SMITH and EFFICIENCY
LECTURE NOTES
REMEMBER:
Nature provides a basis in sentiment for virtue
When we adopt the role of impartial spectators, sympathy is the sentiment that is the
basis for moral judgments
Acting from a sense of duty corrects for any lack of appropriate sentiment in particular
instances
The deity has implanted powerful instincts, or passions, which lead us to behave in ways
that are ultimately beneficial for all
Self-interest coupled with the predisposition to trade, barter, and exchange provides a
basis for the division of labor and economic development
In a market economy free from monopoly control and self-serving public policies,
competition among the self-interests of isolated consumers and producers produces a
stable and expanding economic system
The self-interested pursuit of wealth may not be individually satisfying but leads to an
aggregate increase in wealth that is in the best interests of society as a whole
HISTORICAL TIME PERIOD:
The ERA of ENLIGHTENMENT (1700s)
just past the time of the Absolute Monarchs
Deism--the belief in God as the 'watchmaker' who created and wound the universe
according to universal principals
Logical Thought, the Scientific Method and Systems Analysis
England is at its peak of world power
the Agricultural Revolution
the Commercial Revolution
the Industrial Revolution
the American Revolution just around the corner
Where did this spectacular growth come from?
Economic Freedom
What is holding us back now?
Mercantilism
MAN in a STATE of NATURE:
Compare Smith to Rousseau and Hobbes:
How does Smith feel about the natural state of man?
Theory of Moral Sentiments ( 1759)
The Wealth of Nations (1776)
Man is Self-interested, Ambitious and Greedy
he strives to maximize his own utility by maximizing his
consumption /possession of material goods and property
Man is a TERRITORIAL ANIMAL
Hobbes in wrong in thinking that GREED leads to ANARCHY
Rousseau is wrong in thinking that ALTRUISM leads to FAMILY
According to Smith, GREED leads to FAMILY
What is man’s motivation to remain in a family?
Love?
No! Self-Interest!
ALL MEN are EQUAL in ABILITY, INTELLIGENCE, and OPPORTUNITY
The individual is better protected in a community,
it allows him to further his own self-interest
No man will put another man’s interests ahead of his own
unless he derives greater benefits from delayed gratification
COST-BENEFIT ANALYSIS
Heroism = The “SELFISH GENE”
Self-sacrifice guarantees the continuation of your gene pool
Watch Baboon troops!!
Mother saving her child!
Man makes the correct MORAL CHOICES because he is self-interested,
NOT in SPITE of it!
All men have an “impartial spectator” who considers and advises
Rousseau would call this the SOCIAL CONSCIENCE,
Freud would call it the Superego
But Rousseau believes it is men exercising their self-restraint
from RATIONALITY and SPIRITUAL AWAKENING
And Freud from FEAR of PUNISHMENT, AVOIDANCE of PAIN
Smith believed this “impartial observer” gave us the best possible advice
on how to achieve the most utility on the basis of
the LONG RUN SATISFACTION of our goals
GILLIGAN and the SKIPPER
from Hobbes point of view: if the Skipper wants coconuts but is too fat to get them
but Gilligan can climb the tree to get coconuts
and the Skipper is stronger than Gilligan
the Skipper simply BANGs Gilligan on the head and TAKES the coconuts
so long as he does not kill Gilligan and uses his strength to protect Gilligan from others
this is completely justified
from Rousseau’s POV: the Skipper exercises his SOCIAL CONSCIENCE/EMPATHY
Puts himself in Gilligan's Shoes and asks “What can I do for you today, Little Buddy?”
without regard for his own reward
Now Smith’s logic: If Gilligan has something the Skipper wants
the Skipper cannot smack him on the head, he may die or refuse to get more coconuts
and no one does something with no regard for themselves
therefore the Skipper must think long-term
“What can I do for Gilligan that will get him to give me what I want?”
Man wakes up every morning asking,
“What can I do for ME today?”
The answer comes back,
“What can I do for SOMEONE ELSE today in order to get what I want Tomorrow?!”
The SOCIAL CONTRACT: How do we form the ideal community then?
What brings about the implied SOCIAL CONTACT?
WHY does Man form communities?
Not the LEVIATHAN
Not the SOCIAL CONSCIENCE
But SELF-INTEREST
“Greed is Good!”
Self-interest is Man’s greatest strength
HOW does man form communities?
Through the
1. FREE MARKET:
all societies are organized around a MARKET
What is a MARKET?
A place, organization, or arrangement which brings buyers and sellers together.
A place where individuals gather to COMPETE
in maximizing each other’s material greed
in order to maximize their own SELF-INTEREST
2. COMPETITION
Man responds to MATERIAL success of failure
not INTENT!
Man was made for ACTION!!
3. SELF-INTEREST
NATURE’S DECEPTION:
“Man’s eyes are always bigger than his head.”
Man can never be satisfied by the material things he seeks
Material “stuff” can never be intrinsically satisfying
and we all have the equal capacity to be happy
two men sitting beside the road in the sun: one rich, one poor
Who is happier?
BUT man has a “disposition to admire, almost worship the rich and powerful.”
GREED leads to ENVY leads to EXERTION, SPECIALIZATION, INNOVATION
and INTERDEPENDENCE
Not Violence and War (Hobbes)
Nor a Static Pastoral Society (Rousseau)
Rather a DYNAMIC, PROGRESSIVE, PEACEFUL community
of INTERDEPENDENT INDIVIDUALS
A Group of Individuals gathering to peacefully exchange material goods and services.
A GROUP of INDIVIDUALS = A COMMUNITY
Does man therefore need
4. ORGANIZED GOVERNMENT
NO!!
There is no need for a King or an elected government at all.
it is in everyone’s interest to look out for the good of the communal marketplace!
Anarchy is just fine! Our Natural Rights: LIFE, LIBERTY and PROPERTY
are respected by others in a state of Nature out of Material Self-interest
Particularly the Right to
5. PRIVATE PROPERTY
If we want to obtain the most satisfaction , the maximum UTILITY
we must allow others to use their resource as they see fit
And we will do this because
we know that they will make something from it that We WANT!
Basically, if two people decide to trade objects,
then it is logical to believe that each values the other object more than he values the one
he has
therefore BOTH GAIN FROM the TRADE or EXCHANGE!!
We CHOOSE to respect each other in order to get what we want!
6. FREEDOM OF CHOICE
The good of the COMMUNITY must fundamentally rely on
INDIVIDUAL INITIATIVE AND RESPONSIBILITY
In contrast to Hobbes: FEAR conquers AMBITION through FORCE
or Rousseau: REASON conquers INSTINCT through RESPECT
Smith believes: GREED harnesses REASON through ENVY
RATIONALE:What happens next?
THE INVISIBLE HAND
society is self-correcting and self-adjusting
No one individual or group may take advantage of any other
because those who do will be ostracized and expelled from the market by the consumers!
LAISSEZ-FAIRE
Increasing SPECIALIZATION, INNOVATION, and INTERDEPENDENCE
SMITH is fundamentally an RULE (ENTITLEMENT) UTILITARIAN:
the RIGHT TO PRIVATE PROPERTY is the most fundamental right
and must always be respected
All any individual can ask for is EQUALITY OF OPPORTUNITY
NOT EQUALITY OF OUTCOME
CAVEAT EMPTOR: "LET THE BUYER BEWARE" either in commerce or politics
each individual is responsible for himself alone.