The great paradox at the heart of Adam Smith’s genius

Adam Smith’s reputation is paradoxical. He is celebrated as the author of The Wealth of Nations, perhaps the most significant work of political economy ever written, and yet at the same time held almost personally responsible for the worst aspects of Victorian capitalism.

In order to make a fair assessment of his thought, the proper starting point is his early essay on moral philosophy, Theory of Moral Sentiments.

In this work, he argued that while human beings are endowed with the capacity to reason, our behaviour tends to spring from instincts such as the impulse for self-preservation and sexual desires predicated upon the need to continue the species. Thus, he wrote of “hunger, thirst, the passion which unites the two sexes, the love of pleasure, and the dread of pain”. However, by putting instincts on the centre stage he immediately runs into a problem: where does morality come from? How do people form moral judgements, even about their own behaviour, indeed perhaps sometimes holding themselves to account?

Smith’s response to this was to invoke a certain conception of empathy. Put simply, he argued that we have the ability to sympathise with other people, to put ourselves in their position, and to judge our own behaviour from their perspective. In effect, we internalise an impartial spectator, which enables us to make judgements about our own behaviour and that of other people. The moral and social order emerges out of a process of mutual sympathy and accommodation between individuals.

It must be said that it is not clear that these ideas fit too well with the position that Smith takes in The Wealth of Nations. Although the idea that humans are motivated by instincts of self-preservation and self-interest is found in both works, in the later book he claimed that the social and moral order is an unintended consequence of the pursuit of self-interest: in a free market system, where perfect liberty reigns, people acting in their own self-interest will be guided by an “invisible hand” to the benefit of the social order as a whole.

To get a sense of this argument, imagine setting up a shop selling religious books. In doing so, you satisfy a demand (for books) and create jobs for people. Rational, self-interest requires that you price your books at the appropriate level, otherwise people will buy them elsewhere; and you have to pay your workers a fair wage, for the same reason: they’ll work elsewhere if you don’t. And if you decide only to publish books by German theologians (probably not a good move!), then your competitors, in order to maximise their profits, will start to sell the works of Anselm, Aquinas, and the like, in order to exploit that particular market niche. 

In theory at least, then, self-interest, together with our ability to respond appropriately to the demands of the market, will facilitate the development of a stable and mutually beneficial economic system. But, of course, the devil is in the detail, and the trouble is that while this might work beautifully “in theory”, it has never worked out quite like this in practice. This has damaged Smith’s reputation. Although it is perhaps unfair that his name is associated with the excesses of laissez-faire capitalism, it is easy enough to understand how this has happened.