Like Clockwork: Why People Love the Efficiency of the Marketplace

This is from a talk I gave a little over a year ago at an Adam Smith Conference hosted at Mercer University.

There is a wealth of literature dedicated to the so-called “Adam Smith Problem” which postulates that the Theory of Moral Sentiments is incompatible with the Inquiry into the Nature and Causes of the Wealth of Nations because the former is based in moral sympathy while the latter is based in self-interest. I would like to dissent from this view, and provide a possible way to bridge the gap between Adam Smith’s two most famous works. In The Theory of Moral Sentiments, Adam Smith explores the strong human propensity toward perfection. This drive towards perfection is one of the strongest forces that influence man. People are fascinated with trinkets and toys that work with the highest degree of precision. They are drawn to the impeccable consistency of such devises, and often admire them as much for their perfect execution as for the small conveniences they bring to the owner. In much the same way that people are drawn to these perfectly functioning gadgets, they are drawn to the mechanisms of the marketplace. These mechanisms can help to satiate a drive which Smith speaks of in the TMS—the need for people to understand and be understood by others. This drive presents a problem when people, in general, have vastly different, often irreconcilable, methods of valuation. One way to solve this problem is to make everyone speak the same language. Money, which objectively communicates subjective value, can be this common link. Through the perfectly harmonic forces of Supply and Demand, and with the language of the Market that is the money system, complete strangers can effectively communicate their desires and work for the happiness of each other. One way that the “Adam Smith Problem” can be solved is by realizing that people admire the beauty of the marketplace because it, without the supervision of any central power, works like clockwork.

In Part IV of The Theory of Moral Sentiments, Smith highlights the kinds of perfection that people seek in their lives. According to Smith, “The utility of any object…pleases the master by perpetually suggesting to him the pleasure or conveniency which it is fitted to promote” (TMS 179). This is an important distinction that Smith makes in Part IV: what pleases the master of an object is the suggestion of conveniency—not necessarily the conveniency itself. People marvel when an object seems perfectly fitted to its intended purpose—“that this fitness, this happy contrivance of any production of art, should often be more valued, than the very end for which it was intended” (TMS 179). Smith gives various examples of this. For instance, “a watch…that falls behind above two minutes in a day, is despised by one curious in watches. He sells it perhaps for a couple of guineas, and purchases another at fifty, which will not lose above a minute in a fortnight…But the person so nice with regard to this machine, will not always be found either more scrupulously punctual than other men, or more anxiously concerned upon any other account, to know precisely what time of day it is. What interests him is not so much the attainment of this piece of knowledge, as the perfection of the machine which serves to attain it” (TMS 180).

This same concept can be illustrated in the modern era—with me as a prime example. Since for the past couple years, I have been the proud owner of an iPhone 4S. The week before I got this smart phone, I told myself that I would never need a smart phone. I had an old fashioned cell phone, and that was perfectly fine by me. I was determined to not get sucked in to the smart phone craze. The week after I got it, however, I realized that I had, in fact, been completely sucked in—I could barely live without it. I am obsessed with this little thing. It can do just about anything. I can text, send emails, surf the web, watch videos, listen to music, catch the news, and call anyone I want—and it fits in my pocket! What an amazing machine! But why this obsession? Why do I feel so desperately attached to this device of which I had no earlier need? It’s because I’m fascinated with the beauty and simplicity with which it works. It would be no great hardship to wait until I get to my laptop to check my emails (or look at funny pictures on the internet) but the idea that I can do this whenever I want is awe-inducing. With only four buttons and a touch screen, I possess all knowledge known to man.

So how does my little iPhone obsession tie into Adam Smith? For that, we must inquire into the nature and causes of the wealth of nations. In Book I of this text, Smith lays out the basic laws of Supply and Demand. The consistency with which these forces work together to place goods in their most highly valued uses is just as awe-inducing as the capabilities of my phone—and unlike my phone, the forces of the marketplace need no central human force to perpetuate itself. Instead, it is through human interaction and the efficiency of the division of labor that it is possible to create something like an iPhone at a price that people can afford. People come together from all over the world to join perfectly the pieces of the puzzle necessary to produce a phone. Highly specialized people in extremely different areas of work are required to come together in a cohesive way to make one unique product. One needs miners to obtain the metals and other raw materials, plastics makers to form the casing, and glass makers for the screen. Then one needs engineers, electricians and programmers to make the phone run. After that, one needs artists and designers to make the phone visually, and audibly pleasing. Then one must employ social scientists to run beta tests on customers to make sure it is a product that people will actually want to buy. Then, one needs a full marketing team that is able to communicate to the entire consumer base that the product is ready for sale and worth purchasing. One needs sign producers, script writers, and actors to convey this message to the public. One needs truck drivers to bring the finished phones to all the stores, and finally retail workers to go through the transaction process with me so that at last I can have the whole world in my hands. This complex, even miraculous chain of events seems impossible, but somehow, all these strangers come together perfectly, like the components of a watch, to bring me this amazing device for a couple hundred bucks.

Smith explains why societies tend to give rise to the division of labor. Different people from all over the world come together, each providing a small specialized service which highlights the special comparative advantage which that person possesses. By specializing and habituating one’s work, one can become highly efficient and differentiated from others, and therefore more highly valued. This increase in personal value incentivizes people to become even more specialized in their work to distinguish themselves as the most productive in their individualized line of work. Once people have honed these individual talents, they are able to exchange the result of their labor for a profit. The more highly specialized people are, the more productive they become, and the more they gain from their production. In this way, the tendency to become more and more efficient and productive is a self-perpetuating cycle.

Smith believes that this comes about due to a natural sociability in man. “This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another” (WN 25). This same propensity of man is discussed in Smith’s Theory of Moral Sentiments, although the exchange is of emotions—not goods and services. In this text, Smith highlights that “we often derive sorrow from the sorrow of others” (TMS 9), but also that “nothing pleases us more than to observe in other men a fellow-feeling with all the emotions of our own breast; nor are we ever so much shocked as by the appearance of the contrary” (TMS 13).

Although emotions are the medium of exchange in The Theory of Moral Sentiments, Smith describes a very different currency in the Wealth of Nations. The latter also describes the social nature of man from a different perspective—analyzing the transactions of goods and services rather than the transactions of emotions. Even though they may sound terribly different, they actually share great similarity. Through the mutual sympathy that exists in human nature, people desire to communicate the subjective value of experiences using emotions just as they communicate the subjective value of goods and services using money in the marketplace. When a person shows happiness or sadness, he is expressing a sense of his idea of value. When one’s sport team wins, and a person feels happiness, the shared joy of others reinforces his sense of value in that victory and elevates his joy. When a loved-one dies, and a person feels sorrow, the sympathy of others validates the value of her loss and dampens her sorrow. The transactions of goods and services in the marketplace convey very similar information. The market allows people to communicate their subjective value judgments to everyone else. With the use of money and the price system, one can instantly know what the relative value is of a certain good or service as compared to all other goods and services. When given the price of an object, one can instantly place that object within one’s frame of reference in terms that one can understand. After having been told that my iPhone cost about two hundred dollars, I could place the iPhone within my frame of reference and understand what it was worth in my own subjective terms—about 10 dinner dates with my girlfriend (let’s just say I’m thrifty!) or 20 trips to the movie theatre, or 40 runs to McDonalds, or 80 loads of laundry.

We may solve the Adam Smith Problem if we appreciate that many of the same psychological mechanisms are at work in both The Theory of Moral Sentiments and the Wealth of Nations. People have a natural tendency to seek perfection—perfection in the objects they possess, perfection in communication and social interactions, and perfection in the proper allocation of resources. Humanity has learned that in order to approach perfection, people must work together within the marketplace. In order to produce anything of value, people are highly dependent on the specialized contributions of others. All people “truck, barter, and trade” within the marketplace, allowing humanity to exploit the comparative advantages of every individual.  Just as people trade sympathies of subjective value in the emotional marketplace, they trade goods and services of subjective value in the economic marketplace. Societies use money to objectively communicate subjective value judgments. Without any central oversight, these forces of the marketplace bring mankind as close as possible to awe-inducing, perfect efficiency. Through his writings, Smith attempts to communicate that the market is a beautiful structure of spontaneous order that really does work like clockwork.

Just some thoughts. I hope you enjoyed it.

Have a magical day!