Adam Smith

Description

Adam Smith advocated the idea of spontaneous order by arguing that individuals are guided by an “invisible hand” mechanism in their pursuits for achieving self-interested outcomes.

In [The Wealth of Nations] Smith argues that a social order can be maintained by letting the natural forces operate freely. The invisible hand mechanism argues that members of a society do not coordinate their actions towards achieving a pre-specified outcome. Their actions do not intend to promote public interest and their behavior is not guided by an explicit agreement. As people are self-interested, they will act in such a way so that they can achieve the greatest gains for themselves. However, the results of their spontaneously coordinated actions will translate into the achievement of an aggregate outcome, which seems to be the product of an omniscient mind. He argues that the outcomes resulted by people pursuing their own interests are actually more effective then when people are actually trying to promote the interests of the society (Book IV, Chapter 2, of The Wealth of Nations). Smith argues that centralized legislators cannot possess the knowledge those "on the spot" have, and which is maximized in their pursuits to better themselves. He also argues that interventions in the market are inefficient as regulation of commerce cannot increase output in an industry beyond what its capital can maintain, but only divert it into a direction it otherwise might not have taken (The Theory of Moral Sentiments p. 233).

Smith argues that it is the price mechanism which regulates the market as it guides the production of the right amounts demanded by consumers. He considers that consumers keep prices for products within a close range from the costs of production. As demand for a product rises, current producers gain substantial profits. However, this will result in new producers selling the same product entering the market, which will increase competition and decrease the price of the product. Market prices thus reveal the demand consumers have for a certain product. As consumers induce producers to provide them with the products they want, they direct investments to the most profitable industries, which raises the well being of all the players in the market(20). Thus, although people are inherit selfish and greedy, competition if the free market leads to the society as a whole benefiting from their self-interested behavior.

Further proof of Smith's support of what is today known as "spontaneous order" comes from the fact that he argues that the division on labor is not "the effect of any human wisdom which foresees and intends the general opulence to which it gives occasion" (The Wealth of Nations p 25). Rather, the division of labor arose through a spontaneous, unplanned process, which was found to bring the greater economic benefits for the market players. While advocating market freedom, Smith does not consider that a legal order can be achieved only through natural processes. Rather, he considers that a common law based on “natural reason” and not on the reasoning of legislators needs to be established. However, he believes that natural liberty is not fully benign, as mechanisms for the division of labor result in workers being unable to enjoy natural liberty, as their repetitive work causes them not to develop their intellect (21).