Adam Smith: A Theory of Moral Capitalism?

Adam Smith: A Theory of Moral Capitalism?
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By Scott Dewey

British Prime Minister Margaret Thatcher, the "Iron Lady" of the UK's local version of the global neoliberal conservative reaction of the late 1970s against the various more liberal social and fiscal policies of the earlier postwar decades, reportedly carried in her purse a copy of Adam Smith's famous book, The Wealth of Nations.

The Wealth of Nations is a behemoth; my pocket paperback copy runs to more than 1,200 densely printed pages and is two inches thick. So the Iron Lady was enduring significant opportunity costs by carrying that book around with her, instead of all the other potentially useful or enjoyable items that might have fit within the same space and weight within the limited extent of a handbag.

Thatcher, who was unquestionably a highly intelligent woman, as well as clearly obsessive and ideologically rigid, may actually have read Smith's book in its entirety, perhaps even more than once, and certain favorite passages multiple times. She was a busy woman, though, and cannot have had that much time for pleasure reading. So it seems likeliest that she carried the book around primarily for the comfort and confidence of always having close to her what was, for her, the holy book of her neoliberal, free-market secular religion--much as some other people, depending on their beliefs, might carry around the Christian Bible, the Muslim Q'uran, or a pocket copy of the U.S. Constitution (or in some cases just the Bill of Rights, or only the Second Amendment).

It is also fair to say that most people--even those who, like Thatcher, wave around The Wealth of Nations like a holy book and hold up Smith as a prophet of the secular religion of free enterprise--have not read the book. Nor even half of it (600 pages) or a quarter (still a dense, time-consuming 300 pages). Particularly not the extensive passages of the book that address various issues of concern to early economic theoreticians in the 1700s that are largely irrelevant and ignored today (sort of like certain books and chapters of the Old Testament that are mostly bypassed because they describe such a different world, with such different concerns, that we have trouble understanding them today).

No, Adam Smith's important and deservedly famous early exploration of the operation of capital at the micro- and macroeconomic levels (primarily the latter, regarding matters such as monetary policy and free trade between nations) is a work that is revered based upon passages taken out of context, and like many other famous books (Karl Marx' Das Kapital, Charles Darwin's The Origin of Species, and Rachel Carson's Silent Spring spring to mind), Smith's book is adored (or perhaps in some cases reviled) by people who already know (or think they know) what is in the book without ever having read any of it, or not more than a few brief excerpts. Such books and their authors, used in that manner, become simplified symbols and mere placeholders for ongoing, often simplistic political, philosophical, and rhetorical debates in the present that are largely oblivious to whatever is actually in the book and to the wider intellectual context of the book and its times.

In short, for devoted free-market groupies, The Wealth of Nations symbolizes Capitalism as we know it today, worshipped like a religion in all its supposed glory and perfection, and for such people, like some religious fundamentalists regarding their holy book of choice, there is not much need to look at any other book (unless, perhaps, it's by Hayek). They already know that their holy book says whatever they want it to say--whatever it actually says.

So Adam Smith and his book have been transformed into mere two-dimensional figureheads for political and ideological purposes, sort of like the oversized posters and banners emblazoned with the likeness of Chairman Mao or various Middle Eastern dictators for state-sponsored political rallies.

Adam Smith deserves better than that.

Which is why I want to pull Smith back out of that reduced, simplified, distilled symbolic status and discuss his life and work, and the context of his life and work, in a less cartoonish fashion.

For there is more to Smith than just Capitalism or The Wealth of Nations.

Just to provide some context on the taking of Smith out of context, consider what may be the one thing he is generally most remembered for today: the "invisible hand" of self-interest that guides the market and the economy. From all the attention devoted to that invisible hand, one might well tend to think that much of The Wealth of Nations, or at least a chapter or two, would be focused specifically on that point. Not so. Smith mentioned the now-famous invisible hand briefly, in passing, one time, effectively as a footnote to other discussion. He emphatically did not contend that self-interest, pure and simple and all by itself, offers the solution to all human problems; he made the more mundane, restrained, and reasonable observation that the butcher and the baker do not provide the rest of us with food out of the goodness of their hearts, or following some prearranged master plan, but rather apply their particular skills and industry to benefit themselves, which in turn winds up benefiting the rest of us who need to be fed, and who usually are, thanks to the butcher and the baker working in their own self-interest to help provide our needs.

Thus, Smith identified the invisible hand of self-interest as one significant factor (potentially and implicitly among various others) that goes into the overall functioning of a normal human economy. He did not say it was the only factor, or the only one that matters, even for an economy, let alone for a wider society including other activities and institutions beyond the strictly economic. Had Smith wished to indicate that the invisible hand of self-interest is in fact the only principle in human affairs that really matters, he certainly could have done so easily enough. He did not; instead, he mentioned the invisible hand briefly and in passing. It is only certain later writers and theoreticians, ironically claiming to be acting in the name of their patron saint Adam Smith, who have transformed the invisible hand of self-interest into the single master mainspring of all human policy and affairs, the be-all and end-all, the only principle that really matters or is even worth thinking about.

For the sake of analogy, this bizarre cult of the invisible hand, taking a relatively minor footnote out of context and magnifying it into a master plan for all humanity throughout all eternity, would be comparable to going to the Christian Bible, fixating upon the brief statement in the Book of Exodus, "Thou shalt not suffer a witch to live," ignoring the whole rest of both the Old and New Testaments, and creating a cult of obsessive, single-minded witch-hunting in the name of the Bible. Yes, that's an extreme example; but it also actually does provide a fitting analogy, for the taking of the "invisible hand" out of context has also been extreme and has led to rather extreme results.

Leaving aside the specific issue of the invisible hand, it also crucial to be aware that although Adam Smith was obviously a hugely important and influential early explorer of principles of economic organization, he emphatically never said, or indicated in any way, that economics is the only thing that really matters in human affairs, or even that economic considerations are the primary considerations, compared to which all other aspects of human existence are merely secondary and peripheral at best--in effect, religious worship of the economy for the economy's own sake. Again, such assumptions are more the products of later writers and institutions claiming to be disciples of Adam Smith, speaking and acting in his name, than of Smith himself.

Here it's worth pointing out that although Wikipedia states outright that The Wealth of Nations was Smith's "magnum opus," and most of us living today would agree, because that book is what we remember Smith for, and most of us are unaware that he ever wrote anything else--Smith himself did not necessarily see things the same way. For Smith had written an earlier book--The Theory of Moral Sentiments (published in 1759, hence predating Wealth of Nations by seventeen years)--and from that he was known as a distinguished moral philosopher long before he ever gained fame as an economic theoretician. Although Smith lived a relatively shy, quiet, private life and ordered that all his papers be burned after his death, so that not that much is known of the details of his personal life and views beyond whatever appears in his published works, it is thought that the earlier book was actually his favorite intellectual child, the one that he saw as his magnum opus. [Among other sources, Professor Alan B. Krueger of Princeton makes that point in the introduction to my copy of The Wealth of Nations: "In all likelihood, [Smith] died firmly believing that The Theory of Moral Sentiments was his most important and influential work."] There is no question that Smith continued to tweak and adjust The Theory of Moral Sentiments to the end of his life--apparently more so than with The Wealth of Nations--clearly indicating that he continued to care about it and view it as significant, rather than as merely an old relic left behind after The Wealth of Nations. Moreover, although later economics groupies might tend to assume that the earlier book was just a sideshow, a sort of warm-up opening act for the main event, it is likely that Smith saw things exactly opposite: the book on morality came first because it had priority in his own mind. Granting that Smith also valued and took great pains over the monumental and lengthy work on economics that consumed so many years of his life, it is simply important to remember that, unlike us in the economics-fixated modern world of today who only care about the later book, Smith himself clearly saw them both as important, with his relative ranking of the two quite possibly differing from ours.

[And he took about eighteen years working on the first book, also.]

Indeed, comparing Theory of Moral Sentiments with Wealth of Nations tends to demonstrate how, throughout his life, Smith, like his friend and fellow philosopher David Hume and other thinkers of those times, was concerned with trying to discover the best way to balance the observed and undeniable reality of the principle of self-interest with other, higher, restraining moral factors. He was NOT proposing that self-interest is all that matters and all that is necessary to form and regulate human individuals and societies.

Unlike the "invisible hand," buried in its marginal place in the later book, Smith placed principles other than self-interest front and center in his earlier book:

"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. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it."

[Smith, notably, was writing before the first early diagnoses, in the early nineteenth century, of the condition we now call psychopathy, which was called "moral insanity," and refers to people who generally lack any vestige of the moral sentiments Smith described and assumed. Psychopaths may be the only people who truly exist in a mental world of pure, unadultered self-interest (and vice versa?).]

In The Theory of Moral Sentiments, Smith acknowledged that the moral capacity of individual humans is, however, limited by the "weakness of [their] powers" and the "narrowness of [their] comprehension," such that "The administration of the great system of the universe . . . the care of the universal happiness of all rational and sensible beings, is the business of God and not of man." Nor did Smith offer any simple, pat, "feel-good" conventional answers about the fundamental nature of morality; he was well aware of many of the problematic aspects that plague any theory of morality, including its relationship with self-interest and the difficulty of finding a truly objective grounding for morality--the problem famously explored by Smith's friend Hume and referred to by philosophers as "Hume's Guillotine." The "invisible hand" also made a brief earlier appearance in the earlier book in a passage reflecting Smith's characteristically Enlightenment-era faith in social systems such as societies and economies ultimately acting in a self-balancing, self-correcting fashion.

Adam Smith was part of, and a believer in, the great eighteenth-century European intellectual ferment that we call, generally, the Enlightenment; in particular, he, along with Hume, was a key figure in the Scottish Enlightenment, an intellectual flowering that did great credit to a traditionally relatively small, poor, marginalized nation. As many readers will remember from high school or college Western Civilization courses, the earlier Renaissance and the Age of Enlightenment that followed were profoundly shaped and influenced by the rediscovery of ancient texts from classical Greece and Rome (along with advanced mathematical and other works from the medieval Arabic world, technologies from China and the Middle East, and so on). One of the defining general characteristics of the ancient texts was a belief in a basic order, balance, and harmony in the world and the universe, and a tendency to assume that after any disturbance, such balance would soon be restored. In other words, the ancient writers and philosophers saw the world as a self-balancing system, a place more of stasis than of change, in which things would always tend to go along as they always had done.

As various scholars have pointed out, Adam Smith drank deep at this particular well, and (like the most notable founders of the new American republic and most other Enlightenment-era intellectuals) shared this Greco-Roman faith in the restoration of traditional balance, even without, or in spite of, human efforts. This characteristic Enlightenment belief in self-balancing, homeostatic systems suffuses both The Theory of Moral Sentiments and The Wealth of Nations and profoundly shaped Smith's overall view of human society and institutions, including the economy.

Here it's important to emphasize: although latter-day Smith- and-free-market groupies sometimes like to present Smith as a visionary prophet who foresaw the industrial age, in reality, he was nothing of the sort. Smith himself basically entirely missed the industrial era; he lived from 1723 to 1790, mostly a relatively cloistered, Ivory Tower existence either in Scotland or, for a time, in France, and far from Manchester, England, where the Industrial Revolution was just starting to take root by the later years of Smith's life. There were even fewer inklings of the industrial future to be seen before The Wealth of Nations' publication in 1776. [And all the ostentatiously tough, hard-headed, endlessly practical, business-minded people who claim to be disciples of Smith should also be reminded: he was, by all accounts, the very epitome of a nerdy, egg-headed, otherworldly, absent-minded professor who spent most of his time lost in his thoughts and oblivious to the outside world.] As distinguished Cambridge University demographic and economic historian Anthony Wrigley--one person who really has read Adam Smith--has explained, far from offering any vision of an industrial future, Smith, in his most famous book, was instead offering a thorough description of the late pre-industrial economy of the world and times in which he lived--a relatively settled, stable economic system that could actually fit fairly harmoniously with the homeostatic mindset of Smith and his classical intellectual forebears. To say that is not to diminish Smith's monumental achievements or to fault him for not foreseeing the industrial economic tsunami that was only gradually starting to build up a head of steam at the time of Smith's death; precisely NOBODY saw that coming, or could have.

And, contrary to the expectations of Smith, his fellow Enlightenment philosophers, and their Greco-Roman forebears with their faith in homeostasis--the entire history of the world since the dawn of the industrial age has been ongoing, relentless, explosively rapid change, and destabilization rather than stability.

This raises the question: how would Smith have responded to a world of rapid and relentless change showing none of the characteristics of a stable, self-balancing system? Would he, ostrich-like, have continued to insist upon the miracle of self-correction in the face of all evidence to the contrary? I think not.

In terms of other dramatic changes as the world moved from the early modern to the truly modern (industrial) period, Smith missed most of those, too. He was there for the American Revolution, which was somewhat dramatic but also mostly a sideshow from Europe's perspective, and he generally sympathized with the American revolutionaries and their arguments. Smith survived to see only the very first year of the French Revolution, while it remained relatively tame and middle-class, and he might have sympathized to some extent with that as well. Smith was not around to see the lid blow off the French Revolution into what could appropriately be called the first actual world war, just as he never saw the incredible, destabilizing explosion of the Industrial Revolution. It would be interesting to know what his thoughts would have been, and how they might have changed; of course, we will never know.

But it is interesting, and more than a little ironic, to note that free-market groupies of the industrial age, when they wave Adam Smith and The Wealth of Nations around like oversized posters of Chairman Mao or various Middle Eastern dictators, are holding out a detailed description of preindustrial stasis as the operation manual for a rapidly and relentlessly changing industrial or post-industrial economy.

To do that, it seems to me, is inherently inconsistent--pretending, even demanding, that a settled stability and order must be present where it plainly isn't. It requires a bit of madness--or religious faith. Sort of like assuming that the Bible, or the Q'uran, can tell you how to operate an automobile or a jet plane. [With all due respect to those holy books--they can't. That is not their purpose.]

And, of course, Adam Smith-inspired neoclassical economics has never yet been adequately able to explain the instability of markets, which created recurring crises, bubbles, and subsequent panics throughout the nineteenth century and have been doing so again recently. Economic theory still tends to insist that the economic system is and must be rational and self-balancing; it just somehow doesn't act that way.

At any rate, the events of the industrial age that Smith did not live to see (and cannot be blamed for not foreseeing)--including the Reign of Terror in the French Revolution, the Napoleonic Wars, the Revolution of 1848 and other lesser revolutions of the nineteenth century, the frantic European imperialism of the end of that century, the savage bloodbath of the American Civil War (sometimes called the first modern, industrial total war), the much greater bloodbaths of World Wars I and II, etc.--all tend to emphasize that we in fact live in a world that is not self-balancing or self-correcting, except in extreme, hideous, explosive ways. Other cultural changes, from the Romantic era through the post-Second World War sexual revolution, youth rebellion, and crime wave, all serve to further emphasize that we live in a world of ongoing, sweeping change far from Smith's world and the Smithian and Greco-Roman vision of stasis. As much as anything, the demographic revolution challenges any notion of stasis: there were an estimated roughly one billion people in the world at the end of Smith's life; now there are more than seven billion, and that number is still rising rapidly, while the land area of the globe is not. [Hard to maintain stasis under such conditions.]

Although free-market-adoring Americans tend to attribute all good things to their beloved capitalism, including democracy, freedom, motherhood and apple pie, that market and economy have shown themselves to be NOT self-balancing, not self-correcting, and ultimately not tending in some of the virtuous directions hoped for. Rather, as both the late nineteenth century and the late twentieth century have demonstrated, the logic of the market, left to its own devices, tends inexorably toward inequality and the greater and greater concentration of wealth and power in fewer and fewer hands, not toward equality. It tends toward oligarchy and plutocracy, not toward democracy. Although the market clearly favors libertinism, self-indulgence, and the selling of innumerable products and services to temporarily satisfy that insatiable market, the concentration of wealth and power in the hands of a few inevitably and necessarily reduces the actual freedom of the less privileged and tends to reduce them to the position of lackeys of the wealthy. Aside from broad generalizations like these, it is possible to see these processes in operation historically. Tax policies and other economic policies in the United States grossly favored the rich during both the late nineteenth and late twentieth centuries, and during both periods, economic inequality and polarization increased rapidly while chronic social problems and infrastructural insufficiencies were ignored. Through the middle of the twentieth century, in the wake of the shocking wake-up calls of the Great Depression and Second World War that helped to revive some sense of national brotherhood, citizenship, community, and duty beyond just a money-grabbing free-for-all, taxes on the rich and on corporations were raised (in opposition to neoclassical economic theory), social programs and services and access to education were expanded, and there was a hopeful time of movement toward greater equality and opportunity for the less privileged. To do that, however, required defying the logic of the unfettered free market, and since the end of such efforts and reversion toward the logic of the market from the 1980 election of President Ronald Reagan (and the earlier rise of "Iron Lady" Thatcher) onward, society and the economy have again moved in the same old direction toward extreme inequality, concentration of wealth and power, and disinvestment in infrastructure, public goods, and social programs and services.

Adam Smith was not there to see all this. Pope Francis has been. And Pope Francis' eloquent recent Encyclical Letter regarding the global environmental crisis, along with the crisis of inequality and other interrelated human crises, is, among other things, pointing out in no uncertain terms that we are in fact living in an economic system that is not self-balancing and not self-correcting, that we must confront this reality and not hide from it through quasi-religious worship of unsound economic theories derived from selective readings of preindustrial Enlightenment-era philosophers who could not have dreamed of the sorts of rapid changes the world has experienced since their time, and who offered a Greco-Roman-inspired vision of overall stasis that bears no visible relationship to our modern reality.

This is not to criticize Adam Smith, but only to point out that the Pope has correctly identified that the events of the past two centuries since Smith's day should have, by now, exploded the hopeful myth of a self-balancing, self-correcting economy in the minds of all but the most die-hard and quasi-religious free market groupies. The market is NOT self-correcting. Even the legendary conservative intellectual and prophet of law and economics Judge Richard Posner acknowledged that in the wake of the disastrous mortgage bubble bust of 2008. [Posner, A Failure of Capitalism: The Crisis of '08 and the Descent in Depression, 2011.] Judge Posner knows it. Pope Francis knows it. It's time everybody else knew it, too. [And again, Adam Smith can't be blamed for not knowing it.]

But if Smith and the Pope might differ regarding the essentially self-correcting nature of economic systems, on a more fundamental issue, they agree. Adam Smith, moral philosopher, recognized that there is a moral realm in human affairs, and that there is more to human life, government, and policy than just economics or pure self-interest. Pope Francis of course knows that as well, and in his Encyclical Letter has recognized, and eloquently explained, that moral controls must be (re)introduced to restrain the otherwise relentless, amoral logic of the market in marching toward both human and environmental destruction--that the environmental crisis and the inequality/poverty crises are both fundamentally moral crises, not mere economic aberrations within a conveniently self-correcting system. Both Smith and the Pope thus were/are far ahead of the general, largely unquestioned assumption, held by so many Americans and far too many of their leaders, that the only thing that matters and needs to be worried about is the economy.

Again, to twist around the words of 1992 presidential candidate Bill Clinton and his interlocutors on the campaign trail: Pope Francis has pointed out, "It's the morality, stupid!" And to think that economics and self-interest are all that matters, and that morality does not matter or is merely optional, is the very height of stupidity (or pseudo-religious zeal).

In sum, the logic of the market, and of self-interest, are fundamental forces that exist and must be reckoned with--Adam Smith recognized that, as does Pope Francis. But the raw power of the market and self-interest must be harnessed, steered, and disciplined by higher principles--by morality--to prevent them from careening down the path to self-destruction. And as Pope Francis rightly and eloquently points out, that is an understanding that the dominant secular quasi-religion of free-market economics has denied or ignored for much too long.

Further commentary on the fundamentally non-self-correcting, or only harshly and painfully self-correcting, nature of the economy comes from Yale economics professor and Nobel prize-winner Robert J. Shiller, who has explored in detail how Adam Smith's invisible hand does not only and always lead in benign, happy directions. For, as Shiller and coauthor George Akerlof discuss in their book, Phishing for Phools: The Economics of Manipulation and Deception, the invisible hand can also tickle us, tempt us, manipulate and deceive us into buying, or buying into, "things that are good neither for us nor for society"--which in turn makes fraud and deception unfortunate but integral components of capitalist economies, because they are integral components of human individual and group psychology. In this and other works, including his recently revised bestseller, Irrational Exuberance, Shiller confronts the undeniable reality of irrational human psychology and resulting economic euphoria as reflected in recurring asset bubbles--something Smith, writing half a century after England's South Sea Bubble of 1720, almost a century and a half after the Dutch Tulip Bulb Mania of 1634-37, and before the industrial era, could perhaps forget or ignore as mere anomalies. Yet bubbles, panics, and stock market crashes have not been anomalies, but defining characteristics of the industrial economy from the beginning of the 19th century onward, with the Panics of 1819, 1837, 1873, 1884, 1893, 1907, the Great Crash of 1929, the Tech Bubble Bust of 2000-2001, and the Mortgage Bubble Bust of 2007-2008 just among the especially salient examples of an even wider and more frequently recurring phenomenon. The bottom line is: if individual humans were indeed economically rational and self-correcting, and if the economy--the group expression of their various individual economic behavior--were rational and self-correcting, there never would have been a Tech Bubble, let alone the Great Depression. But both happened, along with many others. One could say that financial catastrophes do indeed represent a type of self-correction, just like a population crash in wildlife biology/ecology that wipes out more than 90% of the overpopulated species in question--but if so, they are a type of self-correction too hideous to contemplate, and far outside the framework of Smith's harmonious, self-balancing vision of the world. As Shiller points out, we have no choice but to try to do better than, for example, a repeat of the horrors of the Great Depression and Second World War.

Scott Dewey is a research specialist and assistant director at the UCLA Law Library. Previously, he was a judicial attorney for the California Court of Appeal, Second District. is dedicated to saving Capitalism from itself. Visit us at to join the debate. Follow us on Twitter and Facebook.

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