Adam Smith Helps Andrew Smith Explain Labor Markets
June 29, 2023
"It’s Adam Smith’s 'Invisible Hand' at work - by acting to satisfy our own gain, we direct our work that produces the greatest value not just to ourselves, but to society."
"It’s Adam Smith’s 'Invisible Hand' at work - by acting to satisfy our own gain, we direct our work that produces the greatest value not just to ourselves, but to society."
Twenty years ago, I was a fairly accomplished small-town journalist. I had a career I enjoyed, had been promoted to a managerial position and won a lot of awards.
Yet, I haven’t stepped inside a newsroom for 17 years. I found another career teaching high school students economics.
What would compel someone to walk away from a solid career to be with teenagers?
There are a lot of reasons, but they largely boil down to the reason many of us change jobs or careers – money.
Teachers often describe their jobs as a “calling,” but most of us are in the classroom because it’s where we can get paid the most for the skills we have.
Each semester, I recount this story with my economics students to explain Adam Smith’s point that civilization emerges from the division of labor, and the division of labor evolves from individuals acting in their own self-interest to serve each other.
One of the best-known passages from Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations is,
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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Why do we go to work? It’s to serve ourselves, in terms of providing the ability to satisfy our wants and needs. I was not able to build my own house and I certainly cannot build or repair my own car and I lack a green thumb to be able to grow my own food.
I obtain food, shelter and transportation by teaching economics to scores of students every day.
The money that goes into my bank account is the reward. But my employer benefits, too. It needs an economics teacher, and so it is more than willing to pay me that money to fulfill its mission of making sure students are able to move beyond high school as well-educated, well-rounded citizens. Just as the diners benefit from Adam Smith’s butcher, brewer and baker, school and students benefit from my work.
That’s the beauty of markets. We have different skills, interests and abilities. We direct them in ways that allow us to best provide for ourselves. I don’t have to know how to grow food and the farmer down the street doesn’t have to know how to teach his kid economics. We can trade. The division of labor allows us to specialize, focus on doing one thing well, and direct our energies and talents to doing that, even while we are still students.
I thought I had found that as a student. The only thing I had ever wanted to be was a journalist. I had become one, and was moderately successful. So what changed?
People stopped buying newspapers and businesses stopped buying ads in them. .
As society evolves and new technologies emerge, older ones are often made obsolete. The news industry has had to reinvent itself to adapt to that new reality, meaning newsrooms are slimmer and younger.
That doesn’t mean communications jobs have gone away. Some jobs that are in high demand now - especially in corporate communications and social media - didn’t even exist in their current forms a quarter-century ago.
So how do communications professionals find careers? We rely on wages, which are prices, to signal to would-be job-seekers what jobs are in demand.
According to the Bureau of Labor Statistics, the annual mean wage at a newspaper in 2023 is about $54,000 per year. The mean annual wage for a teacher is $69,000 per year.
Why is one larger than the other? Simple supply and demand. Thousands of people graduate from journalism schools, but find themselves entering an industry where there are very few jobs available. It’s become a regular occurrence in the news industry to see older staff laid off and replaced with recent graduates.
At some point, those in the industry realize “I’m not making enough money here” and a signal gets sent to the brain to find another job.
For me - like a lot of former journalists - it was finding another career. Former colleagues and classmates have become attorneys, entrepreneurs, social media managers and public relations managers.
But what guided us there was prices. Wages are nothing more than prices, and like all prices, they are determined by market forces. And, as Friedrich Hayek writes, those prices guide our behavior.
We don’t need a central planner to say “hey, we have too many journalists. Maybe we need to have fewer people going into that field.” The wage rates for journalists do that for us and direct some of those journalists to higher-paying fields. If there aren’t enough teachers, shortages would cause schools to increase their pay to find the scarce number of employees out there and entice them to come to their school.
That’s what happened in our community, which got tired of seeing many of its top teachers leave for neighboring schools, so it increased its pay. As a result, it now is the destination for teachers from those neighboring districts.
Friedrich Hayek takes Smith’s ideas of the division of labor and how we follow our own self-interest to show how we benefit society. As he writes in “The Use of Knowledge in Society,”
It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses.
Prices work and direct our actions as individuals in a way no planner could ever predict. Our small bits of fragmented local knowledge, guided by prices, guide our decisions, but direct us into the areas that are the most socially-optimal, just as Smith’s “Invisible Hand” thesis predicted would happen.
In my past life as a reporter, the decision I made came because I saw consumers’ habits changing as they preferred free news over the Internet to paying for news and my colleagues being laid off or denied raises for years.
Hayek writes,
If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them.
We don’t need to know why high school economics teachers are in greater demand than people who can write about a city council meeting. The higher wage for one shows us that they are in higher demand and we act accordingly. It’s Adam Smith’s “Invisible Hand” at work - by acting to satisfy our own gain, we direct our work that produces the greatest value not just to ourselves, but to society. Following the price signals to benefit ourselves directs us to benefit those around us.
Want to learn more?
Adam Smith on the Butcher, the Brewer, and the Baker from the Online Library of Liberty
Jacob Sider Jost's Bargaining with the Butcher, Baker, and Brewer: A New Look at Smith’s Most Famous Sentences
Paula Richey and Jeremy Lott's Adam Smith Comics: The Butcher, The Baker, and the Brewer
Garret Edwards' Competition as a Discovery Procedure: Smith, Hayek and Leoni
Peter Foster's Adam Smith's Invisible Hand
Want to learn more?
Adam Smith on the Butcher, the Brewer, and the Baker from the Online Library of Liberty
Jacob Sider Jost's Bargaining with the Butcher, Baker, and Brewer: A New Look at Smith’s Most Famous Sentences
Paula Richey and Jeremy Lott's Adam Smith Comics: The Butcher, The Baker, and the Brewer
Garret Edwards' Competition as a Discovery Procedure: Smith, Hayek and Leoni
Peter Foster's Adam Smith's Invisible Hand