Adam Smith and the Other Revolution of 1776

The Declaration of Independence famously appeared on July 4th, 1776. But a less famous yet equally important text was published four months earlier, a text that eloquently explained the working of the economic institutions that created the modern world. That text is Adam Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations.

The Wealth of Nations offered the first systematic explanation of how a people blessed with the rule of law and secure property rights create wealth for the masses. Smith’s core message is profound. In a market economy, because no one can be forced to buy, producers who want to profit must offer buyers attractive deals. Likewise, because no one can be forced to sell, buyers who want goods and services that raise their standard of living acquire these outputs only by offering producers attractive prices.

A person’s freedom to choose whether to keep or to part with some of his property, including his money and labor, prompts individuals who wish to deal commercially with that person to help that person improve his life. As Smith explained, “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.”

Careless readers leap to the conclusion that Smith celebrated greed. But this conclusion is mistaken, for two reasons.

First, Smith’s goal in Wealth of Nations was to explain the workings of a modern commercial society. In this society, the vast majority of individuals whose efforts make your lifestyle possible don’t know you. Think of a recent visit to a supermarket. Whatever you purchased–perhaps beef, beer, and bread–was produced by individuals who don’t know that you exist. The rancher doesn’t know you. The brewer doesn’t know you. Ditto for the baker. And yet all of them devoted some of their time, effort, and resources to produce things that improve your life.

Why did they go to this trouble?

The answer isn’t their fondness for you. Although the baker, for example, doesn’t know you personally, she’s aware that many strangers will pay prices that make it worthwhile for her to bake bread. To improve her and her family’s life, the baker needs an income. Because she’ll earn no income if she doesn’t please her customers, she has incentives to bake bread that you and others want in order to entice you and others to voluntarily turn over to her some of your money.

It’s true that the baker is motivated to help you by her own interest. Yet it’s also true that you’re motivated to help the baker by your own interest. You pay money to the baker only because you want the bread she baked.

Nothing that occurs in this simple transaction is greed. Neither you nor the baker grasps for more than you’ve earned or for more than your fair share. Each of you, it’s true, is self-interested, but each of you also is led by that self-interest to serve the other fairly.

Adam Smith understood that while we can, do, and should rely on love to guide our behavior toward many of the individuals whom we personally know, it’s not in our nature to be motivated by that same love to guide our behavior toward people we don’t know. Yet because our modern standard of living requires each of us to depend on hundreds of millions of strangers for our daily existence, a commercial market in which each person is free to buy and sell as that person thinks best is an amazingly effective institution that leads each of us, motivated by self-interest, to serve the interests of others.

A second reason why it’s mistaken to conclude that Smith celebrated greed is that, when he identified actual instances of greed, he vehemently opposed it.

Smith despised above all the special privileges granted by the government. Most famously, he criticized producers who seek government protection from foreign competition. Because protectionism allows producers to extract more than their fair share from consumers, Smith denounced this greed with (as he described it) “a very violent attack.”

Smith understood that what people earn in competitive markets is just and honorable, even though motivated by self-interest. He also understood that grasping for more by seeking special privileges from the government is greedy and, thus, unjust and dishonorable.

To read more from Donald J. Boudreaux and many others on the work of Adam Smith, see The Independent Review: Symposium on Hidden Gems from Adam Smith’s The Wealth of Nations and subscribe to receive physical publications in the future!