Self-interest leading to the public interest via the invisible hand?- Adam Smith

Question

Adam Smith argued that the pursuit of self-interest will lead to the public interest - the public good - by the mechanism of the invisible hand. Does this argument hold only for a perfect economic system and in a business context? Does this mean we should focus only on self-interest in doing our jobs and activities ?

Answer 1

Smith is writing in the context of a capitalist market economy. He makes three major claims :

▻ THE GENERAL ECONOMIC CLAIM

The basic idea is that if each individual pursues his or her own interest, without regard to the public interest, the 'invisible hand' of the free market will promote the public interest. This appears a paradox. Let's see how Smith tries to remove the paradox :

'As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.' (Wealth of Nations, 1776, IV.ii.9)

So, for instance, if I pursue only my own economic interests, investing my capital in a free market, I will prosper only if I produce goods and services that consumers want. I reap the economic rewards and this is all that matters to me but the public interest is served. I have to employ my capital efficiently in order to make a profit; this is in the public interest as much as the resulting profits are in my own. The 'invisible hand' is just the mechanism of a free market.

Smith can also be less abstract and more homely in talking about the promotion of the public interest by the pursuit of self-interest:

'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. (WN I.ii.2)

In a free market the butcher, the brewer and the baker are business from self-interest but they will fail unless they provide quality goods at competitive prices - this promotes the public interest.

I am not presenting the situation in a sophisticated economy but trying simply to convey Smith's basic point. We'll see next how he complicates the picture.

▻ EXCEPTIONS TO THE GENERAL ECONOMIC CLAIM

Smith distinguishes three economic classes : (a) labourers, (b) landlords, and (c) manufacturers and merchants. He is doubtful whether the invisible hand argument works very effectively in the case of manufacturers and merchants :

'The interests of this third order [those who live by profit], therefore, has not the connection with the general interest of society as that of the other two [labourers and landlords]. . . . The proposal of any new law or regulation of commerce which comes from this order [those who live by profit], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it. (WN I.xi.)

Smith offers an explanation for why the self-interest/ public interest equation readily fails in the case of merchants and manufacturers but to go into this would take us into economic analysis. The main text is WN I.xi. Suffice to say that for whatever reason Smith does not think there is an automatic interlock between the pursuit of self-interest and the promotion of the public interest across the piece.

▻ THE MORALITY OF SELF-INTEREST

Smith does not promote a morality of self-interest. He does not endorse the pursuit of self-interest in general. Self-interest serves a particular purpose in the context of economic activity, and even there only under free market conditions and with a cautious eye kept on merchants and manufacturers. The pursuit of self-interest is morally neutral. Smith invokes a doctrine of 'natural liberty' to block any automatic right of the state or society to interfere with it as such. But his view of the moral life as set out in 'The Theory of Moral Sentiments'.

Smith regarded viewed sympathy as the foundation of virtue. In his ethical theory he is not concerned with the promotion of the public interest. The virtues are to be pursued for their own sake; and the central moral virtues derive from sympathy (a concept he took over and re-worked from David Hume). Sympathy is the root of beneficence (altruism or concern for the interests of others), self-command ('propriety') and justice. Where his economic theory uses the metaphor of the invisible hand, his ethical theory employs that of the impartial spectator :

'We either approve or disapprove of the conduct of another man according as we feel that, when we bring his case home to ourselves, we either can or cannot entirely sympathize with the sentiments and motives which directed it. And, in the same manner, we either approve or disapprove of our own conduct, according as we feel that, when we place ourselves in the situation of another man, and view it, as it were, with his eyes and from his station, we either can or cannot entirely enter into and sympathize with the sentiments and motives which influenced it. We can never survey our own sentiments and motives, we can never form any judgment concerning them; unless we remove ourselves, as it were, from our own natural station, and endeavour to view them as at a certain distance from us... We endeavour to examine our own conduct as we imagine any other fair and impartial spectator would examine it. If, upon placing ourselves in his situation, we thoroughly enter into all the passions and motives which influenced it, we approve of it, by sympathy with the approbation of this supposed equitable judge. If otherwise, we enter into his disapprobation, and condemn it.' (Smith, TMS, 1759, III.1.2).

It is clear that there is no necessary coincidence between self-interest and the judgements of the impartial spectator. Whatever role Smith assigns to self-interest in the economic realm, it is not self-interest but sympathy adjudicated by the impartial spectator that dominates - to an extent does, and totally should - in the moral life.

Answer 2

Modern economic theory, especially game theory, provides many examples where the pursuit of self-interest leads to outcomes that are suboptimal from the perspective of the public interest. The paradigmatic example is the Tragedy of the Commons, in which each individual, driven by self-interest, overuses the common resource, whereas everyone could have been better off if everyone had used it less. Overfishing is a good modern example, as are many other examples involving the environment. (Note that these are still business contexts.) In such cases, it is sometimes possible to realign the individual's incentives with the public interest via Pigouvian taxes. But modern economic theory certainly doesn't support the blanket statement that the public interest is always best served by everyone pursuing their self-interest.