socialism, however, and industries are Nationalized, goods and services are still provided on a monopoly basis, and the bureaucracy which does so is unelected. Worse, bureaucrats are not residual claimants on the value of output, who are rewarded by efficient resource use and penalized by inefficient resource use, as are business owners./6/ As a result of these factors nationalized industries are insensitive and inefficient./7/ The right of citizens to substitute at the political level can never compensate for lack of a right to substitute directly between private competing suppliers at the product and input levels.

Still, intellectuals as a group hate the market and love socialism. One major reason is simply that the market seldom accords to artists and intellectuals the degree of reward and respect that they believe their "superior" intelligence and talents merit. In this regard it needs to be stressed that the market is an extremely democratic institution. Though since incomes vary, it does not work entirely on the principle of "one man, one vote" (and neither, of course, does political democracy), the members of the general public, in their decisions as consumers and resource suppliers, really are largely sovereign in determining the use of resources and allocation of rewards.

Arguably, it is precisely the democratic character of this process that most members of the literati do not like, since the values which guide the decisions of the masses seldom accord with theirs. The anti-Capitalist attitude of most artists, intellectuals, and academics is thus, one suspects, both profoundly anti-democratic, and extremely self-interested. It seems guided precisely by a desire to forcibly reallocate rewards (money, prestige, and power) through government away from the pattern determined by the voluntary market interactions of the public, and towards themselves./8/

Another factor in the intellectual love affair with socialism, long stressed by the philosopher Ayn Rand and others, is that the moral and ethical doctrines of Western culture all say that altruism is good and self-interested behavior is bad. Socialist doctrines always portray themselves as altruistic, while the market is portrayed as not only depending on, but encouraging selfishness. Neither of these claims is empirically verifiable, and the latter in particular involves a clear misunderstanding. Economists (including Smith) have never said that people should act only in self-interest, nor have they denied the widespread existence of (or benefits from) altruistic behavior. They merely claim that most people are concerned, in the bulk of their activities, with attaining their own well being, and that an institutional structure (the free market) is available which will channel those actions automatically in socially desirable directions.

In a market context self-interest and altruistic behavior are not incompatible. Americans, among the most Capitalistic people on earth, are also among the most charitable, perhaps precisely because they can afford it. Not everyone (in either the private or public sectors) will be altruistic, however, and that is why an institutional framework which takes human beings as they are is so important. Ideally this requires both economic and political competition (free markets and multi-party democracy), as well as a constitutional framework which protects individual rights by limiting the sphere of political decision making in a manner analogous to the market principle of voluntary contract. No such devices for constraining the behavior of decision makers would be necessary if people could otherwise be reliably assumed to act for the common good.


  1. A particularly egregious example is the current domination of literary analysis in university departments of English by the radical leftist deconstructionist perspective.[Back]

  2. The apocalyptic view of this movement has a long history going back to Thomas Malthus in 1798, whose predictions of overpopulation and falling incomes in market economies all proved false, and whose modern followers, such as Paul Ehrlich, have done no better. The environmental movement views capitalism as the root of all evil, and socialism as the cure, even though environmental degradation before 1989 was enormously worse in the Soviet Union and Eastern Europe than it was in the west. See Thomas DiLorenzo, "Does Capitalism Cause Pollution?" Center for the Study of American Business Contemporary Issues Series no. 38 (St. Louis: Washington University, August 1990) for elaboration and documentation.[Back]

  3. A good discussion of the nature and transformation of mercantilism is contained in Robert B. Ekelund and Robert F. Hebert, A History of Economic Theory and Method (2nd ed., New York: McGraw Hill, 1983): 32-60.[Back]

  4. Persuasive (but incorrect) arguments have been made that the success of such nations has been due not to limited government and free markets, but to large scale government activism in the form of export-oriented industrial policy patterned after that which is (also incorrectly) alleged to be responsible for the success of Japan. In fact, quantitative measures of such policies never show that these nations engage in them to a larger degree than others (Hong Kong, for example, has no industrial policy at all). What the data show to actually be characteristic of such nations is that their governmental activity is small relative to overall economic activity (that is, total governmental expenditure as a percent of Gross Domestic Product is small) in comparison to other nations with more stagnant economies.[Back]

  5. See Adam Smith, The Wealth of Nations (any edition): Book IV, Chapter 2.[Back]

  6. Where a firm's profit is by definition the difference between the total revenue it obtains from selling a given number of units, and the total cost of producing and selling those units, or PR = TR-TC, the magnitude of the owners' incomes depends on the size of such a residual (workers and bondholders, in contrast, are paid contracted amounts, and their incomes are part of TC). It follows that they have a strong incentive to keep TR as large as possible (satisfying customers), and TC as low as possible (operating efficiently).[Back]

  7. Paul Macridis, Contemporary Political Ideologies: Movements and Regimes (5th ed., New York: Harper Collins, 1992), 67, contains data on the degree of nationalization of eleven major industries in eighteen nations. From this I was able to construct a crude percentage nationalization index. From The Handbook of International Trade and Development Statistics (Geneva: United Nations, 1991), 436, I was able to obtain the average annual percentage change in real Gross Domestic Product from 1980 to 1988 for twelve of the same nations. The correlation between their degree of nationalization and average real GDP growth is inverse and statistically significant at the 90 percent level. It was for good reason that Britain, France, New Zealand, and many other nations began heavily denationalizing in the 1980s.[Back]

  8. I am not here simply speaking of direct subsidies to the literati such as the National Endowment for the Arts and National Endowment for the Humanities, though those are perfect examples. In fact all nationalization (including state education), regulation, industrial policy, and central planning requires the use and increases the incomes, status, and power of the intellectual/academic class, and they know it. It is no accident that most intellectuals work so hard to cloak their own interests in the public good in advocating such policies.[Back]

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