In 'The Wealth of Nations' Adam Smith described the benefits of the division of labour and the self-interest of mankind. The most quoted sentence from his exstensive oeuvre:
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.
This sentence is often quoted and used as an explanation or even justification of our current economic system. But is this one sentence the essence of his work and thought? Is the theory of the invisible hand the essence or are there more and even better lessons to be learned from his work?
The theory of the invisible hand and our current belief in markets and competition are based on his assumption that there is a natural equilibrum for everything, in his words: " the natural state of things". This natural state may be disturbed for a short period if the quantity brought to market is insufficient the actual price will exceed the natural price. Suppliers will soon take action to restore the quantity so natural prices will be restored.
In his analysis Smith discovers a hierarchy between land and stock versus labour. On of these three should be the source for every man to gain his income and support his family. Workmen are in need of a master and wages are deducted from profit. So masters won't raise wages above the natural level.
Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.
He also concludes that capital has an accumulating nature:
A great stock, though with small profits, generally increases faster than a small stock with great profits. Money, says the proverb, makes money. When you have a little, it is often easier to get more. The great difficulty is to get that little.
Besides the effect of self-interest and natural prices and equilibria Smith describes the effects of competition and monopolisme. The next text about product development gives us a thoroughly understanding of his observations:
The establishment of any new manufacture, of any new branch of commerce, or any new practice in agriculture, is always a speculation, from which the projector promises himself extraordinary profits. These profits sometimes are very great, and sometimes, more frequently, perhaps, they are quite otherwise; but in general they bear no regular proportion to those of other older trades in the neighbourhood. If the project succeeds, they are commonly at first very high. When the trade or practice becomes thoroughly established and well known, the competition reduces them to the level of other trades.
So we have seen that Smith explains growth and wealth with self-interest and competition. Besides this he shows us the ultimate goal of production:
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 customer.
Here we may have found the basis of our current supply based economic policy. Then again Smith observes the natural tendency of people to create market power and maximize their profits.
The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers.
Not only by their profession or in the organization of the economy as described in the previous text people are striving for profit maximazation.
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Questioning ourselves if we have fulfilled and optimized the theory of Adam Smith we should make two remarks. The first is the fact that 'The Wealth of Nations' mainly is a description of a feodal system that grew due to the end of mercantilisme and later on eroded by the declining dependancy of land and stock. In our current society creativity and talent of highly skilled workers, which includes management, dependancy also works the other way around: if a company refuses to pay the demanded salary, the worker might leave to a competitor that is willing to pay extra for this worker. The second point I would like to raise is the unlimited self-interest and greed that is currently dominating our economic system. We surely all can remember the famous quote of Michael Douglas as Gordon Gekko in the film 'Wall Street': "Greed is good!" Presenting all of this as the result of Adam Smiths theory and philosophy would be an insult to the man who wrote:
All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.