The Emergence of Economic Ideas
Smith is, in effect, searching for the appropriate definition of an institutional order which will eliminate zero-sum (or even negative-sum) games. It is the function of institutional arrangements to cut off all avenues (and they are many) along which wealth may be pursued without contributing to the welfare of society. Such a goal in practice requires a careful balancing of incentive, of provision of opportunity to enlarge one's income, against the need to minimize the opportunities for abuse, i.e., possibilities for increasing one's income in an antisocial fashion.
A central, unifying theme in Smith's Wealth of Nations, then, is his critique of human institutions on the basis of whether or not they are so contrived as to frustrate man's baser impulses ('natural insolence') and antisocial proclivities and to make possible the pursuit of self-interest only in a socially beneficial fashion. Indeed, it will become apparent below that Smith's basic argument applies to the whole spectrum of social contrivances and is not restricted to economic affairs. The question is, in each case, whether institutions do, or do not, harness man's selfish interests to the general welfare. This is, of course, the basis of Smith's critique of mercantilism.
The violence of Smith's polemic against mercantilism lay in the fact that it enabled merchants to better their condition in a manner which did not contribute to the nation's economic welfare. As a result of the dispensation of monopoly grants, of the arbitrary bestowal of 'extraordinary privileges' and 'extraordinary restraints' upon different sectors of industry by the government, the individual merchant was able to enrich himself without at the same time enriching the nation. For, as Smith clearly recognizes, the pursuit of one's economic self-interest is not necessarily confined to the economic arena. When it spills over into the political arena, it leads to actions which detract from, rather than add to the economic welfare of society. By contrast, the competitive order which Smith advocated was an institutional arrangement which was characterized, negatively, by the absence of all special privilege and sources of market influence and positively, by the all-pervasive and uninhibited pressures of the market place.
The price system, as Smith saw it, was an intensely coercive mechanism. Its decisive superiority as a way of organizing economic life lay in the fact that, when it was surrounded by the appropriate institutions, it tied the dynamic and powerful motive force of self-interest to the general welfare. Its free operation would, in most cases, leave the individual producer no alternative but to pursue his economic interests in a manner conducive to the national welfare.
The secondary literature on Adam Smith has devoted considerable attention to the ways in which the establishment of a free-market network will promote economic efficiency. But the emphasis has been primarily on the allocative efficiency of the free market and too little on the ways in which appropriate institutions contribute to the productivity of the human agent as a factor of production-a matter of supreme importance to Smith. Appropriate institutions increase both the motivation and the capacity of the human agent, whereas inapropriate institutions detract from these things.