[Note – The following long-ish post was written as part of an independent study on the history of economics. I thought it might interest one or two of you out there.]

Adam Smith did not believe that man was solely motivated by self-interest. The first sentence of The Theory of Moral Sentiments (TMS) makes the case quickly enough: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.” In this brief essay, I will explore Adam Smith’s conception of human nature and human motivation with a focus on the role of sympathy and conflicting passions. I will then connect Smith’s microfoundations (to use an anachronism) to his arguments concerning the relative efficacy of markets and states in producing socially beneficial outcomes. Drawing on Viner (1927), Coase (1976), Rothschild and Sen (2006) and Kennedy (2009), I argue that Adam Smith was not a naïve proponent of laissez-faire, and never argued that an “invisible hand” automatically coordinates economic activity to produce optimal results when left alone (see Kennedy 2009 for an excellent treatment of this myth). Rather, Smith focused on the institutions that channel self-interest into beneficial or injurious outcomes (Rosenberg 1960). Smith did argue that in many cases where contemporary governments attempted to manipulate trade, they did so in error, but he also left open three tremendous roles for government: maintaining property rights, establishing justice, and building public works.

The introductory quote to this essay comes from Adam Smith’s first major work, first published in 1759. Another, much more famous quote, is often seen as being in contradiction to this first principle, “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.” (Wealth 15) The inconsistency between the seemingly self-interested, rational, “truck, barter, and exchange” man of Wealth contrasts with that of the sympathetic man of TMS. 19th century German scholars termed this Das Adam Smith Problem, and argued that the two books should be read separately. More recent scholarship (especially the incredibly influential Viner 1927) has argued that Wealth is misread. A closer reading of even this passage about the brewer and the baker shows that it follows a more nuanced treatment of the problem of coordination in a society characterized by the Division of Labor: “In civilized society he stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons… [M]an has almost constant occasion to for the help of his brethren, and it is in vain for him to expect it from their benevolence only.” (15) So here we see an easy solution to a supposedly intractable problem: men are driven by multiple motivations. They are benevolent, yes, but they are also self-interested. In particular, as argued in TMS, men are most benevolent to their family, close friends, and local communities . Thus, we can expect benevolence from our friends with some frequency. But in a complex commercial society, we are reliant on the labor of thousands or more to produce our clothes, pins, beer and bread. So, when we are dealing with the countless others who we do not have strong personal ties to, we find other ways to coordinate, namely, by exchange motivated from self-interest (see Coase 1976 for a detailed discussion of this whole paragraph’s argument). The question then becomes, when does such an arrangement work well?

Before tackling that question, I want to briefly explain the connection between sympathy and self-interest. In TMS, Smith argues that men are driven by sympathy – we imagine ourselves in the shoes of another and through that act of imagination feel a part of what they feel. He spends a great deal of time exploring how this process works, and sometimes fails to work (as when someone feels too great a pain from a small injury and thus loses our sympathy). He also explores the role of the “impartial spectator” – the view we attempt to acquire when we wish to judge the morality of our own actions or someone else’s. One key feature of sympathy, for Smith, is that since joy and prosperity are more pleasant to experience, we desire to be around and give high regard to those who are successful. Because we regard the prosperous highly, and because we wish to be highly regarded, we end up pursuing our self-interest more strongly than we would if left to our own devices – after all, the very rich and the modestly well off eat the same amount of food, and have equally serviceable shelter from the cold. Basic human needs, or some sort of intrinsic self-interest, could not motivate ambition or avarice past a certain point. Rather, sympathy itself engenders such passions (see section III, ch. 2, “Of the origin of Ambition and the distinction of Ranks”, e.g. “It is because mankind are disposed to sympathize more entirely with our joy than with our sorrow that we make parade of our riches and conceal our poverty. … [I]t is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty.”). Thus, man’s ambition and avarice (the lusts for political power and wealth) are products of our sympathy reflected back on ourselves. But these lusts are tempered too by other passions – for example, sloth and the desire for luxury temper our drive to succeed.

So, now we understand a bit about why Adam Smith thinks that men are driven by self-interest, but also why they are not solely driven by self-interest. The next key insight is that our self-interest can lead us to do good or ill for society, depending on how it is channeled. For example, in another famous quote, Smith notes that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (Wealth 148) Here men act strictly in their self-interest, but in a collective fashion, and one that is detrimental to the public. In total, Smith notes approximately 60 places in Books 1 and 2 where self-interested actions lead to malign consequences (Kennedy 2009: 255). Mercantilism itself is a key example for Smith – what is good for one set of merchants is, in this case, bad for society as a whole. The question then becomes, when does self-interest lead to good outcomes? Note that Smith does not, as far as I can tell, neatly distinguish between (for example) self-interest within the rules of the economic system and self-interest with guile, which seeks to alter the rules (through political action, for example). The drive to make large enterprises which have the power to fix prices, the drive to acquire a monopoly from the state over a certain kind of trade, and the desire to get the best deal in a given transaction are all forms of self-interest and none is neatly separated from the others. This line of thought requires further investigation however, as does the general problem of the extent to which Smith separates the political and economic.

Next, I want to pause for a moment to consider the question of laissez-faire. Adam Smith is often argued to be one of the fathers of this intellectual tradition. Wealth is read as an attack on government’s interference in the economy through the mercantilist tradition. Smith argues for a “system of natural liberty”, which connects individual liberty and positive economic outcomes. There is something to this argument. However, as Viner (1927) notes in “Adam Smith and Laissez-Faire”, Smith was far too pragmatic, empirical and eclectic to hold to a doctrinaire position on government non-interference. Smith is a strong proponent of the elimination of such government measures as restrictions on trades through apprenticeship and guild systems, restrictions on the use and title on lands, and especially restrictions on foreign trade (see Viner 1927: 213). However, Smith also notes the many circumstances when self-interest and the natural order of things lead to negative outcomes. For example, the division of labor taken to the extreme leaves men narrow and incapable of innovation. Smith argues for a system of public education to prevent this decline (Wealth 839-840).

More generally, Smith sees three roles for the government: establishing and maintaining property rights, building public works that would not otherwise be built because of collective action problems (again, apologies for the anachronistic shorthand), and lastly the stunningly large “duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it.” (Wealth p.??, see Viner 1927: 223) This mandate, Viner argues, was not seen as particularly onerous by Smith, but to modern eyes it reads like an incredibly large mandate for civil rights and anti-discrimination legislation and enforcement, among many other things.

In sum, Smith saw the market as a societally useful coordinating system for harnessing self-interest, one of man’s many motivations, to produce good outcomes. Smith did not think markets always worked, that they worked perfectly, that they worked solely in the absence of any government involvement, or the like. Most importantly, to me, Smith never denied the obvious ways in which people are altruistic or other-regarded, rather, he focused on the limitations of such motivations for coordinating a complex society. Indeed, this scope of benevolence is part of Adam Smith’s distrust of politicians – even those who are most altruistic may still be focused helping a fairly narrow subset of others, and may end up hurting the whole.