...My antitrust professor in law school used the example of getting the proper number of eggs and slices of bacon into NY City everyday to show the differences between free markets and command economies under communism. Under the free market each resturant and grocer decides how many eggs and packages of bacon they can sell each day. They both have incentives to get the number right. If they buy too few, they will lose sales to cometitors. If they buy too many they will have waste to deal with. Working through suppliers they each can call in orders and arrage delivery. In the socialist or communist system a central authority, possible thousands of miles from New York has to decide how many eggs and slices of bacon to alocate to New York, then arrange transportation and distribution. The general result was to underestimate demand causing rationing and waiting in long lines. Before the demise of the Soviet Union, it was common for people to wait in long lines to buy bread, something unheard of in the US.
The East-West divisions following World War II engendered an unintended four-decade-long experiment in comparative economic systems--Smith versus Marx, so to speak. The results, evident with the dismantling of the Iron Curtain, were unequivocally in favor of market economies. The consequences were far-reaching. The long-standing debate between the virtues of economies organized around free markets and those governed by central planning came to an end. There was no eulogy for central planning; it just ceased to be mentioned, leaving the principles of Adam Smith and his followers, revised only in the details, as the seemingly sole remaining effective paradigm for economic organization. A large majority of developing nations quietly shifted to more market-oriented economies.
But even earlier in the postwar decades, distortions induced by regulation were viewed as more and more disturbing in the developed world. Starting in the 1970s, American Presidents, supported by bipartisan majorities in the Congress, deregulated large segments of America's transportation, communications, energy, and financial services industries. Similar initiatives were advanced in Britain and elsewhere. The stated purpose was to enhance competition, which following Adam Smith was increasingly seen as a significant spur to the growth of productivity and standards of living. The slow, but persistent, lowering of barriers to cross-border trade and finance assisted in the dismantling of economic rigidities.
By the 1980s, the success of that strategy in the United States confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economies. Flexibility implies a faster response to shocks, a correspondingly greater ability to absorb their downside consequences, and a quicker recovery in their aftermath. Enhanced flexibility has the advantage of enabling market economies to adjust automatically and not having to rest on policymakers' initiatives, which often come too late or are misguided. Such views, which echo Jean Baptiste Say in some ways, clearly have been paramount in a renewed twenty-first century appreciation of Adam Smith's contributions.
Earlier in the speech Greespan said:
What we now know as the rule of law--namely protection of the rights of individuals and their property--widened, encouraging people to increase their efforts to produce, trade, and innovate. A whole new system of enterprise began to develop, which, though it seemed bewildering in its complexity and consequences, appeared nonetheless to possess a degree of stability as if guided by an "invisible hand."...It takes some kind of willful ignorance for people like Castro and Chavez to persist in a fail economic model. Greespan's speech on Adam Smith's contributions to economic thought is worth the read.
He (Adam Smith) concluded that, to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of ... other ... men."2 "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."3 The individual is driven by private gain but is "led by an invisible hand" to promote the public good, "which was no part of his intention."4 This last insight is all the more extraordinary in that, for much of human history, acting in one's self-interest--indeed, seeking to accumulate wealth--had been perceived as unseemly and was, in some instances, illegal.
In the opening paragraphs of the Wealth of Nations, Smith recognized the crucial role played by the expansion of labor productivity in improving welfare when he cited "the skill, dexterity, and judgment with which labor is generally applied" as one of the essential determinants of a nation's standard of living. "Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must in that particular situation, depend upon ... the productive powers of labor."5 More than two centuries of economic thought have added little to those insights.