25 May 2023
“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.” With these words, we are reminded that the provision of our daily sustenance is not driven by altruism of those who supply it, but by their self-interest – the pursuit of their own gain. It highlights the fundamental principle of individual motivations shaping economic transactions.
These words are from a man born on 5th of June 1723, some 300 years ago next week. A man who has influenced Economics like no other. His name – Adam Smith – and his book “The Wealth of Nations” remains a timeless masterpiece that continues to shape our world today. However, as we celebrate his 300th birthday we must reckon with an upcoming meeting of the UK Chancellor with food producers – “I’m asking [the food] industry to work with us as we halve inflation, to help ease the pressure on household budgets.” Adam Smith must be turning in his grave. His central idea being the ‘invisible hand’, the notion that individuals, by acting in their own self-interest, unintentionally promote the well-being of society – as if guided by an ‘invisible hand’. Price controls he would argue interfere with the equilibrium of supply and demand. Distorting incentives and most importantly preventing the efficient allocation of resources.
So, let’s imagine the butcher, the brewer, and the baker in today’s world before and after their meeting with the Chancellor. Before the meeting, the butcher driven by market forces, would use his gains to strive to improve quality, perhaps adding a barbecue range to maximise profits. The brewer, aware of changing tastes would develop craft beers or branch into cocktails. And the baker, ever resourceful, would adapt to changing dietary trends. At least having read this newsletter you don’t need to wonder anymore why gluten free bread is so expensive!
However, in our present reality, the Chancellor’s attempt to curtail prices could disrupt this delicate dance of self-interest. It could erode incentives for innovation. Would gluten free bread still taste like cardboard had the Chancellor had this meeting 10 years ago? Would craft beer have remained just that? A night out in London with my daughters would be cheaper no doubt, but would they actually want to come if all we had to drink was warm, flat beer?
While this seems trivial and exaggerated, the longer-term impact is anything but. Germany was one country until after the second world war. By the time of reunification forty years later, the price controls, i.e., lack of invisible hand in the East had created starkly different realities – resources misallocated, society impoverished. Sure, Britain is not like that yet, but weak regulation and poor governance has broken our belief in the invisible hand. Sewage in our rivers and bosses awarding themselves millions in stock options as their share prices sag are just two examples of what has been allowed. The sense of exclusion and inequality created by this poor regulation is leading to the targeting of self-interest. Self-interest is a no-no in Britain today.
So, as we raise our glasses (Aperol Spritz at £10 a glass) to Adam Smith we should be reminded that the pursuit of prosperity and the well-being of society are not mutually exclusive but intertwined. And your most effective way of helping society as a whole is by making decisions that are right for you.