Readers Question: discuss whether economic actions by individuals always results in net benefit to the society
“Many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”
– Adam Smith, Wealth of Nations, Book IV
In the Wealth of Nations, Adam Smith noted how individuals who pursued their own self interest actually ended up helping the public good.
For example, the pursuit of profit encourages firms to become more efficient and sell products that people want. This creates a dynamic economy which helps to overcome shortages and surpluses.
Consumers, on the other hand, buy the goods they want and this creates employment and economic growth.
However, whilst many selfish actions can help the public good, there are many exceptions worth considering.
Externalities. This occurs when consuming or producing a good causes a harmful affect on a third party. By following our selfish interests we have consumed many fossil fuels which have contributed to global warming. This global warming could prove very damaging to the future public good. This represents a failure of the invisible hand approach. Selfish actions ignore the unintended impact on others. There are many other examples of externalities that we could consider.
Merit Demerit Goods. These are goods where people may be unaware of the costs/benefits and so over or under-consumed – e.g. drugs use can damage society in various ways.
Monopoly Power. Contrary to popular belief. Adam Smith wasn’t unconditionally supportive of free markets. He admitted that monopoly industries could lead to an inefficient and inequitable allocation of resources. Also worth considering is the case of monopsony labour markets where firms have the market power to set wages.
Tragedy of the commons – when there is incentive to over-produce a common shared resource – e.g. overfishing.