Opinion: Daily Journal

The message of Adam Smith: In a free market, ‘narrow self interest’ means failure

One of the most common misconceptions about the free market is that it encourages people to pursue their own “narrow self-interest,” usually interpreted as caring only about one’s self while ignoring the needs and desires of others. But in fact, the truth is quite the opposite. In a market, the surest route to economic failure is to focus strictly on one’s own wants and ignore the wellbeing of others. Indeed, this is the fundamental message about markets that Adam Smith, in 1776, was trying to convey when presenting his famous metaphor of the invisible hand. In any economy based on voluntary cooperation and trade, as opposed either private or governmental force, it’s impossible to simultaneously advance one’s own economic wellbeing while at the same time ignoring the desires and wishes of others.

This stems from the nature of exchange, which is the defining characteristic of a market economy. As Smith pointed out:

Whoever offers to another a bargain of any kind, proposes to do this. Give me that which 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.

In other words, when one operates within a system where we get what we want from trade we are actually forced to ignore our narrow self-interest. The only way to improve your lot is to persuade others to make exchanges with you, to buy what you are offering. Those who are particularly good at figuring out what others want and how much they value it will end up increasing their own well-being the most. They increase their incomes not by focusing on their “narrow self-interest” but by looking outside themselves and determining what others want. This is why, in a system based on the principle of free exchange, Smith argued that:

“[I]t is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods.”

By equating value with the quantity of “money or other goods” that he can receive in exchange for his produce, he is making it clear that he means value to others. In fact, what the successful profit seeker is producing is of greater value to others than it is to himself, otherwise he would not be willing to trade it away. This is why he goes on to argue that “every individual necessarily labours to render the annual revenue of the society as great as he can.” This is the consequence of those individuals looking outward to society in an attempt to determine what others value the most.

Of course, Smith was quick to note that it is not because the producer cares, in an altruistic sense, what those others want, but because the fulfillment of his wants depends on his ability to fulfill theirs. Again, in the words of Smith:

“He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it… by directing that industry in such a manner as its produce may be of the greatest value [to others], he intends only his own gain…”

While for most people this would be a positive feature of an exchange based economy, there are those who see this aspect of the market as an unfair obstacle to success. And of course, if your success depends on thwarting rather than fulfilling the desires of others, it is.

There is the “starving” avant garde artist who believes there’s an injustice in the fact that very few people want to buy his concert tickets or paintings while a pop artist, who, in an objective sense, may have much less skill or talent, is in high demand and earns a great income. It’s not uncommon for that person to attempt to gain prosperity, not by pleasing those others who would buy the art but by reverting to non-voluntary means, possibly by applying for a taxpayer funded NEA grant. Such grants in fact do allow people to pursue their “narrow self-interest” without having to pay much attention to the desires of others.

At the other end of the same continuum from the avant garde artists are full-fledged political entrepreneurs like Elon Musk, CEO of the heavily subsidized electric car company, Tesla. Musk, like the starving artist, has done a rather poor job at producing what others want. On the other hand, unlike the artist, he has done a better job than maybe anyone ever has of persuading those who can help him avoid this market constraint; namely politicians, who can force people to pay for what they don’t want. Clearly, in a free market, if Musk insisted on producing his Tesla automobiles, i.e. pursuing his own narrow self-interest, he would be going broke rather than amassing a fortune.

In the real world, political institutions and the incentives they create often do allow people to thwart the interest of others while pursuing their own. Markets are in fact an anathema for those who care only about their narrow self-interest. Without the pathway provided by government and the legal use of force, narrow self-interest will ultimately be the kiss of death for anyone seeking true prosperity.

Roy Cordato is senior economist and resident scholar at the John Locke Foundation.