Adam Smith in the Car and in the Classroom

spontaneous order self-interest voluntary exchange scarcity prices where do prices come from kids parents

Andrew Smith for AdamSmithWorks

“Dad, what if there were no money? What if we could have everything we wanted and not have to pay for it?” 
My elementary-aged son was full of wonder when he asked a simple question - one that crosses a lot of young minds. 

“Dad,” he asks while we’re in the midst of a drive. “What if there were no money? What if we could have everything we wanted and not have to pay for it?” 

What he was really asking wasn’t “what if there were no money,” but what if there were no scarcity. Without scarcity, there is no need for exchange. Without exchange, there is no need for mutual cooperation. 

I responded with a few simple questions - “do you grow your own food?” “Did I build my house from scratch? Did I cut down the trees for the frame, then cut the wood? Did I mine the copper for the electrical wires, fashion the steel for the sink and do everything else?” 

Of course not. 

“So, how do we get someone to provide those things for us? I’m a high school teacher. Your mom is a journalist. We’re not farmers, carpenters, lumberjacks, miners or jewelers. Therefore, how can we get someone to provide food for us? Is the farmer next door going to grow food out of the goodness of his heart and just give it to us for free?” 

He again responds in the negative. 

“For a farmer to be willing to grow food for us and everyone else who lives around us, we have to make it worth his while. For the carpenter to cut the wood and build the frame for our house, we have to make it important for him. We have to give them something of value - even if it’s not necessarily money. But to entice you to provide something of benefit to me, I have to provide something of benefit to you. Money is just a tool to help us attain what we need.” 

My son responds, “Oh, that makes a lot of sense.” 

In a brief conversation, I explained to my son the concept of the invisible hand in words an elementary student can understand. Each day, I’m tasked with doing the same for high school seniors. 

Adam Smith’s work provides a very good foundation for all of the teaching of economics, which begins with learning the economic way of thinking. It begins with the idea that scarcity exists  and continues by understanding that because of scarcity, we need to make choices. Our goals - like my son’s fantasies - are unlimited, but our means to obtain them are limited. Those limits means that individuals must interact in order to maximize their self-interest and achieve their goals.

One would expect those interactions to be “selfish” - just as my son’s inquisitive question surmises--that we could have things without giving anything up for them, and society would produce winners who steal from losers. 

But amazingly, society doesn’t work that way. It’s largely peaceful. It’s mostly ordered. And those who voluntarily exchange scarce goods and services benefit not only themselves, but everyone around them. 

As Adam Smith writes in The Wealth of Nations, “He intends only his own security; and 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.” 

Voluntary exchange benefits not just the individuals, but all of society. In a high school classroom, this simple point of the invisible hand can be reinforced in many ways. 

One is to look around our community. My students live in a small, but growing, suburban community. One of my favorite activities is to ask students about businesses they frequent in the community. Why do they shop there, visit, eat or play there? What benefit do they gain? On the other hand, look at it from the perspective of the business. The business gains through profit. The customer gains through usefulness. The community benefits from jobs and access to resources. 

We then take that conversation to businesses they would love to have in town - coffee shops, entertainment facilities, restaurants, movie theaters. My students then develop a plan for a business to serve their community. 

That’s one example of ways we can teach Smith’s ideas in the classroom. The idea of the invisible hand guiding peaceful human interaction permeates everything I do - including resources that reinforce that point. Leonard Read’s “I, Pencil,” Frederic Bastiat’s “Parable of the Broken Window,” and excerpts from “The Wealth of Nations” - such as the above quote. Even when graphing supply, demand and market price, we come back to the concepts of how that reflects scarcity and voluntary exchange. 

Smith’s ideas permeate the way I teach everything, from microeconomic ideas of voluntary exchange, to the macroeconomic concepts of national production and international trade. 

As Smith wrote in The Wealth of Nations, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished.” 

This is a difficult concept for many high school students to understand, as they see trade as “lost jobs” and “everything is made in China.” Using Smith, I can employ the law of comparative advantage to demonstrate how the United States benefits from trade through the inflows of capital, access to lower-priced, higher-quality goods, and for sales in industries in which the U.S. has an advantage - such as agriculture, services and high-tech industries. Students use mathematical models to show how specialization in the area of comparative advantage produces surpluses, and thus allow each to trade from its area of excess to obtain more cheaply that which it does not produce as efficiently, benefiting both. 

I often also use Bastiat’s “Candlemaker’s Petition,” where he satirically petitions the French government on behalf of candlemakers to make it mandatory to block out the sun to sell more candles. That opens the door to demonstrate how tariffs and trade barriers hurt the economy more than they “save jobs” through higher prices and fewer choices. I demonstrate that mathematically through showing how tariffs and quotas raise prices and can create shortages of goods, thus harming the end consumer. 

While the science of economics can be very complex, it all stems from a few simple concepts - that scarcity exists, that individuals act in their own self-interest to trade goods and services with each other to benefit themselves, and that society benefits as a result. Market prices, as determined by the junction of supply and demand, govern those exchanges. The invisible hand envisioned by Smith sees that function as not just guiding simple exchanges, but creating a modern, advanced civilization. What he envisioned in the 1700s still governs our world today.