The world comprises 7.9 billion people who make different occupational choices. But the real question that arises is – For whom have the goods and services been produced? Have the right things been produced in the right quantities? Have the best production practices been followed in factories? Have the goods & services been produced for those who are going to benefit most from them? We do need to understand how and if these questions make any difference in reaching the market equilibrium.
While it might seem almost impossible to answer these questions, it would be interesting to deliberate on the theory of the Invisible Hand by economist Adam Smith, the father of laissez-faire economics. His ideas are explained in his major work published in 1776, titled ‘An Inquiry into the nature and causes of the wealth of nations’- often just called ‘The Wealth of Nations.
Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and 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 cases, led by an invisible hand to promote an end which was no part of his intention.
The Wealth of Nations, Book IV, Chapter II, p. 456, para. 9.
Here he explains how choices that individuals make that are in their self-interest help to boost the economy. The idea here is that the government should leave markets as free as possible and that the self-interest of individuals will ultimately grow the economy. The metaphor of the invisible hand dictates that the sum of all the individual choices on the part of businesses and consumers inevitably guides economic growth.
Is it possible that when each one of us makes choices that are in our self-interest, it also turns out that these choices are also in the social interest? Choices for society are in social interest when outcomes are in social interest. This means resources are used efficiently and goods & services distributed fairly. When we explore the economic effects of self-interest and competition, we find that self-interest is very motivational for human action and leads to innovation in business and hence growth in the economy.
Let’s take the example of mineral water to explain further. At one point in time, mineral water or bottled water was not in demand. However, the demand increased when there were multiple players of bottled water. The more the players, the more the competition, the more awareness created. This ultimately resulted in most people preferring bottled water over normal water, even if the normal water was good in that region. Digital television was one such idea and so was social networking. At the time of Myspace, there were few players. But today, besides Facebook people use Instagram, Pinterest, Snapchat, and various others.
The benefit of a new entrant in the market means the rise in competition and once there are more players, people are more accepting and more ready to purchase a product because it has found social acceptance. Furthermore, once you have competition, the players try to
differentiate themselves from each other. This leads to better products being developed, faster product upgrades as well as product innovation. Overall, it increases the market size considerably. This is the same effect observed in the Mobile and Smartphone market. In 1990, few people had mobile phones. But as the products started developing (thanks to Nokia), the penetration levels grew.
Later, Apple differentiated itself by launching touch phones like I phones which were top-of-the-line stuff. Iphone created a huge demand in the market for smartphones and this market was then captured by Samsung. Samsung concentrated heavily on differentiation and product up-gradation and kept adding new products every month to its product portfolio. Apple did the same, and they are at loggerheads to date. But look at the way the smartphone market has grown.
Apple has always been ahead in the game and is using technology that is far ahead of its competitors. Apple launched the MacBook and has kept it upgraded to the latest in hardware and software. Its iPad, iPhone, MacBook Air, I watch, and everything that it launches, is assumed to have the best and the latest. This shows that Apple has always evolved as a brand that people buy irrespective of the fact that they need it or not. In doing so, it has not just survived but created a market for what it developed. And yes, the growth that followed helped boost the economy.
Yes, efficiency comes in business when you are constantly on watch of what you want to do next. Consequentially you keep asking yourself, what do I do so that my customers are attracted to me and stick with me only? The great Steve Jobs was known to think like this, and he made Apple one of the leading companies in the world. Thus, it would not be wrong to say that the countries with the greatest economic freedom tend to be those that encourage entrepreneurialism and protect private property. These policies encourage laissez-faire economics, another term for a free market structure.
As Adam Smith rightly puts it, “It is not from the benevolence of the butcher, the brewer, or the baker that we get our dinner but from their regard to their own self-interest.