The Creative Society
Originally published in the auspicious year of 1776, Adam Smith’s classic text on economics, “The Wealth of Nations,” went through five editions during Smith’s lifetime, so great was its impact on the intellectual world. In it, he intuited the existence of self-organizing economic systems some 200 years before science began to illuminate them. It’s extremely unlikely that Smith ever understood how such systems could exist. All he could do was describe the phenomenon honestly, with as much detail as possible, and hope that future generations would be able to unravel the mystery.
In the section on “Restraints on Importation of Goods,” we find Smith’s famous assertion concerning “the invisible hand.”
“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest values; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…”
Here, Smith is addressing the difficult subject of unintended consequences, not a theology of capitalism as is so often assumed.
“…by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cased, led by an invisible hand to promote an end which was not part of his intention…”
The economy is an information network made up of discrete decision-making parts with the power to create a whole greater than those parts.
“…Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectively than when he really intends to promote it.”
Smith believes that economic benefits to society as a whole arise systematically out of the interactions of the marketplace spurred on by competition and incentives. Motives are not the same as consequences. No matter what intentions people have, the results will be slightly or quite a bit different than those envisioned.
No one, no matter how powerful, can run an economic system. The ordering intelligence we seek lies not in political rulers or captains of industry, but within the system itself. Think of the economy as a vast computer. It consists of “decision gates,” better known as individual buyers and sellers. It compiles vast amounts of data and saves it in “memory” in the form of prices. It processes changes in supply and demand in its “CPU”—the market. Here, self interest codes as data input. The economy is given systematic access to accurate information on the economic state of all its members by the members themselves.
In order for this to work, the area of leeway left to the individual economic actor must remain large while incentives for long-term cooperation between economic actors are strengthened. Only when we can trust others to deliver on promises, trust the government to not change the economic rules in the middle of the game, and assume that society will remain stable, can we give of ourselves in reasonable expectation of a return on our investment.
We can go further than Adam Smith. Let us consider the pursuit of self interest to be a genuine good in of itself, and not just a failing of humanity that has to be tolerated for efficiency’s sake. When we are most honest with ourselves, we help others. When we learn something, we put it to use. When we act, other people learn something about us. Slowly, painfully, we learn about the world from one another. We learn from our mistakes as well as from our best acts. The economy learns, also.
Two centuries ago, the West was the first civilization in history to learn how to produce sustained economic growth. But, the West wasn’t always rich. Michael Novak, author of “The Spirit of Democratic Capitalism,” begins his book with a graphic description of the world of 1800, a human culture seemingly frozen in time. Famines ravaged whole populations every generation. Larger portions of the French population—a society presumed to be wealthy at the time—subsisted ONLY on bread, and enjoyed (?) a life expectancy of 25 years. In today’s economic terms, the continent of Europe was moribund. In the year 1800, the infant United States with only four million people had more business corporations than all of Europe combined.
Europe enjoyed but one dubious consolation. Things were much worse in the rest of the world. People suffered from virtual universal illiteracy and a total lack of elementary hygiene. Human cultures were nearly all presided over by absolute rulers, leaving no room for the self-organizing systems so crucial to the creation of new wealth and freedom.
To be able to produce more wealth each and every year means being able to produce truly NEW wealth. Over time, new wealth compounds, transforming the society that creates it. Smith’s dream of abundance must have seemed like science fiction to the people of his time—even though it was dead-on accurate.
How did they do it? How did they break out of those ancient bonds of ignorance and servitude? According to Novak, they did it by building up these parts of a self-organizing economy over time: