Adam Smith was the first economist to claim that self-interest was the primary human motivator. Perhaps, one of the most famous quotes from the “Wealth of Nations” suggests that “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” (Smith ). Self-interest, according to Smith, guides the consumer response to price changes and wage adjustment , while producers pursue self-interest in maximizing profits and altering supply level based on the market conditions. The self-interest, therefore, maintains equilibrium in the economic lives of nations, fostering division of labour, efficient resource allocation and as a consequence a welfare increase.
Adam Smith in his work greatly supported free trade and economic liberalization, the concepts that have not been fully appreciated until the 20th century. In “The Wealth of Nations” Smith emphasizes “the obvious and simple system of natural liberty” and opposes any kind of external interference into it (Smith ). According to this book, there is an external force in the market place, the so called “invisible hand”, which directs individual self-interest into benefitting the whole society. For Smith “self-love is really as necessary to the Good of the Whole, as Benevolence; as that Attraction which causes the Cohesion of the Parts, is as necessary to the regular State of the whole, as Gravitation”(Smith ).
Self-interest concept has been often criticized by comparing self-interest to the absence of virtue. However, such conclusion can be erroneous, since Adam Smith considered moral values and virtues as an integral part of human motivation. In fact, the benefits of the self-interest driven economy can be realised only in case all the agents act with transparency and without breaking moral and legal laws of the society.
Adam Smith’s self-interest and free market economy have become an important contribution into the modern understanding of the market, they can hardly be used in the real world. In fact due to their core benefits, simplicity and universal application, they oversimplify the complex nature of human motivation and market regulations, thus not being able to consider all the factors affecting modern economies. Firstly, Adam Smith’s theory does not account for the classical market failures, such as externalities, public goods, information asymmetries and imperfect competition. Therefore, failures of the market to adjust prices and allocate resources strongly jeopardize the ability of the “invisible hand” to maintain equilibrium in the market. Furthermore, the condition depicted in “The Wealth of Nations” did not take consider the highly globalized modern environment. Business activity today does not limit itself to production, but it affects numerous aspects of our lives and impacts not only the parties, which take part in the transaction, but also the society as a whole. Thus, global trade is associated with multiple complications arising from exchange rates variability, cross-border operations and political interests. Moreover, the production for some types of goods, such as weapons, should be controlled, since self-interest and profitability in this case do not coincide with societal benefits. The provision of some of the products and services, which have become an integral part of the societal development, such as healthcare and education, have to be regulated by the governments, since under laissez-faire they will always be undersupplied (Corfe ).
Adam Smith was truly a visionary in the economic theory. His self-interest and “invisible-hand” concepts have been used by the economist and policy makers in developing modern economic structures even today. Of course, as any model, Smith’s self-interest represents only a small aspect of the reality and therefore possesses a number of limitations. However, increasing economic freedom has been an overarching objective of the modern society, especially after planned economy has been proven inefficient and unviable. Therefore, the key to success is not only to refute or criticise Adam Smith’s arguments, but leverage on them and adopt his theories to the complex environment of the contemporary world.
Corfe, robert. New Socialist business values: for industrial resurgence. Bury St. Edmunds,
NU: Arena Books, 2002.