A New Idea in Economics
The prevailing economic system in the 18th century was mercantilism. This was a stagnant system built around governments building up big reserves of gold and passing protective trade tariffs against competing countries. Further protection came in the form of chartered monopolies granted to favored companies. These policies were a reflection of the prevailing notion that wealth was a finite proposition that needed to be jealously guarded. With this defensive view of economics it is little wonder innovation and dynamism were in short supply. Thinkers like Adam Smith began to argue for a new economic system that emphasized free-market forces. Smith’s groundbreaking book “The Wealth of Nations,” published in 1776, represented a sea change. Instead of mercantilism’s stifling government control, Smith and others believed the new capitalism could generate profits with only limited government regulation. People would be able to take advantage of a free market system and make economic decisions to benefit themselves. Under capitalism, wealth is not a finite commodity to be jealously guarded, but something that can be pursued by all.
Self Interest, Not Selfish
A key aspect of the free market system is a belief in the efficacy of individual self-interest. Critics of the free market system sometimes complain that it encourages selfishness over selflessness, but this misses the point. Motives are less important than outcomes, so the important thing is that people are dealing with one another with fairness. Self-interest causes people to do things that benefit themselves, but this does not mean they are hurting others by their actions. For example, your local grocer does not necessarily sell food to you out of altruism, but because he can make money doing it so he can provide for himself and his family. The grocer expends the effort, money, and time to run his business in order to make a profit on his investment. His desire to work hard in order to realize that return on his investment is an example of the profit motive.
Profit is Good
Adam Smith and other free market economists described the complex marketplace, where the profit motive plays an integral part, as being guided by a hidden hand. The hidden hand represents the effect on the market made by the countless decisions and transactions made when people are pursuing their own self-interests. In “The Wealth of Nations” Smith wrote, “By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” Without the expectation that a successful business can make a profit, people would not be motivated to work hard to make the business work. In order to pay vendors and employees, a business must make a profit. Without successfully pursuing the profit motive a business would fail and the employees would lose their jobs. Even if the businessman had selfless motives for offering a product or service to the public, if he cannot make a profit he cannot stay in business. If not for the pursuit of the profit motive, he and other entrepreneurs would be much less likely to take the risks associated with starting a business.
Byline
Mel Caldwell is a freelance writer specializing in legal and financial topics such as Financial Regulation, Tax Law, Banking, Personal Injury, Criminal Defense, Traumatic Brain Injuries and other associated topics.
JRO
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