Adam Smith, Employment, and the Advantages to Society
The Scottish moral philosopher Adam Smith (1723–1790) was the author of two books, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
In his discussion “Of Restraints upon the importation from Foreign Countries of such Goods as can be produced at Home”, Smith writes the following passage:
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. (IV.2.4)
In this passage, Smith says that individuals will be motivated by profits and losses in how they use their capital, or the money advanced towards additional production, whether it’s advanced wages, payment for inputs, or machinery to improve production. Smith believes that these profits are greatest where the need is greatest: if people demand more food, capital will be directed towards improving land to increase the yield of corn or cattle. If they demand more pins, capital will be invested in the workers and equipment for a pin factory.
The reason that the owners of capital will direct their resources to meet these broader needs is not their interest in meeting those broader needs, but the higher profits that come from investing their capital in this way when people are able to pay market prices for goods and services.
If profits did not direct capital towards the most urgent needs in society, we would not expect the pursuit of self-interest to spur investors towards employment of resources most advantageous to society: it’s the structure of the market that aligns these incentives.
These are the building blocks towards the most famous passage in Adam Smith’s works, which appears later in this chapter: that of an invisible hand that guides the investors to “pursue an end which was no part of their intention”: the betterment of society by directing resources to meet human needs and desires.