What Would Adam Smith Think of Today's Economy?

What Would Adam Smith Think of Today's Economy? | Vinoth Ramachandra, Adam Smith, Economics

The globalized economy of the 21st century means that people often have no knowledge of where the products they are buying come from, who made them and under what conditions, Ramachandra observes.


These are the opening words of Adam Smith's (1723-1790) "The Theory of Moral Sentiments," a book he wrote a few years before his more celebrated work, "An Enquiry into the Wealth of Nations."


My comments today are prompted by a student quoting at me Smith's well-known words, in Volume I of "The Wealth of Nations:" "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."


These seem to be the only words of Smith that the typical economics undergraduate has ever heard. (Not surprisingly, sociological studies in American universities reveal that economics students demonstrate higher degrees of selfishness than students of other academic disciplines!)


Adam Smith's moral framework is an essential part of his economic theory, and yet many economists, policymakers and businessmen have routinely ignored it. The opening paragraph of "Theory" introduces what Smith considered the most important of the principles of natural law compassion in understanding human behavior.


Compassion enables people to enter into the miseries and joys of others. It is grounded in what his friend and fellow Scot, David Hume, believed to be the basis of our "moral sentiments:" empathy. We do not live our lives as isolated individuals who are driven only by self-interest. Smith believed that natural law also assured that humanity is endowed with "an original desire to please, and an original aversion to offend his brethren" (Theory, III.ii.6).


Smith was, like many 18th-century European philosophers, a Deist. There is an Author of nature who has set up a rational system in which the social welfare is realized in general by each pursuing his or her own interests. Hence the famous metaphor of the "Invisible hand" in both his works – that moves the rich to reduce gross inequalities and mitigate the suffering that arise from the operation of free markets. Human happiness, for Smith, is bound up with "fellow-feeling" and the development of communal bonds.


So Smith's proverbial butcher is motivated not only by the desire for profit but also for happiness, which involves caring for others and also being loved and respected in turn (Theory, III. Iv.8). Within this moral framework, the butcher is not likely to serve bad meat or to cheat his customers, not only because self-interest indicates that he is likely to lose his customers if he does so, but also because he recognizes through empathy that he would not like bad meat or price cheating to happen to him.


Smith believed, rather naively, that the power of our common moral sentiments by themselves would serve to mitigate any ill treatment of our neighbors and fellow citizens. The butcher lives in a community where he knows his customers and is known by them; the fact that he is in relationship with them beyond his economic transactions affects his behavior.




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Believing in the capacities of craftsmen and laborers who were denied access to local and global markets through patronage by the state of monopolistic guilds and merchant cartels, Smith fought to break down these hierarchical power structures and create a more level economic playing field.


This was also why, in promoting the liberalization of trade and growth, at the same time he argued for the protection of fledgling national industries and was opposed to joint-stock companies because they encouraged irresponsible risk-taking.


How ironic then that Smith's name should be invoked by right-wing "think tanks," such as the Adam Smith Institute in the United Kingdom, in defense of laissez-faire, doctrinaire capitalism. How fascinating to speculate on what Smith must make of today's world of casino capitalism, high-risk "investments" with other peoples' money, the multibillion dollar advertising industry that intentionally masks the costs of products, the resulting asymmetric information between buyers and sellers, and the systematic exclusion of workers and small businesses from the marketplace through "mergers and acquisitions."


Smith could not have envisioned the world we live in today. The globalized economy of the 21st century means that people often have no knowledge of where the products they are buying come from, who made them and under what conditions. Given this situation, how likely is it that our moral sentiments of compassion and empathy will be engaged?


The Christian doctrine of "original" sin expresses the moral intuition that human beings receive their moral agency in the midst of human relationships and structures, which are already distorted by prior acts of sin. Those relationships and structures are now global and ecological.


Traditional morality in economic life is based on interpersonal relations among neighbors, but our contemporary global economy is based on impersonal exchanges around the world. Herein lies the challenge to ethicists and economists alike.



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