Self-interest, not generosity, is what feeds you: The person who makes your sandwich at 8am is not doing it because you are hungry. They are doing it because they want the money.
Adam Smith (1776) noticed that this is enough. Everyone chasing their own gain ends up producing what other people want — as if led there by a hand nobody can see.
What each person is thinking
- The baker wants to be paid.
- The farmer wants to sell the wheat.
- The driver wants the delivery fee.
What actually comes out of it
- Bread exists, at 8am, near you.
- Nobody planned it.
- Nobody is in charge of it.
The other half: division of labour: One person making a whole pair of trainers from scratch might manage a pair a day.
Split the job — cutting, stitching, soles, laces, boxing — and the same people make hundreds. Same workers, same hours. Specialising is where the extra output comes from.
What Smith is remembered for
- Self-interest coordinates — no planner needed for bread to appear.
- The division of labour multiplies output — specialise and the same effort produces far more.
- Free exchange makes both sides better off — nobody trades to lose.
What he did not say: Smith did not say markets are always right or that government should never act. He wrote about the damage sellers do when they can gang up on buyers — which is the same worry behind competition law today.
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Water keeps you alive and costs nothing. A diamond does nothing and costs a fortune.: That puzzle stopped classical economists for a century. The nineteenth-century answer was to ask a different question.
Not what is water worth? but what is one more glass worth?
Two words that run through the rest of the course
- Utility — the satisfaction something gives you.
- Marginal — one more. Not the whole lot, the next one.
- And the next one is usually worth less. The first slice of pizza is worth a lot, the fourth less, the seventh you do not want.
So that is why water is cheap: You already have plenty, so one more glass is worth almost nothing — and that is what sets the price. Diamonds are scarce, so one more is worth a great deal.
Scarcity does the work, not usefulness.
You will meet this word constantly: Marginal cost, marginal revenue, marginal utility, marginal tax rate.
Same word every time, and it always means the next one. Decisions in economics are made at the margin, never over the whole lot.
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If everything produced earns someone an income, it can all be bought: Making things pays wages, rent and profit. Those payments are income. Income is spending power.
So — said the classical economists — production creates the very demand needed to buy it. This is Say's law, usually put as supply creates its own demand.
What the classical school expected
- A glut cannot last — prices fall until the goods clear.
- Unemployment cannot last — wages fall until workers are hired.
- Any slump corrects itself, given time.
So their advice was
- Leave it alone.
- Balance the government's books.
- Do not interfere with wages or prices.
The load-bearing assumption: All of it rests on wages and prices being free to fall.
Hold that in mind — it is the exact thing the next micro-topic attacks.
The same system, looked at from the factory floor: Karl Marx accepted that markets produce enormous amounts. His question was who ends up with it.
Workers produce goods worth more than they are paid. That gap — the surplus — goes to whoever owns the machines.
His argument in four steps
- Labour creates the value. Materials do not turn themselves into trainers.
- Wages are less than that value. What is left over is the owner's.
- So the two sides want opposite things — that is the conflict, not a misunderstanding.
- And the system keeps breaking. Owners compete, pay less, and then nobody can afford the goods.
Why he is in an economics course: Not because his predictions came true — the revolutions he expected mostly did not happen where he expected them.
He is here because he asked a question the classical model does not answer: who gets what, and is that all right? Every argument about inequality since is downstream of it.