Adam Smith: Morality and Markets
Updated: Jul 16, 2019
Who was Adam Smith? And did he really believe in benevolent markets?
It is a strange and fitting coincidence that an Adam has been labelled as the father of modern economics. Adam Smith’s mark on history is at once indubitable and biblical. Indeed, his “Wealth of Nations” can be found in the great libraries of the world alongside the Bible as well as works by Newton and Marx, among other great scientists and philosophers. Smith’s primary concern was undoubtedly moral philosophy, and it is in this field – rather than the field of economics – that his interest in observing human nature and theorising about it began. Immersed in the socio-historical milieu of 18th century enlightenment Scotland, Smith engaged in contemporary issues of philosophy, justice and economics.
Essentially, Smith’s concern lay in the nature of humankind, and how to go about growing the “wealth and power of nations” which was the central economic question of the time (and may well still be). This is noteworthy because, unlike today, economic thinking was not divorced from political and philosophical thinking in Smith’s time. To understand Smith correctly, we too must see the connections between morality, economic activity and government policy. Emerging from Smith’s core beliefs of human nature was the idea of a free, liberal market, where “animal spirits” (Keynes, 1936) drive the economy to an efficient allocation of resources, or at the very least, a more efficient allocation than the one governmental systems would arrive at. In this essay, I will attempt to re-link morality and economics, as Smith did, and show how his ideal system of economic activity (one which is widely accepted today) was born of his idea of a fairer, more just world. Additionally, I will aim to show how the rise of the Scientific Method as the basis of economic analysis undermines questions of morality in modern economics and discuss how we might rediscover these moral ambiguities in an attempt to correct certain market failings in the case of the poor and disenfranchised.
Smith imagined a free, liberal market, where “animal spirits” (Keynes, 1936) drive the economy to an efficient allocation of resources
Smith’s work, “The Theory of Moral Sentiments”, was a huge success in its time, and provided the necessary base for Smith to move from his work on individual nature to public system. It is important to understand therefore that the economic discourse of Adam Smith is embedded in justice, human nature and questions of correct government. In “The Theory of Moral Sentiments”, two key questions are addressed (Strathern, 2001). Firstly, Smith questions what actions should be deemed “virtuous” and secondly asks: why do we see some actions as virtuous while others as dishonourable?
Why exam Adam Smith’s work in moral philosophy when considering his economic contributions? Smith’s economic writing was embedded in his philosophical thinking, and to exam the economic and ignore the moral is losing half the picture. From a young age, Smith was a keen learner, and challenged the traditional moral assumptions of his time. As opposed to the established view – which considered morality an external, objective and established order – Smith posited that morality was instead a force that comes from within each individual human being. For Smith, an internal “spectator”, whose judgment arises from the culmination of all our individual social and moral conditioning, informs us as to the rightness or wrongness of our actions. This “inner man” is essentially the voice of conscience, the inner sense of pride or guilt we inevitably experience after action. Some have even criticised Smith for condoning an inherently and irredeemable selfishness unique to mankind. However, in “The Theory of Moral Sentiments” we see Smith is merely realistic about the nature of humankind, while simultaneously aware that this behaviour can benefit society, and places faith in people’s interest to feed themselves and their families which is a key driver for economic behaviour and necessary for a prosperous nation. In amusing and unquestionable support for the assertion that for Smith, morality and economics are inseparable, one should note that his idea of the “invisible hand” came from his seminal work, “The Theory of Moral Sentiments”, a work of moral philosophy, rather than his economic text, “The Wealth of Nations”.
Smith notes “The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society” (Smith, 1759). In summary, the “man of system”, the man who moves people around like chess pieces on a board and prescribes a system of behaviour that is both universal and individually applicable (an inherent paradox), fails to take cognisance of the efficiency of allowing individuals freedom to operate for their own ends. It is in this way that an economy will ultimately be guided towards efficiency, opportunity and prosperity. For Smith, the great economic questions should only be answered with respect to the moral element of human nature, and with a mind to increase to prosperity, not only of the rich and powerful, but also of the poor and lowly.
Smith wrote at a time in history where the scientific method was gaining huge momentum. As such, economic discourse was becoming increasingly scientific in nature. Strathern (2001) posits that Smith’s himself has an idea of science conforming to Newtonian principles. For Smith, the “natural law” that the Physiocrats so often referred to, was not a metaphysical superstructure, but a result of the inevitable way the economy arranged itself thanks to the human drive to preserve and improve life. Strathern (2001) also points out the argument of some authors that Smith was the “founder” of the core ideas of supply and demand in an economy. The “natural law” in this view refers very basically to the relationship between price, demand and supply.
Though Smith was deeply concerned with issues of injustice, inequality and poverty, he was not a hopeless idealist. Smith, embracing the scientific method, was a scientist, concerned with physical reality, things as they happened to be, not as he wished they were. Because Smith was introducing Economics to the world as an independent academic and scientific discipline, there exist natural tensions in his work. We may find some elements of Smith’s work where his personal belief system and idea of virtue conflicts with ideas of an efficient economy. It is possible that had Smith been more fortunate in the length of his life, he would have been able to provide satisfactory replies to any apparent contradictions. An example: Smith was a clear advocate for education and the “civilisation” of the working class. This seems, however, to clash with the idea of a “division of labour” whereby workers focus on perfecting one task among many rather than attempting to produce a good from start to finish individually. Of course, it seems unlikely that a worker, educated and free-thinking individual would appreciate a menial chore for a job for long. It seems Smith’s idea of market efficiency necessitates the existence of labourers who, in Smith’s own assessment, cannot be said to be realising their full potential as human beings.
Ideas like the invisible hand and division of labour, and our contemporary understanding of them exist largely thanks to Adam Smith. His idea of the ideal market might be summed up in the term “free trade”, and the economic axiom represented when Smith writes: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.” Markets provide goods more cheaply than we can ourselves make them. Of course, Smith would acknowledge that a larger free trade area allows more room for specialisation and prosperity for all. Hence our contemporary drive for free trade and economic openness, though in recent years this goal has been undermined for socio-political reasons (here lies an example of why we should not wholly divorce economics from social and political factors).
It is pertinent here to remind ourselves that Adam Smith was not a man of unquestioning doctrinal beliefs. Laissez faire was a policy that might aid free trade but he was not a preacher for laissez faire in the extreme sense. Smith saw room for governments to participate in the economy, in a spirit of public service, if it proved itself competent. The individual certainly stood primary in Smith’s idea of economic activity – since he saw in humankind the capacity to serve social welfare through promoting their individual ends – and thus presented a case for individual freedom which saw regulatory bonds in England lessen in the years after his work (Viner, 1927).
In The Wealth of Nations Smith reflects the philosophical atmosphere of his day, using deductive logic instead of appeals to metaphysical or abstract philosophical reasoning in order to present his system of an economy made up of self-interested people acting in a manner that is consistently beneficial to all participating in the system. Apart from the clear goal of Smith’s work to identify the source and nature of the wealth of nation, Smith grapples with a second issue. This issue presents to us a clear illustration of the relationship between markets and morality for Smith. He expressed concerned over the rightful distribution of profits. Since – for Smith – value is derived from the labour effort put into producing a commodity, he wondered if landlords should receive rent and capitalists profit, not being the labourers who create value in the first place. We cannot here explore the issue in great detail, suffice to say the issue illustrated that economics was not a place devoid of issues of morality for the “father of modern economics” (Rima, 1967).
Smith illustrates to us that it is treacherous to prescribe an economic course of action for a government unless one has an idea of the ideal end of such action, its implications for social justice and its impact on human life for the ordinary person. Smith’s remarkable faith in the rationality and capability of each person to make economic decisions and his belief in their pursuit of self-preservation and self-interest are core to his idea of the functioning of an economy. For Smith, this makes up the natural order, and this order promotes the welfare of society. It is clear that the philosophical background of Smith pervades and permeates his Wealth of Nations. His theory on the origins and nature of morality and the nature of the human being plays a significant role on his later work, and ultimately, believes in the natural liberty of humankind, undoubtedly clear in his economic prescription. Perhaps it is prudent for us to encourage a re-examination of Smith’s work in our contemporary world. Smith’s major lesson for us today may be that, while economic thinking benefits from scientific rigour, it is impoverished if we divorce moral considerations from it. Economic growth should only be considered valuable inasmuch as it produces happier, more dignified living conditions for human beings. Growing inequality may be a symptom of our reluctance to engage questions of fairness, justice and morality, and though these are not as easily measured as gross domestic products or inflation rates, they are more important for the happiness and prosperity of society, both poor and rich.
For more information, check out these sources:
Barber, W. J., 1967. A History of Economic Thought. 1 ed. s.l.:Penguin.
Free to Choose Network, 2016. The Real Adam Smith: Morality and Markets. [Online]
Available at: https://www.youtube.com/watch?v=V6S6pMsKzlI
[Accessed 5 October 2017].
Keynes, J. M., 1936. The General Theory of Employment, Interest and Money. 1 ed. s.l.:Palgrave Macmillian.
Rima, I. H., 1967. Development of Economic Analysis. 7 ed. s.l.:Taylor & Francis.
Rosenberg, N., 1960. Some Institutional Aspects of the Wealth of Nations. Journal of Political Economy, 18(6), pp. 557-570.
Smith, A., 1759. The Theory of Moral Sentiments , Cambridge: Cambridge University Press.
Strathern, P., 2001. Dr Strangelove's game : a brief history of economic genius. 1 ed. New York: Penguin Putnam.
Viner, J., 1927. Adam Smith and Laissez Faire. Journal of Political Economy, 35(2), pp. 1-35.