Adam Smith believed that self-interested individuals are not primarily concerned with helping other people out. However, by operating in an efficient market system, they indirectly promote the benefit of society as a whole. In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, he wrote:
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. 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 effectually than when he really intends to promote it.
To be fair, Adam Smith did state that self-interested individuals are not interested in promoting the welfare of the society. However, his concept of the “invisible hand” working to promote the general interest of society is questionable. One specific graph demonstrates exactly why.
What strikes me the most about this is the fact that GDP per capita has, generally speaking, been increasing in the U.S. The median real household income, on the other hand, has been declining for quite some time. Yes, as a whole nation, we are producing more and getting richer. However, most Americans are not benefitting from this economic growth. The widening income equality gap in the U.S. is exactly why. Today, the top 1% makes an average of $1.3 million a year. According to economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman, this indicates a threefold increase from the $428,0000 that the rich earned, on average, in 1980. At the same time, the bottom 50% of Americans made an average of $16,000 in 1980 and it has not changed much since then.
Today, the top 1% earns more than 20% of national income. In 1970, they were taking home just over 10% of U.S. income. The rich seem to be getting richer but the bottom 50%, who once earned 20% of U.S. income in 1970, are only taking home 12% today. As can be seen in Figure 2, by the 1990s, the wealth of the top 1% was increasing dramatically, while the fortunes for the bottom half were quickly decreasing.
Assuming that the top 1% are self-interested individuals similar to those that Adam Smith described, they are only concerned with their own gains. However, Smith believed that by pursuing their own interests, they indirectly benefit society as a whole. “The invisible hand”, in this case, would help achieve this. The truth is, however, that by pursuing their own self-interest, the top 1% are the only ones that benefit and that’s okay. However, there does not seem to be a force that indirectly leads them to promote the well-being of everyone else. That’s what the striking income gap indicates. Looking at figure 3, one thing becomes clear: wages are not moving much for the bottom half. For the top 1%, the increase in earnings is, on the other hand, huge. One fact seems obvious: most Americans are not doing nearly as well as the top 1% and this isn’t something new.
So was Adam Smith completely wrong? Not necessarily. Smith was concerned about poverty and economic inequality. It is what drove him to argue in the first pages of his book, Wealth of Nations, that a market economy produces so much wealth that society as a whole, including the less fortunate, benefits. It is, in fact, hard to deny that market economies produce greater social wealth and make countries richer. Yes, richer countries are more capable of providing their poorest citizens with clean water and housing. Smith’s ideas are more focused on problems of poverty than on problems of inequality and the two are different. His work offers a solution to the former but not the latter and that’s the exact problem. Yes, countries become wealthier when people produce and earn more, but if most citizens cannot not directly benefit from that, how much good does that bring for society as a whole? Not as much as Adam Smith made it seem.