What is the economy for?

CHINA Hunan Famine 1946: Emaciated boy begging for food in front of black market rice shop during famine. (Photo by George Silk/Life Magazine)

by John MacBeath Watkins

In Adam Smith's book, The Wealth of Nations, the following passage appears:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

Smith was a moral philosopher, and what interested him as such was the way a system of values enabled people, entirely without compulsion, to provide for each other.

What we expect this system of values to produce is not economic growth, it is our dinner. The object of the system is not to grow the system, it is to serve the needs of its participants.

This may seem an obvious and mundane observation, but it seems to get little mention in modern economics. There is a great deal of talk about efficiency and economic growth, but little talk about what the economy is for.

The whole point of having an economy is to provide the goods and services a society needs.

Some economists have argued that we must balance between economic efficiency and economic equity. But if the economy grows and only a few see the benefit, what is the point of the growth?

In a book of photojournalism my family had when I was a child, I remember a 1946 photograph by George Silk of a Chinese rice merchant, chubby and beaming, sitting at her black market stall while a boy whose face held no hope and whose skeletal frame carried little flesh sat with his begging bowl before him. The Chinese Communist Party came to power promising to fix such injustice, and produced an even worse famine in 1959-62, demonstrating that more than one economic system can produce disaster.

One of the worst famines of all time, proportionate to the population affected, was the Bengal famine of 1770. Estimates go as high as 10 million deaths amounting to perhaps a quarter or a third of the population in a region controlled at the time by the East India Company. 

Drought resulted in crop failure, a weakened people were more susceptible to disease, and the Company continued exporting rice from the region while people were starving (most famine regions export food, because the farmers have lost not only the food they planned to eat, but the crops they meant to sell, producing a market failure that is entirely predictable.) Tax farmers and Company employees had enough to eat. The East India Company increased its tax revenues 10% while the famine continued, maintaining shareholder value throughout the calamity, but then revenue fell because there were too few survivors to work the land or weave the cloth.

The point is, we don't have an economy so that we can grow the economy, and we don't have an economy to increase shareholder value. We have an economy to produce the food we eat, to put a roof over our heads, to provide the heat and comfort we need to live out healthy lives. An economy that produces a few people rich beyond the wildest dreams of avarice while hundreds of thousands go homeless is failing.

And the trade-off between equality and efficiency? Is a society with a high level of inequality really more efficient than a more equitable economy? Certainly the post-WWII era, when the American economy distributed income more equitably was a period of higher growth than the post-Reagan era when inequality increased.

The title of The Wealth of Nations is a bit deceptive. It is not about achieving some sort of national greatness by producing a few men more powerful and wealthy than most entire nations. It is about a value system which can enable a nation's people to lead comfortable lives, and prosper by doing things for others.