Tag Archives: adam smith

The economic concept of ‘demand’ was developed in the 19th century but merging our wants with our needs has its roots in Adam Smith’s Wealth of Nation (1776).  He observed that people were highly motivated to improve their own lives, spurring social progress.  Yet the mechanics of supply and demand mean that poor people lose out.

Smith believed that self-interest, combined with specialisation from a more complex division of labour, would unleash so much productivity and innovation that even the poorest benefit.  He claimed that markets are just because they advantage everyone, giving us permission to pursue our wants irrespective of other people’s needs.  Famously he wrote that markets are ‘led by an invisible hand’ though the end of that sentence is less widely cited: ‘to make nearly the same distribution of the necessaries of life, which would have been made had the earth been divided into equal portions among all its inhabitants’

With the benefit of hindsight we know he was wrong.  Today’s welfare state only exists because 19th century laissez-faire failed to address extreme poverty.  In reality, the market would fill a rich man’s swimming pool before quenching a poor family’s thirst given sufficient disparity in wealth.  Smith was right about capitalism’s productivity and innovation, but he was wrong to claim that market outcomes advantage the poorest.  He let us off the hook regarding the well-being of others, making selfishness consistent with the common good.  This is highly comforting for those who do well, but if something is too good to be true, it usually is.

Markets can be liberating, challenging established hierarchies and empowering people with choices through free exchange.  People facing acute need do not participate in this win-win.  Markets allocate on price and unequal bargaining power at the heart of every transaction systematically favours the stronger side.  Money exerts its own gravity, and tends to mass into fortunes as market prices suck wealth up from the poorest.

On the supply side, all workers sell their produce or their time, but those trading to meet their basic­ needs are forced sellers.  They must accept worse prices and lower wages because they have so little bargaining power.  When your children will go hungry or some other need will not be met, you are not just competing with others in the market but also racing against the clock, because needs get worse over time.  Those who survive this race to the bottom must tread water – they live to fight another day but are no better off.  They cannot afford any advancement, or enjoy any choice, through which the rest of us progress.