Which books – classics or recently published – should you read if you want to acquire a deep understanding of markets and morality? In this series of interviews researchers from the project ‘What Good Markets are Good for’ make their personal recommendation.
Why did you propose to discuss this book? Do moral sentiments matter for how we think about markets?
For many, Adam Smith is still a great inspiration. Even more people have at last heard of Smith’s most famous book, The Wealth of Nations (1776). But that book gives a one-sided view of his position. It is a rather technical-economic treatise – although Smith does give some hints in The Wealth of Nations about the moral implications of his economic ideas. Our research project is about economics and ethics of the good life. Then it is necessary to also take The Theory of Moral Sentiments (1759) into account. Or actually: that is not only important to us. If people base their position in the free market debate on Adam Smith, they should consider his complete body of thought and not shop around selectively.
How do the two books relate to each other?
That is a question that has often been discussed. In the scientific literature there is even a term for that, it is called “Das Adam Smith Problem.” He first wrote his The Theory of Moral Sentiments, in which he attaches central importance to virtues. Later, in The Wealth of Nations, self-interest gets a lot of emphasis; the thesis is that this eventually works out in everybody’s interest thanks to the ‘invisible hand’ of the market. Did he change his mind about ethics in that book, you may wonder. No, that is not the case, because he also released later editions of The Theory of Moral Sentiments. It remains an interesting question, the relationship between the two books. He never explained it himself and that leaves room for all sorts of interpretations.
Do economics students today still read the work of Adam Smith?
I teach History of Economic Thought to economics students. It is only an elective, but quite popular. The book we use, Economics Evolving; A History of Economic Thought by Agnar Sandmo, gives a good impression of Adam Smith’s economic thinking, although he might have improved his argumentation in some areas if he had also referred more to The Theory of Moral Sentiments, for example when it comes to the invisible hand.
Reading Smith’s original works gives us a better picture; it is very informative and instructive. But with economics students we limit that to a few selected pages or passages. The Wealth of Nations demands a lot of perseverance. The Theory of Moral Sentiments does not, that is an easy read. But it is less systematic in its argumentation than economics students are used to.
I read somewhere that Adam Smith has a very particularistic and phenomenological way of doing ethics – that he discusses many concrete cases of how exactly we make moral judgments in certain situations.
Yes, that is true. And that is also the nice thing about this book: the many observations that Smith makes are often very striking. For example, he explores what it leads to when people start working hard to get rich. His discussions are stimulating, always widening your perspective again and sometimes contrary to what you would expect from an economist. You recognize that this is what people are like, even if you have never consciously noticed it before. The book displays an enormous understanding of human nature.
The book is written against the background of ‘natural theology’: the vision that God created reality for the purpose of making people happy. God has given us everything to make that possible, including different sentiments such as sympathy: our ability to understand others and put ourselves in their shoes. And also our tendency towards mutual sympathy: our sensitivity to harmony with others and the need to be appreciated by other people.
But Smith recognizes that people are not only inclined to positive emotions such as sympathy, but also to jealousy, for example. And he is aware that people are not as rational as economists normally presume.
“Perhaps there is not such a big ‘Smith problem’ after all, I would say.”
The ‘greed is good’ mentality that was portrayed in the film Wall Street in 1987, which is seen by many as inherently connected to market forces and capitalism … how does Smith look at it in The Theory of Moral Sentiments?
That someone is driven by greed and as a result becomes rich, is according to Smith not something that deserves admiration or praise. On the contrary. Nevertheless in practice, he notices, many people still form their judgment about others based on such visible consequences. Wealth generates the sympathy of others. Parents are proud of successful children. In Smith’s view this is a corruption of morality; virtue ethics claims that you should not look at the results of an action, but at the intention behind it.
Still, in a way this human tendency is also good, he thinks. We naturally have a desire to be valued by others. This positive judgment about rich people, it gives people a huge drive to get rich as well, to commit themselves, to work hard. That in turn stimulates the economy, and we all benefit from that.
Somewhere in his book he gives the example of landowners who let laborers sweat on their land to become rich themselves. But the invisible hand of the market also does its work in this case. If more food is produced and offered on the market, the prices will go down. Because of the lower price, the poor can buy enough food. As if it was steered by an invisible hand, the greed of the rich translates into an equal distribution of happiness among all.
Because in the end, Smith reflects some more on the topic, only the most basic things are important for your happiness. If a poor person has enough to eat, he is almost as happy as a rich person. The latter will have to conclude at the end of his life that all his wealth has not contributed much to his happiness – and perhaps he has even missed the important things in life through his hard work. Such as rest and small enjoyments. A quote: “What can be added to the happiness of the man who is in health, who is out of debt, and has a clear conscience? To one in this situation, all accessions of fortune may properly be said to be superfluous. ”
That is quite contradictory. What does he in the end find more important, personal virtues or social consequences?
He does not clearly choose a position and in that sense the book does not provide a systematic ethical argument. In a more positive way, you could say that he paints a very nuanced picture of the complex matter of morality. He makes you reconsider your point of view times and again, that is what I like so much about the book.
But if you ask me to capture the gist of it, yes, then overall he is inclined towards sticking with self-interest. Although he was very critical of Bernard Mandeville, who spoke in his well-known Fable of the Bees of “private vices, public benefits.” That was going too far for Smith, such an explicit approval of vices.
Did you know that Smith’s famous metaphor of the invisible hand is only mentioned once in The Wealth of Nations? But in The Theory of Moral Sentiments he also mentions it and in that instance the idea is the same – so we cannot really have any misunderstanding about that.
The Theory of Moral Sentiments actually presents the psychological mechanisms behind the workings of the invisible hand. And it places economics in the broader context of life as a whole, a society in which morality and a wide range of virtues matter. The difference is that in the economic domain we place a little more emphasis on certain virtues, in particular ‘prudence’ – acting wisely with a view to your own interests.
Perhaps there is not such a big ‘Smith problem’ after all, I would say.
But why is there then so much discussion about it? And why did Smith never explain how the books relate to each other?
Perhaps our questions arise because we do not sufficiently acknowledge the specific purpose for which The Wealth of Nations was written at the time, namely in defence against the Mercantilists. They were pertinently opposed to free trade and therefore in favour of very strict government regulation. They also had their own view of the meaning of money, which – or rather the amount of gold – was for them the measure of the wealth of a nation. Exporting a lot and importing as little as possible was the motto of the Mercantilists, in that way the amount of money or gold increases the fastest. After all, you then get paid by other countries, without the money leaving the country again.
So Smith makes a plea for free trade in response to these Mercantilists. For him money is only a means to keep the economy running, the added value that is created through production is more important. This added value promotes consumption and according to Smith this is what ultimately matters. If you do not trade, you miss out on the benefit of specialization: that everyone is ultimately better off if all countries focus on the production of the goods they are best at and then exchange them for goods that they could themselves only produce against much higher costs.
So The Wealth of Nations was written with a specific purpose. What implications does this have?
Smith argued against the extreme government regulation of the international market that Mercantilists proposed. But externalities such as the negative environmental effects of economic production played a much smaller role at the time. So we cannot conclude that he was against any form of government regulation. He also assigned certain tasks to the government regarding the provision of public goods, such as primary education and infrastructure. He was in favour of a minimalist government, but not for a laissez-faire policy.
The invisible hand is actually also a form of an externality, but a positive one. That landowner or industrialist, is the idea, may only think about his own interests. But unconsciously he also serves the interests of others because of the positive effects that they experience as a result of his economic activities. Yet such positive effects are not self-evident. Sometimes exclusively pursuing self-interest can lead to a major social drama; we have seen enough examples of this during the recent economic crisis.
That markets do not automatically work out well, is also illustrated by the example of Russia and how that country developed after the fall of communism. It missed the required cultural and institutional context to make market forces fruitful for everyone. In that respect Smith is too optimistic, I think. He does acknowledge at places that the free market needs to be embedded in certain cultural and moral practices to contribute optimally to human flourishing, but in the end his faith in the invisible hand is much stronger.
What do you want to add to our understanding of Adam Smith with our project on Moral Markets?
In the sub-project on Adam Smith we mainly take a theological approach. He is, of course, a child of his time, like everyone else. An interesting question is how he was influenced by the Calvinistic theology of his time. Paul Oslington has compiled an interesting book about it a few years ago, Adam Smith As Theologian. I myself am going to focus specifically on a comparison between the ethics and the sociological view of Calvin and the socio-economic vision of Adam Smith. That will hopefully further sharpen our image of Smith. We hope to be able to show even better that his vision on market forces has a context that you cannot ignore and must understand properly if you quote him in debates on market forces.
Series "‘Good Markets’ Book Interviews":
Articles in this series:
- Why GDP Gradually Became Dominant in Economics
- False Contrast between Radical Individualism and Socialist Collectivism
- Inevitable that We Occasionally Hurt Each Other in the Market
- The Psychological Mechanisms behind the Workings of the Invisible Hand