Adam Smith's Wealth of Nations: Economics and Moral Philosophy

Introduction: Smith as Economist and Moral Philosopher

In his classic text on political economy, An Inquiry into the Nature and Causes of the Wealth of Nations, eighteenth-century Scottish philosopher-economist Adam Smith deftly laid the foundation for contemporary discourse concerning ethical issues in business. Modern scholars characterize the work as one "which [argues] that a nation's wealth is maximized by permitting individuals to pursue their own interests, rather than through political intervention to secure some notion of the common good" (Oakley, 1997, p. 383). Smith largely focuses on topics such as the division of labor, self-interest as the main principle of economics, national wealth as represented by production capacity rather than by stocks of gold (introducing in rough form the concept of gross national product), free markets, a theory of real price, a theory of rent, and not least, the principles of market forces:

"The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour." (Smith, 1776).

Adam Smith describes the free market as "an obvious and simple system of natural liberty" (Smith, 1776). In short, he reveals the theoretical basis of the economic system known today as capitalism.

Smith is generally known as the founder of the modern school of political economy, particularly with his celebrated Wealth of Nations, published in 1776. Those theorists who support free market economics have conferred on Smith the honor of being the founder of their discipline. Yet despite his special status in the history of economic thought, it is not generally recognized that Smith was a philosopher by vocation and published in the areas of moral philosophy and jurisprudence. The reason is that economic theory has undergone a radical epistemological transformation since Smith's day; he is now considered a political economist whose theories were founded not only on the facts of human economic life but also on the value judgments that yielded optimal economic decision-making.

Smith's liberalism was qualified by his commitment to a moral worldview. Contemporary scholarly attention to the psychological judgments on which the Wealth of Nations is frequently based has not merely given Smith's economic analysis renewed prominence but has also attracted attention to and made familiar Smith's classic statement:

"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. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens. Even a beggar does not depend upon it entirely." (Smith, 1776, p. 19).

Smith expounds two seemingly contradictory but ultimately empirical observations about economic man:

"[The] division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another." (Smith, 1776).

He accepts that greed and other desires were an aspect of human nature, but he does not conclude that the satisfaction of those desires should become the high point of human endeavor or the governing principle of public life. The foundation of Smith's society was legal constraint on excessive self-love, not self-love itself. "Self-interest" was barely mentioned in the Wealth of Nations, but there are frequent references to both self-love and self-interest in the Theory of Moral Sentiments, where the two terms were given seemingly incongruous meanings. Smith did not regard self-love as the foundation of society; in modern terms, the capitalist system was not originally meant to be built on greed.

Given that Smith's approach to economics was much influenced by his previous work in moral philosophy developed in the Theory of Moral Sentiments, it is instructive to note in what moral context Smith formulated the key ideas in the Wealth of Nations. He had previously established himself as not only a brilliant economist but as a moral philosopher deeply concerned with the human element:

Self-Interest, Benevolence, and the Role of Sympathy

"Are you in earnest resolved never to barter your liberty for the lordly servitude of a court, but to live free, fearless, and independent? [Then…never] enter the place from whence so few have been able to return; never come within the circle of ambition; nor ever bring yourself into comparison with those masters of the earth who have already engrossed the attention of half mankind before you." (Smith, 1759).

The tension between the altruistic and egoistic modes of human behavior is often exemplified by references to Adam Smith. In the Wealth of Nations, Smith emphasizes the notion that we cannot expect people to help each other out of sheer goodwill: where help is given, selfish motives lurk behind it (Smith, 1776). Nonetheless, he begins the Theory of Moral Sentiments with a touching testimony to altruism:

"There are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it." (Smith, 1759).

Building on the Theory of Moral Sentiments, Smith stated in Lecture 16 of his Lectures on Rhetoric (1762) that:

"It is with the misfortunes of others that we most commonly as well as most deeply sympathise. A historian who related a battle and the effects attending it, if he were no way interested, would naturally dwell more on the misery and lamentations of the vanquished than on the triumph and exultations of the victors." (Smith, 1762).

This principle springs from Smith's conception of human nature. According to Smith, humans are motivated by two traits: self-love and benevolence. The bridge between both sentiments is determined by the human psychological characteristic of sympathy. Smith's earlier work laid great emphasis on the spirit of benevolence, arguing — seemingly paradoxically, at least at first glance — that the wellspring of benevolence is self-love combined with man's capacity for sympathy with his fellows:

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it." (Smith, 1759).

The ultimate goal in all of this is human happiness, which represents a quasi-Aristotelian balance between tranquility and enjoyment. It should be noted that Smith's idea of human happiness is not founded on any principle of utilitarianism, which later came to dominate post-classical economic theory.

In the Wealth of Nations, Smith recommends a free enterprise system based on the argument that free interactions among self-seeking individuals may lead to opulence. However, in the Theory of Moral Sentiments, Smith suggests the possibility that the manner of moral judgment — namely, sympathy — may reduce individual differences among people in society (Smith, 1759). There are passages in the Wealth of Nations, however, that indicate that the attempt to locate sympathy in that treatise may not be entirely unfounded. Developing the idea in the aforementioned quote, Smith writes:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own self-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." (Smith, 1776, p. 119).

This quote says very little about the modus operandi of an individual; instead, it informs us about the preponderant motives in the marketplace. In addition to underlining the selfish motives in trade, this passage drives home the fact that the modern conveniences and plenty that people enjoy are obtained from trade, and that it is the human propensity to trade that underlies the division of labor:

"As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of, so it is this same trucking disposition which originally gives occasion to the division of labour." (Smith, 1776).

Again he emphasizes self-love, but with a twist — it is the needs of commerce that mediate:

"Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer." (Smith, 1776, pp. 118–119).

The Invisible Hand and Free Market Theory

The unintentional consequence is the same as before: an increasingly respectable and thriving nation, shaped by what Smith deems the "invisible hand," from which he concludes that "it is the necessary, certain propensity in human nature . . . to truck, barter, and exchange one thing for another" (Smith, 1776).

Also of significance is the interplay and conflict between self-love and benevolence by way of "sympathy," which would serve as the template on which all subsequent economic theory would be founded. Most economic theory is essentially a debate between the virtues of individualism and benevolent altruism by way of the state as intermediary. In short, economic theory concerns but two phenomena: production as the goal of the most efficient combinations of human labor combined with capital, and the subsequent distribution of such. Smith explains:

"What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." (Smith, 1776).

Once production has been effected, the hugely important question of how to distribute it arises. It is this question that implicitly informs Smith's political economy.

That the Wealth of Nations and the Theory of Moral Sentiments flowed from the same pen may be regarded as enigmatic. However, it is important to underscore the fact that denying inconsistency between the two works is not the same as denying the existence of tension between ethics and economics in the thought of Adam Smith. Smith likely assumed that readers of the Wealth of Nations would also have read the Theory of Moral Sentiments. It is certainly to the latter that one must turn before the full dimension of Smith's thought can be illuminated, as it is only there that readers encounter a full treatment of the complex psychology of self-love. Smith exhibits a scientific purpose in the Wealth of Nations, much as he had years before in the Theory of Moral Sentiments, both works arguably utilizing their means in direct pursuit of the end of revealing the hidden foundations of decent society.

Adam Smith is traditionally considered one of the principal founders of scientific economics and the first great advocate of economic liberalism based on the principle of laissez-faire. This principle appeared before Smith, of course, but it was Smith who, through his famous parable of the invisible hand, first imbued it with a potency it has held, aside from the Keynesian interlude, ever since.

"Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and 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." (Smith, 1776).

Perhaps the most well-known of Smith's theories is that of the "invisible hand," which states that "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" (Smith, 1776). The disciples of what we call neoliberalism claim Adam Smith as their prophet, the first to demonstrate how the pursuit of self-interest spontaneously generates the best possible social order — the maximum good for all and the best allocation and full employment of a society's resources.

The idea is hardly new. The capability of a well-ordered polity to exploit selfishness to the greater good, without duress or overt design, has been depicted by many other scholars, with perhaps the most well-known example being Bernard Mandeville's Fable of the Bees (Mandeville, 1988). Adam Smith's significant contribution is that he takes the proposal earnestly, elaborates it admirably, and scrutinizes all of its consequences. In Book Three of the Wealth of Nations, Smith attempts to explain the mechanism by which feudal economic and social relations in Europe eventually came to be transformed into relations typical of and dependent on capital markets. The feudal varieties were exemplified by the sway and clout of larger landowners, who sustained countless retainers. However, Smith argues that, with the steady manifestation of lavish possessions, the grand proprietors chose to adorn themselves rather than maintain their retainers:

"For a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged...the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them." (Smith, 1980, pp. 418–419).

Smith notes that powerful landholders, faced with the realities of their retainers dismissed and their tenants' newfound independence, ultimately bargained their power away "not like Esau in time of hunger and necessity, but in wantonness of plenty, for trinkets and baubles fitter to be the playthings of children than the serious pursuits of men" (Smith, 1980, p. 421).