Question

Prior to writing The Wealth of Nations, Adam Smith wrote The Theory of Moral Sentiments (TMS). If you recall, greed was considered evil or a sin during the feudal period. Greed will lead us to the flames of hell and so you should provide your wealth to the Catholic Church.

The purpose of writing TMS was to distinguish “good greed” versus “bad greed”.

In the movie Wall Street, greed is portrayed as bad as Gordo Gecko ( the character played by Michael Douglas wants all the money, pleasures, properties, cars …. For himself.

Now, you might consider yourself as not being greedy – but consider this. Say you are thirsty or hungry – you go to a deli or the cafeteria (whenever it opens) and purchase a sandwich and soda for say $5.00.

In one sense, you are greedy as you want to satisfy your hunger and thirst needs. But, and this was Adam Smith’s point – you gave the cashier $5.00 and the deli can pay its employees, pay for supplies, etc.

Adam Smith considers this “good greed”.

Based on this introduction, “What do you think Adam Smith was getting at when he wrote:

Every individual...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 of 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.

The Wealth of Nations, Book IV Chapter II

Consider this, “Do you wake up in the morning and consider, “How can I save the world?” “How can I cure Covid?”, “How can I reduce racism in the U.S.?”, “How can I help society?” Like me, to be honest probably not as we have to many other things to consider.

However, indirectly we have helped society without our intention!

How did we accomplish this? Please provide least 4 experiences or examples.

Answer 1

• According to Invisible hand's theory of Adam Smith, free market (the one without government intervention) can attain equillibrium by its own if every individual act in their own self interest.
• Eg if price of a good increases, people will decrease demand(acting in their own self interest) such that market equillibrium is attained again.
• In case of Covid scenario also, if people act in their own interest, if they take care of themselves by staying at home (at most of the times) --> it will decrease the spread of corona --> overall society will be benefitted.
• Think of the effect you have while buying the stuff you like, it will increase the demand of that good --> production of that good increase --> output increase --> income of individuals will increase --> society's welfare will increase.
• Now suppose your work load is increasing, so instead of strainig yourself you acted in your best interest and employed an assistant. --> employment increase. The imapct will be larger if by imitating you others also start employing assistance to decrease their work load. Increasing employment--> increase demand --> increase output (if country has free capacity)--> increase society's welfare.