Notes on Adam Smith's Defense of Laissez-Faire Capitalism

Regarding Manuel Velasquez's Summary of This Defense in Business Ethics: Concepts and Cases

by Dr. Jan Garrett

Last modified: October 31, 2012

His Basic Claim:
If certain conditions are met, then national well-being, insofar as it is affected by economic arrangements, will be maximized.
  • A clearly stated premise: People insofar as they engage in economic transactions are self-interest maximizers or rational egoists.
    Rational egoists are persons who make their choices as follows: they consider all their personal options; accurately predict the consequences of each of them, paying attention to how these consequences affect their interests, and choose the option that is predicted to maximize their self-interest.
  • Unstated psychological premise: Happiness increases when people get what they want, decreases when they do not get what they want.

  • An unstated moral premise: We ought to do what promotes collective well-being. (This is implicitly addressed to those who set public policy and define the laws of the land, not to individual agents acting in the market-place, who are expected to act as self-interest maximizers.)

  • Moral/political Corollary that logically follows from the Basic Claim: Those conditions ought to be met, to the extent we can, by political and legal measures.

    What the CERTAIN CONDITIONS mentioned in the Basic Claim are:

  • Economic arrangements reflect the operation of free competition.

    This requires:

    1) There are no economic monopolies (no overwhelming concentrations of economic wealth)
    2) The state generally takes a hands-off position in relation to economic transactions.
    Other Unstated Premises or Assumptions:
    1) The prevailing legal system recognizes private property rights.

    2) The prevailing legal system provides for the possibility of contractual arrangements and acquisition of contractual obligations.

    3) The material basis for a modern system of production exists (modern, that is, by the standards of Adam Smith's time, late 18th century).

    The Argument for the Basic Claim. Key metaphor: The invisible hand

    Velasquez claims that the Invisible Hand is just another name for market competition. This fails to grasp the essentially metaphorical thinking that is involved. The metaphor requires the prior experience of an early modern manufacturing business (where production takes place under a single roof and human managers or capitalists acquire and distribute resources to employees who can, under those supervisors, efficiently produce useful products.

    Metaphors have the following general MAPPING structure

    SOURCE CONCEPT1 → TARGET CONCEPT2

    1. often based on everyday experience
    2. pertaining to something at larger or smaller scale than everyday experience, or involving longer or shorter periods of time than we can easily visualize

    Cognitive scientists like George Lakoff (Metaphors We Live By and other books) tell us that in learning a metaphor, connections are made between neurons in our brains. Learning in this sense is a physical as well as mental process.

    The Invisible Hand Metaphor

    SOURCE CONCEPT:TARGET CONCEPT
    Visible hand of manufacturing capitalist
    assigning resources to various aspects      
    of production    		            

    →

                    		 Invisible hand of the national market,
    moving resources around to "places"
    so that supply and demand match

    Rather than explaining the phrase "invisible hand" as another name for market competition, as Velasquez does, it is better to understand it as a metaphor, an imaginative way of summarizing the claim that society does not need a single all-powerful economic agency to efficiently distribute resources to the places and business entities where they can produce the best results, that is produce goods most efficiently and distribute them to the purchasers who can get the most personal advantage out of those goods.

    General "factual" premises in the argument for the MAIN CLAIM

    Price rises when supplies drop, fall when supplies increase.

    Price rises when demand (want backed by ability to pay) increases, fall when demand decreases.

    Economic agents agree to exchanges when, understanding the conditions of the exchange, they agree to the price of the exchange.

    Economic agents make purchases when they desire the product or service offered and believe it is the best product or service they can get for the money they are willing to spend.

    Economic agents make sales when they believe the money they are offered is the most they can get for what they are selling .

    Economic agents (capitalists, workers) enter industries or lines of work where they believe they can maximize income.

    Economic agents leave industries or lines of work where they believe they cannot maximize income.