Adam Smith and Self Interest

Born in London, England, on May 20, 1806, John was the eldest of nine children of James Mill, a prominent philosopher, statesman, and political economist. James Mill believed that all people are born with equal ability, so he carefully supervised his son’s education. John’s intense education included Greek, Latin, philosophy, history, mathematics, and political economy, and he was writing and publishing works by his mid-teens. When he was twenty he suffered from what some would consider a well-deserved nervous breakdown.

According to Adam Smith, specialization and economic growth are motivated by self-interest. At the same time, pursuit of self-interest by individuals promotes the well being of the rest of the community.

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to the their own interest” Smith’s logic here is simple and effective. Society benefits by having goods provided. People don’t provide those goods for us because they like us, but because it is a way for them to generate income to satisfy their own wants. If, to earn that income, the butcher, brewer, and baker must compete with others in their industry to sell their products, it encourages the production and sale of quality goods at lower prices.

 

The wealth of a nation could be increased, according to Smith, by specialization, also known as “division of labor”. Smith illustrated the concept by describing the workings of a pin factory.

This allegory of the pin factory is also seen in the automation essay found here.

 

To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour had rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certain could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.

But though they were poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins might be considered as making four thousand eight hundred pins a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day.

 

An interesting side Note:

Before focusing his attention on political economy (the old term for economics), Smith published The Theory of Moral Sentiments in 1759. This work concentrated primarily on philosophy and ethics, and in particular the moral forces which guide behavior. Smith’s best known work, the work that clearly defines Smith as an economist, was An Inquiry into the Nature and Causes of the Wealth of Nations (often referred to simply as Wealth of Nations), published in 1776. The 900 pages of Wealth of Nations contain not only the articulation of many time-tested concepts in economics, but also a refutation of the economic philosophy known as mercantilism. Mercantilists believed that nations should enact trade barriers with other countries so as to reduce imports and achieve a trade surplus. Their belief was that the wealth of a nation was in the gold and silver (bullion) it possessed, and that trade surpluses were a primary means to accumulating bullion. Smith argued that the wealth of a nation was the real goods it produced, not the money it possessed.

 

What I learned today.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s