The Economics Book

56

A

ccording to the Scottish

thinker Adam Smith, the

West had embarked on

a great revolution before the 18th

century, with nations changing

from agrarian, or agricultural,

societies to commercial ones.

During the Middle Ages towns had

developed, and they were slowly

joined up by roads. People brought

goods and fresh produce to the

towns, and the markets—with

their buying and selling—became

a part of life. Scientific innovation

produced reliable, agreed-upon

units of measurement, along with

new ways of doing things, and

centralized nation-states formed

from the mix of principalities that

had dotted Europe. People enjoyed

a new freedom and had begun to

exchange goods for their own

personal gain, not merely for that of

their overlord.

Smith asked how the actions

of free individuals could result in

an ordered, stable market—where

people could make, buy, and sell

what they wanted without enormous

waste or want. How was this possible

without some kind of guiding hand?

In his great work of 1776, The

Wealth of Nations, he provided the

FREE MARKET ECONOMICS

Mandeville’s Fable of the Bees

explored the idea that when people

act out of self-interest, they benefit the

whole of society, like the self-interested

behavior of bees benefits the hive.

answer. Man, in his freedom, rivalry,

and desire for gain, is “led by an

invisible hand to promote an end,

which was no part of his intention”

—he inadvertently acts on behalf of

the wider interest of society.

Laissez-faire economics

The idea of “spontaneous order”

was not new. It was proposed in

1714 by the Dutch writer Bernard

Mandeville in his poem The Fable

of the Bees. This told the story

of a beehive that was thriving

on the “vices” (self-interested

behavior) of its bees. When the

bees became virtuous (no longer

acting in their own self-interest

but trying to act for the good of

the hive), the beehive collapsed.

Smith’s notion of self-interest was

Covent Garden Market in London

is pictured here in 1774. Smith thought

markets were key to making society fair.

With the freedom to buy and sell, people

could enjoy “natural liberty.”

IN CONTEXT

FOCUS

Markets and firms

KEY THINKER

Adam Smith (1723–90)

BEFORE

1714 Dutch writer Bernard

Mandeville illustrates the

unintended consequences that

can arise from self-interest.

1755 – 56 Irish banker Richard

Cantillon describes a version of

“spontaneous order.”

AFTER

1874 Léon Walras shows how

supply and demand lead to a

general equilibrium.

1945 Austrian economist

Friedrich Hayek argues that

market economies produce

an efficient order.

1950s Kenneth Arrow and

Gérard Debreu identify

conditions under which free

markets lead to socially

optimal outcomes.