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An Especially Appropriate Day to Recall Some of Adam Smith’s Wisdom

Here’s a letter to the Washington Post; astute readers will realize that I’m simply summarizing a point made recently by Tim Worstall:

Harold Meyerson apparently believes that the correct criterion for measuring Wal-Mart’s merits is how much it pays to suppliers of one of its inputs (“D.C. Council stands for fair wages and against Wal-Mart,” July 17).  Specifically, the more Wal-Mart pays to suppliers of labor services – that is, to workers – the more meritorious is that company.  The less it pays to those suppliers, the more wicked is Wal-Mart.

On this, the 223rd anniversary of the death of Adam Smith, it’s appropriate to point out that the ultimate goal of economic activity is consumption, not production.  As Smith wrote in 1776, “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.”*  Wal-Mart, like all private producers in a market economy, is not in business to make its suppliers wealthier.  Rather, it’s in business to earn profits by pleasing consumers.  To that end, Wal-Mart aims to reduce its costs as much as possible.  Like all competitive businesses, it properly strives to produce more and more output with fewer and fewer inputs.

Mr. Meyerson’s complaint, then, is really that Wal-Mart acts as a profit-seeking firm in a competitive industry rather than as a charity for the benefit of low-skilled workers.  There’s a place for philanthropy, of course.  But to criticize a profit-seeking firm for acting as a profit-seeking firm rather than as a charitable organization – as well as to suggest that Wal-Mart is unique among private firms in acting this way – reveals deep intellectual confusion.  Further, to imply that such cost-cutting retards rather than promotes economic growth betrays a weak grasp of economics.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776), Book IV, Chapter 8, paragraph 49.

The Online Library of Liberty has collected here some wonderful Smithian resources.