THE IMMORTAL ADAM SMITH, PART 3

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.” (Wealth of Nations, IV.ii.4)

The fourth paragraph of Book IV, Chapter 2 of Adam Smith’s Wealth of Nations (quoted above) contains one of the most original — and controversial — insights of all time, an idea that the father of economics would immortalize with his timeless invisible hand metaphor (cf. WN, IV.ii.9). In plain English, Smith is saying that a group of people will be better off overall when each person pursues his own self-interest — i.e., when each member of the group makes the best or most profitable use of the “capital” at his disposal — a proposition I like to call Smith’s Second Law. (For reference, I blogged about Smith’s definition of “capital” and his First Law in my previous post.) But is Smith’s Second Law true? How does promoting one’s self-interest work to advance the common good? Rest assured, I will further explore Smith’s controvertible and counter-intuitive claim in my next post …