Adam Smith (1776, Book 4, Chapter 2) argued that::

(....every individual generally, indeed, neither intends to promote 
the public interest, nor knows how much he is promoting it. ...) By 
pursuing his own interest he frequently promotes that of the society 
more effectually than when he really intends to promote it. I have 
never known much good done by those who affected to trade for the public good."


It seems that unless one specifies the conditions under which 
self-interest is pursued, Smith's statement may be without useful 
meaning. We may think of three different scenarios under which the 
pursuit of self-interest would respectively (1) destroy social 
welfare, (2) leave it unaffected, and (3) promote social welfare.


Case 1: When Pursuit of self-interest ensures destruction of social welfare:

In a natural ecology, the natural law of subsistence allows the 
strong to kill and eat the weak. Surely the tiger pursues its 
self-interest to kill and eat the fawn. Does it promote social 
welfare (in a society where the prey and predator are all members?). 
Humans are the most accomplished hunting animal, and until quite 
recently, they were the deadliest economic cannibals (who ate the 
wealth of the members of the species, though not much of their 
physical flesh). No, this pursuit did not promote social welfare at all.



Read between the lines: Economists should not forget that a very long 
and persistent and arduous struggle against plunder was necessary to 
establish the institutional prohibition on plunder along with the 
institutional mandate to pay. Until quite recently, most humans were 
slaves, serfs, servants, and subjects of the strong, and the human 
population stagnated, and most people lived in utter misery. Why? If 
Alexander pursues self-interest and destroys the kingships of Darius 
and <?xml:namespace prefix = st1 ns = 
"urn:schemas-microsoft-com:office:smarttags" />Purus and others, the 
vanquished are finished. Adam Smith closed the door to institutional 
economics by pretending that unregulated pursuit of self-interest 
would promote social welfare. No. it would not. Take away the 
regulations that mandate that the buyer must pay the seller (and make 
the plunderer free to plunder the producer with impunity) and show 
how it promotes welfare.



Read even more between the lines: Smith believed that humans had a 
'natural propensity to 'truck, barter and exchange'. No sir, humans 
had and still have a natural propensity to plunder the unguarded and 
the weak. Historically, exchange came after a long and hard 
resistance. Take away property rights, disband the police and shut 
down the courts and wait to see who has the natural propensity to exchange.



Case 2: Subsistence by isolated individuals leaves social welfare 
unaffected:  Suppose that the individuals are all isolated. Then the 
prosperity of one does not in any way help the other. Nor is the loss 
of productivity of one in any way harmful to anybody else. If Crusoe 
lives in an island all by himself, how does he help anybody else?



Case 3: Gains from Trade is the only possible manner of promoting 
gains for society, under institutional mandate to pay and 
institutional prohibition on plunder:

If there is commerce, then all participants voluntarily take part in 
it because each is able to gain something. The necessary condition 
for promotion of social welfare is the social organization of 
commerce such that one who is relatively more efficient in producing 
something is able to offer the advantages to others.



Reading between the lines: Adam Smith is missing the issue of people 
paying for what they get. The producer/seller has no reason to intend 
any benefit for the buyer/consumer. The intention of the buyer is 
relevant here: he is the one who pays for what he gets, and 
definitely intends to get the benefit. The benefit is not unintended. 
The key issue is that the condition that permits the gains from trade 
(so that the buyer can buy something at a cost much lower than he had 
to incur if he had to produce it): the condition of anomaly of 
endowment and difference in tastes.  In short, the two conditions 
that must prevail to allow promotion of social welfare through the 
pursuit of self-interest are (1) the existence of anomaly of 
endowment (that one is more efficient in production of x than 
somebody else) and (2) that society has instituted rules of exchange 
(to make sure the seller has a protected right to receive a payment 
and the buyer is compelled to pay the seller).


Mohammad Gani