“Economics is the study of how
people in society choose to
employ scarce resources to
produce goods and services and
distribute them among various
persons and groups in society.”
Waud Principles of Economics
Key Economic Issues
Motivation
Property
Direction &
Coordination
Resource
Allocation
Policed by
Government
Adam Smith
Institutions of Capitalism
Motivation
Self-Interest
Property
Private
Direction & Free
Coordination Enterprise
Resource
Allocation
Free
Market
Policed by
Competition
Government Limited
Comparative Economic Systems
Institutions
Capitalism Communism
Motivation
Self-Interest
Property
Private
Direction &
Coordination
Resource
Allocation
Policed by
Free
Enterprise
Planned
Free
Market
State
Supervised Markets
(Excise Taxes, Tariffs)
Competition
State
Constrained Competition
(industry regulations,
controls, and limits)
Has a Role to Play
Planning, and guiding
Government Limited:
(in economy) Laissez faire
Community/
Equality
State
Totalitarian
Socialism
Tempered Self-Interest
(income taxes)
Mixed (infrastructure,
large employers, natural
resources)
Bureaucratic Controls
(licensing, incentives)
Every man is no doubt, by nature,
first and principally recommended to his
own care; and as he is fitter to take care
of himself than of any other person, it is
fit and right that it should be so. Every
man, therefore, is much more deeply
interested in whatever immediately
concerns himself than in what concerns
any other man.
Adam Smith TMS
It is not from the benevolence of the
butcher, the brewer, or the baker, that we
expect our dinner, but from their regard
to their own interest. We address
ourselves not to their humanity but to
their self-love, and never talk to them of
our own necessities but of their
advantages.
Adam Smith WoN
He generally, indeed, neither
intends to promote the public interest nor
knows how much he is promoting it….he
intends only his own security; and by
directing [his] industry in such a manner
as its produce may be of the greatest
value, he intends only his own gain;
and he is in this, as in many other cases,
led by an invisible hand to promote an
end which was no part of his intention.
Adam Smith, WoN
Self Interest is the motivation in
Capitalism, but it is not a
justification for immoral behavior. It
gives us a reason to work hard not an
excuse to do whatever we like.
How selfish soever man may
be supposed, there are evidently
some principles in his nature,
which interest him in the fortune of
others, and render their happiness
necessary to him, though he derives
nothing from it except the pleasure
of seeing it. Of this kind is pity or
compassion…. Adam Smith TMS p. 9
There can be no proper motive for hurting
our neighbour, there can be no incitement to do
evil to another, which mankind will go along
with…. To disturb his happiness merely because
it stands in the way of our own, to take from him
what is of real use to him merely because it may
be of equal or of more use to us, or to indulge, in
this manner, at the expense of other people, the
natural preference which every man has for his
own happiness above that of other people, is
what no impartial spectator can go along with.
Adam Smith TMS
One individual must never prefer
himself so much even to any other
individual, as to hurt or injure that
other, in order to benefit himself,
though the benefit to the one would
be much greater than the hurt or
injury to the other.
Adam Smith TMS
Self Interest
Hence arises the Universality of
these Desires of Wealth and Power, since
they are the means of gratifying all other
Desires. “How foolish then is the
Inference, some would make, from the
universal prevalence of these desires,
that human nature is wholly selfish, or
that each one is only studious of his own
advantage.” Hutcheson, Essay 3 p. 19-20
Self Interest
How weak also are the reasonings of some
recluse Moralists who condemn in general all
pursuits of wealth or power, as below a
perfectly virtuous character: since wealth and
power are the most effectual Means, and the
most powerful Instruments, even of the
greatest Virtues , and most generous actions?
The pursuit of them is laudable when the
Intention is virtuous: and the neglect of them,
when honourable opportunities offer is really a
weakness. Hutcheson, Essay 3 p. 19-20
Comparative Economic Systems
Institutions
Capitalism Communism
Motivation
Self-Interest
Property
Private
Direction &
Coordination
Resource
Allocation
Policed by
Free
Enterprise
Planned
Free
Market
State
Supervised Markets
(Excise Taxes, Tariffs)
Competition
State
Constrained Competition
(industry regulations,
controls, and limits)
Has a Role to Play
Planning, and guiding
Government Limited:
(in economy) Laissez faire
Community/
Equality
State
Totalitarian
Socialism
Tempered Self-Interest
(income taxes)
Mixed (infrastructure,
large employers, natural
resources)
Bureaucratic Controls
(licensing, incentives)
Comparative Economic Systems
Institutions
Capitalism Communism
Motivation
Self-Interest
Property
Private
Direction &
Coordination
Resource
Allocation
Policed by
Free
Enterprise
Planned
Free
Market
State
Supervised Markets
(Excise Taxes, Tariffs)
Competition
State
Constrained Competition
(industry regulations,
controls, and limits)
Has a Role to Play
Planning, and guiding
Government Limited:
(in economy) Laissez faire
Community/
Equality
State
Totalitarian
Socialism
Tempered Self-Interest
(income taxes)
Mixed (infrastructure,
large employers, natural
resources)
Bureaucratic Controls
(licensing, incentives)
Assumptions of Capitalism
• Rational self-interested Consumer
• Full and Accurate Information
• Costs/Benefits Contained in
Transaction
• Meritocracy (Opportunities and
Income Fairly Distributed)
• Institutions Functioning as Designed:
(Implicit Assumption)
Assumptions of Capitalism
• Rational Consumer
– Not choosing the best product for the best
price (e.g., impact of advertising)
– Choosing things that are bad for us and/or
society (e.g., drugs, fortified wine,
gambling, pornography, cigarettes,…)
– -Non-rational choices
Assumptions of Capitalism
• Full and Accurate Information
– Crucial to the proper functioning of
markets
– Information Asymmetries (Seller has an
inherent advantage.
Assumptions of Capitalism
• Costs/Benefits Contained in
Transaction -- no negative externalities
– Costs of production that are borne not by
the enterprise that causes them but by
society. (p. 288)
– E.g., Pollution
Assumptions of Capitalism
• Meritocracy: Opportunities and
Income Fairly Distributed
– Wealth – impact on choices
• Theory of the Leisure Class, Thorstein Veblen
– Inheritance – non contributory wealth
• The Acquisitive Society, R.H. Tawney
– Opportunities
• The Myth of Meritocracy
Assumptions of Capitalism
• Institutions
Functioning
as Designed:
(Implicit
Assumption)
Motivation
Self-Interest
Property
Private
Direction & Free
Coordination Enterprise
Resource
Allocation
Free
Market
Policed by
Competition
Government Limited
Assumptions of Capitalism
• Rational Consumer
• Full and Accurate Information
• Costs/Benefits Contained in
Transaction
• Meritocracy: Opportunities fairly
distributed
• Institutions Functioning as Designed:
(Implicit Assumption)