[Market Economy Guide] Who Do We Bake Bread For?

“The bakery owner makes good bread not for someone else, but for himself.”

“This kind of self-interest benefits both the bakery owner and us.”

In his book The Wealth of Nations, Adam Smith, the “father of economics,” explained the principle of the market economy—the “invisible hand”—as follows: “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’s View of the “Invisible Hand”

Adam Smith sought to find the “invisible hand” not in the realm of God but in human nature. That is, in humanity’s innate self-interest. Smith believed that when people engage in economic activity, they act according to “self-interest,” in keeping with human nature. The self-interest he referred to here was not “the vicious mindset of trampling on or harming others just to save oneself.” Rather, it meant concern for oneself—in other words, the boundless desire to live better than one does now. Instead of being satisfied with one’s circumstances and settling for them, self-interest is the desire for a better life, a more prosperous life—in short, the pursuit of one’s own happiness. In economic activity, self-interest leads people to act more actively, more proactively, and more persistently. It serves as a powerful motivation. People live by working harder, more steadily, and more faithfully when they pursue and achieve benefits for themselves.

Self-Interest Makes Economic Activity Run Smoothly

Take, for example, a bakery owner. He wants to earn a lot of money so that he can buy a large house, expensive furniture, and stylish clothes. What must he do to buy those things? He will try to earn money by selling even one more loaf of bread. He will get up at dawn to bake fresh bread, or do his utmost to develop new kinds of bread that are distinctive and delicious compared with others. These efforts ultimately improve the quality of the goods and services the bakery provides, which in turn leads to higher sales. Given the choice, wouldn’t anyone prefer to buy bread that is fresher and tastier if the price is the same? In the end, the reason we are able to eat fresh and delicious bread can be said to stem from the bakery owner’s self-interest—his desire to earn a lot of money and live well.

In this way, human self-interest, through the effort to raise one’s own life to a better level, becomes the driving force that ultimately creates a world in which everyone prospers together. This human self-interest is also the most natural “invisible hand” that coordinates all economic activity so that it functions smoothly.

The Pursuit of Private Interest Produces the Public Good

Think about it carefully. At first glance, people may seem to be pursuing only their own interests, but on closer inspection, do not individuals, in the process of maximizing their own interests, autonomously find an appropriate balance and ultimately create a rational and efficient flow of economic activity? Therefore, Adam Smith’s central claim was that even if everyone pursues only their own interests, the result can still be positive: the economy develops, life grows more prosperous, and social harmony improves.

Adam Smith believed that if a nation’s wealth is to increase, people must be allowed to express human nature in the freest and safest way possible. He thought that a free economic environment—one in which basic human desires move in the most natural way, without the state or institutions suppressing human self-interest—is precisely what makes sustained economic development possible and ultimately creates a world in which everyone can prosper together. This is because even without active intervention by the state or institutions, all the main actors in the economy can carry out economic activity naturally and efficiently. In this way, the entirely natural act of pursuing one’s own interests can be brought into harmony not only with individual benefit but also with the interests of society as a whole—and that was possible only when the market was allowed to function fully as a market.

■Please remember

Adam Smith sought to find the “invisible hand” not in the realm of God but in human nature. He argued that humanity’s innate self-interest is the invisible hand itself. He said that each person, by engaging in economic activity in accordance with his or her own nature, can also benefit others.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 누구를 위해 빵을 만드나

Author: Sung-no Choi

Date: 2019-04-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=14&idx=20089