Smith did not invent economics. Joseph Schumpeter observed that “The Wealth of the Nations” did not contain “a single analytic idea, principle or method that was entirely new”. Smith’s achievement was to combine an encyclopedic variety of insight, information and anecdote, and to distill from it a revolutionary doctrine. The resulting masterpiece is the most influential book about economics ever published. Remarkably, much of it speaks directly to questions that are still of pressing concern. The pity is that Smith’s great book, like most classics (of 900 pages), is more quoted than read. All sides in today’s debates about economic policy have conspired to peddle a conveniently distorted version of its idea. If his spirit is still monitoring events, it will undoubtedly have celebrated the collapse of communism. But it must also long to meet the politicians who have taken charge of a fine reputation and not so fine profile. And put them right on one or two points. Today Smith is widely seen as intellectual champion of self-interest. This is a misconception. Smith saw no moral virtue in selfishness; on the contrary he saw its dangers. Still less was he a defender of capital over labour (he talked of the capitalist’s “mean rapacity”), of the rising bourgeoisie over the common folk. His suspicion of self-interest and his regard for the people as a whole come through clearly in one of his best-known remarks: “People of the same trade often meet together, even have merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Far from praising self-interest as a virtue, Smith merely observed it to be a driving economic force. In “The Wealth of Nations” he explained how this potentially destructive impulse is harnessed to the social good. What is to prevent greedy producers raising their prices until their customers cannot afford to pay no more? The answer is competition. If producers raise their prices too high, they create an opportunity for one or more among them to profit by charging less and thus selling more. In this way competition tames selfishness and regulates prices and quality. At the same time it regulates quantities. If buyers want more bread and less cheese, their demand enables bakers to charge more and obliges cheese-mongers to charge less. Profits in bread-making would rise and profits in cheese-making would fall; effort and capital would move from one task to the other.
Through Smith’s eyes, it is possible to marvel afresh at this fabulously powerful mechanism and to relish, as he did, the paradox of private gain yielding social good. Only more so, for the transactions that deliver a modern manufactured good to its customer are infinitely more complicated than those described by Smith. In his day, remember, the factory was still a novel idea: manufacturing meant pins and coats. A modern car is made of raw materials that have been gathered from all over the world, combined into thousands of intermediate products, sub-assembled by scores of separate enterprises. The consumer need know nothing of all this, any more than the worker who tapped the rubber for the tyres knows or cares what its final use will be. Every transaction is voluntary. Self-interest and competition silently process staggering quantities of information and direct the flow of good. Services, capital and labour — just as in Smith’s much simpler world. Far-sighted as he was, he would surely have been impressed. Mind you, modern man has also discovered something else. With great effort and ingenuity, and the systematic denial of personal liberty, governments can supplant self-interest and competition, and replace the invisible hand of market forces with collective endeavour and a visible input-output table. The result is a five-year waiting list for Trabants.

Question

Smith did not invent economics. Joseph Schumpeter observed that “The Wealth of the Nations” did not contain “a single analytic idea, principle or method that was entirely new”. Smith’s achievement was to combine an encyclopedic variety of insight, information and anecdote, and to distill from it a revolutionary doctrine. The resulting masterpiece is the most influential book about economics ever published. Remarkably, much of it speaks directly to questions that are still of pressing concern. The pity is that Smith’s great book, like most classics (of 900 pages), is more quoted than read. All sides in today’s debates about economic policy have conspired to peddle a conveniently distorted version of its idea. If his spirit is still monitoring events, it will undoubtedly have celebrated the collapse of communism. But it must also long to meet the politicians who have taken charge of a fine reputation and not so fine profile. And put them right on one or two points. Today Smith is widely seen as intellectual champion of self-interest. This is a misconception. Smith saw no moral virtue in selfishness; on the contrary he saw its dangers. Still less was he a defender of capital over labour (he talked of the capitalist’s “mean rapacity”), of the rising bourgeoisie over the common folk. His suspicion of self-interest and his regard for the people as a whole come through clearly in one of his best-known remarks: “People of the same trade often meet together, even have merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Far from praising self-interest as a virtue, Smith merely observed it to be a driving economic force. In “The Wealth of Nations” he explained how this potentially destructive impulse is harnessed to the social good. What is to prevent greedy producers raising their prices until their customers cannot afford to pay no more? The answer is competition. If producers raise their prices too high, they create an opportunity for one or more among them to profit by charging less and thus selling more. In this way competition tames selfishness and regulates prices and quality. At the same time it regulates quantities. If buyers want more bread and less cheese, their demand enables bakers to charge more and obliges cheese-mongers to charge less. Profits in bread-making would rise and profits in cheese-making would fall; effort and capital would move from one task to the other.

Through Smith’s eyes, it is possible to marvel afresh at this fabulously powerful mechanism and to relish, as he did, the paradox of private gain yielding social good. Only more so, for the transactions that deliver a modern manufactured good to its customer are infinitely more complicated than those described by Smith. In his day, remember, the factory was still a novel idea: manufacturing meant pins and coats. A modern car is made of raw materials that have been gathered from all over the world, combined into thousands of intermediate products, sub-assembled by scores of separate enterprises. The consumer need know nothing of all this, any more than the worker who tapped the rubber for the tyres knows or cares what its final use will be. Every transaction is voluntary. Self-interest and competition silently process staggering quantities of information and direct the flow of good. Services, capital and labour — just as in Smith’s much simpler world. Far-sighted as he was, he would surely have been impressed. Mind you, modern man has also discovered something else. With great effort and ingenuity, and the systematic denial of personal liberty, governments can supplant self-interest and competition, and replace the invisible hand of market forces with collective endeavour and a visible input-output table. The result is a five-year waiting list for Trabants.

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The Correct Option is C

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