A central concern absorbs his work: It is to lay bare the mechanism by which society hangs together

1. The 'Wonderful' world of Adam Smith A central concern absorbs his work: It is to lay bare the mechanism by which society hangs together i.e how is it possible for a community in which everyone is busily pursuing his/her self- interest to stay together; with no central planning nor authority, what are the binding forces of this new social formation. What was the “invisible hand” whereby “the private interests and passions of men” were led in a direction “which was most “agreeable to the interest of the whole of society”.

2. Self-Interest and Competition The answer to the previous question introduces us to the central mechanism regulating the market: the mechanism of competition. How is competition the regulator of profit hungry individuals? • According to Smith, the drive of individual self-interest will create an environment of similarly motivated individuals who are engaged in exactly the same pursuit. “It is not the benevolence of the butcher, the brewer or the baker that we expect our dinner” says Smith, but from their regard to their self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages. Self interest leads to competition. But a community activated only by self-interest would be a community of ruthless profiteers. The regulator is competition. How does competition serve to regulate the greed of a community of self-interested individuals ? • Suppose a manufacturer tries to charge more than other manufactures or refuses to pay as much as everybody else. He will be out of buyers since competitors have slipped in to take his/her trade away. He will also be out of employees if he decides to give them lower than everyone else. In this way, the market mechanism according to Smith imposes a form of discipline.

3. Regulation of goods, services and labour Aside from regulating competitive prices and wages, the market mechanism also takes care of demand and supply of goods, services and labour. • Suppose that consumers want more socks and fewer watches than being turned out. The public will demand more socks than available raising the price of socks, while watch prices will fall. The sock industry will make high profits while profits will decline in the watch industry. More entrepreneurs will join the sock industry producing more socks while the watch industry will produce many lay offs Once again self interest will step in to the right the balance • Employers in the favoured sock industry will seek to expand hiring more factors of production, while employers in the watch industry will reduce their use of the factors of production. As more socks come on to the market, sock prices will fall back in line. As fewer watches are produced, the surplus of watches will soon disappear and watches prices will again rise to normal.

4. Regulation of Incomes and the market as taskmaster • If profits in one business are unduly large, there will be rush of other individuals into that field until competition has lowered surpluses. If wages are out of line in one kind of work, there will be a rush of individuals into that favoured occupation until it pays no more than comparable jobs of that degree of skill and training. Explaining matters in this form, Adam Smith has found in the mechanism of the market a self regulating system for society’s orderly provisioning. In other words, the beautiful consequence of the Market, according to Smith, is that it is its own guardian. Is this not a curious paradox: The market is the acme of individual economic freedom is the strictest taskmaster of all.

5. Market mechanism and regulation Through this process of self-regulation, the market mechanism has: • kept prices from ranging arbitrarily • induced producers to provide society with the adequate amount of • desirable quantities of products • created the leveling of incomes across the working population According to Smith, the selfish motives of humans are transformed by interaction to yield the most unexpected of results: social harmony Self interest and competition, acting one against the other, have accomplished the transition. The systematic nature of his concepts and logical manner in which they follow each other is almost enviable, except that it is fundamentally contradictory (to be discussed later).

6. Division of labour, law of accumulation and law of population The second Issue that concerns Smith: • the market mechanism generates prosperity on the whole for the masses of labourers as well. This is attempted by introducing two new concepts/laws: • the law of accumulation • the law of population • Smith argues that “no society can surely be flourishing and happy, of which by far the greater part of the numbers are poor and miserable”. Smith’s goal was to show that society would propel towards a positive state through the market mechanism; that the wealth of nation following this form of self-regulation would steadily grow. After all he referred to commercial capitalism as “the system of perfect liberty.” How does he go about showing this? • Self- interest → profit maximization → savings and investment to accumulate more capital to reduce costs and increase productivity →to increase sales →to increase more profits

7. Productivity, accumulation and prosperity How does one increase productivity? • Improve the division of labour by introducing extensive machinery and breaking down the various tasks of the production process. The law of Accumulation • Each firm seeking to expand is naturally led to introduce more machinery as a way of improving the productivity of its workers. Thereby the market system becomes an immense force for the accumulation of capital, mainly in the form of machinery and equipment. But this poses a problem: Accumulation would soon lead to a situation where further accumulation would be impossible. For accumulation means more machinery and more machinery means more demand for workers. And this would surely lead to higher and higher wages until profits –the source of accumulation would be eaten away.

8. The Law of Population • This problem is surmounted by the another of Smith’s concepts: • the law of population • Smith wrote that “the demand and supply of men, like that for any other commodity, necessarily regulates the production of men”. If wages increased, not only the number of workmen increase, but the wage increase would alleviate the dismal effects of malnutrition and poor conditions among the working class to ensure a future generation of workers. This would increase the supply of workers bringing the wage down. • This meant that accumulation could increase at its own rate. The rise in wages which it caused and which threatened to make further accumulation unprofitable is tempered by the rise in population.