Freeman

ARTICLE

The Invisible Hand

NOVEMBER 01, 1964 by WYATT B. DURRETTE JR.

Mr. Durrette has finished law school and is doing graduate work in Political Science at Johns Hopkins University.

Our giant government, giant corporations, and giant unions make it difficult to see how the market economy functions and to understand the role profits play. Though we frequently refer to the "invisible hand," it is seen with little more clarity today than when Adam Smith identified it in 1776:

… by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he fre­quently promotes that of the society more effectually than when he really intends to promote it.

The following personal experi­ence may help to exemplify how the market functions and profits play their part.

To help defray expenses while in law school, I worked part time as equipment manager for the varsity athletic teams. There, in the locker rooms, I met a senior of some ingenuity who had estab­lished and developed a popular and profitable orange juice concession.

He offered to pay me a certain amount each afternoon if I would help. The juice sold for 10 cents a cup, cash or credit, and we dipped it out from behind the equipment counter. This worked fairly well, except that now and then, if there was a heavy call for shoulder pads or other equipment, the lines would lengthen and im­patience would cost us sales of juice.

Since the "owner" of the juice business had no other reason to stay in the locker room, he soon offered me a better deal—50 per cent of the profits if I would oper­ate the concession. He would see that ice and juice were always available.

So, I became a partner and con­tinued to operate the concession as before, giving little thought to measures to increase sales. There were no complaints, and it never occurred to me to make changes. I think now that my complacency then stemmed from the fact that I was doing all the work for only half the profit.

The situation changed when my partner graduated. The next fall, as sole owner of the concession, I began to contrive ways to increase sales, and profits. As Adam Smith might have observed, I was moti­vated only by the desire for per­sonal gain; but I realized that if I failed to provide a good product and adequate service at a reason­able price, my sales would decline.

My first innovation was to offer a free cup of juice to each cus­tomer who bought five in a day. Immediately, many of my 3-and 4-cup boys began to down an extra cup or two to get the free one.

They were getting more juice for each 50-cent outlay, and I was gaining sales and profit.

Next, with equal satisfaction to all concerned, I offered a free cup for each ten purchased in a week.

Finally, I moved the concession from behind the counter to a cen­trally located table, invested in two large plastic containers and six dippers, and instituted self-serv­ice. The increased volume of busi­ness was amazing. Again, the cus­tomers were pleased with the changes I had made in an attempt to increase my profit.

Here, then, was a monopoly operated by a profit-seeking en­trepreneur. But, contrary to the popular myth, no one was being exploited. The willing customers were getting more product for their money and faster service.

Yet, the myth persists, and the assault on profits continues. The national government first takes half, then taxes again the divi­dends received by owners. These and other highly progressive in­come taxes siphon off much of the venture capital so desperately needed for economic progress.

Of course, different conclusions can be drawn from my experience and arguments made that it has no relevance to the affairs of big industries today. Still, it may afford some slight challenge to the prevailing dogma.

ASSOCIATED ISSUE

November 1964

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