The person who employs his stock in maintaining labour, necessarily wishes to employ it in such a manner as to produce as great a quantity of work as possible. He endeavours, therefore, both to make among his workmen the most proper distribution of employment, and to furnish them with the best machines which he can either invent or afford to purchase.
-Adam Smith (An Inquiry Into the Nature and Causes of the Wealth of Nations)
Comment by Prof. Don Boudreaux:
Smith here observes that businesspeople using their own funds (and funds voluntarily entrusted to them) seek to produce for the market as much output as possible by employing what we today call “optimal” amounts, and kinds, of capital goods and labor. And in seeking maximum possible profit in this way, businesspeople are led as if by an invisible hand to promote the welfare of countless other human beings, nearly all of whom are strangers to businesspeople and to each other.
…It is, by now, easy to rattle off reasons why free markets fail to reach “perfection.” It’s done frequently by sophomores and pundits. But it is also impossible – at least for the historically informed – to deny that market failures in reality are swamped by market successes. The standard of living of ordinary people in the modern world testifies to this truth.
What no one has done is to offer a compelling reason to believe that substituting government direction of economic activity for market direction of this activity will generally outperform markets. The only truly serious attempt to offer such a reason is found in the work of the so-called “market socialists” of the first half of the 20th century. That effort failed.
(H/T: Cafe Hayek)
