Putting Adam Smith Back Together

The choices underlying marketplace transactions are more complicated and less narrowly self-regarding than we often suppose. By returning to the full corpus of Adam Smith’s writings, we can escape economistic conceptions of human beings and enhance our understanding of how market economies actually work.

Every once in a while, a particular society experiences a moment of intellectual flourishing whose implications go far beyond the immediate time and place in which it occurs. One such movement of ideas, whose effects are still being felt today, is the Scottish Enlightenment.

The poor backwater that was eighteenth-century Scotland was an unlikely setting for a renaissance of thought that would reshape the West forever. But whether it was Thomas Reid’s common sense realist philosophy, Lord Kames’s jurisprudence, or William Robertson’s historiography, these and many other Scottish Enlightenment thinkers had an indelible impact on modernity.

No figure is more associated with the Scottish Enlightenment than the philosopher and founder of modern economics, Adam Smith. His The Wealth of Nations (1776) is surely one of the most important books ever written. It is also one of the most controversial.

In the nineteenth century, for instance, ideas expressed in The Wealth of Nations motivated European governments from Britain to Prussia to break the control exerted by guilds over important sectors of economic life. The result was enhanced economic growth but also dramatic changes to the status quo. This was resented by many who regarded such policies as attacks on solidarity. Today, you need not look far to find those who view The Wealth of Nations as foreshadowing the “greed is good” mentality famously depicted in films such as Oliver Stone’s Wall Street (1987).

Part of the genius of The Wealth of Nations is the way it demonstrates how free competition and the individual pursuit of economic self-interest produce, as unintended side effects, improved living standards and rapidly diminished poverty. But, some claim, the spread of market relationships and commercial society stimulated by The Wealth of Nations has contributed to the degrading of other forms of human interaction and even widespread alienation. This critique has been articulated by groups as different as Marxists and some Catholic traditionalists.

It may well be true that Western societies are more socially fragmented than they were, say, forty years ago. But how fair is it to attribute significant responsibility for this state of affairs to the thought of Adam Smith?

Not a Simple Story

One way of answering this question is to consider Smith’s other, lesser-known, and much revised book, The Theory of Moral Sentiments (1759). This work embodies a decidedly non-economistic understanding of human nature. Perhaps best described as a work of moral psychology, Smith’s first book explores how we develop the kind of moral empathies and sensibilities that can cause us to look beyond what appears to be in our immediate self-interest.

For some time, many wondered about the apparent disparity between Smith’s two books. Late nineteenth-century German professors even gave it a name—Das Adam Smith Problem—to express their perplexity at what they saw as two contradictory logics for human action. These apparent inconsistencies in Smith’s thought, however, start to dissolve once we understand that Smith’s inquiries into human behavior, whether moral or economic, reflect the type of social science that was pursued during the Scottish Enlightenment.

While Scottish social science manifested the increased specialization in intellectual inquiry that was characteristic of the eighteenth-century Enlightenment, it also held that something like economic life was thoroughly integrated into interconnected―and mutually reinforcing―social, political, and cultural orders. As Ryan Patrick Hanley observes of the Scots,

In their social science, the distinction of the descriptive from the normative is unintelligible; empirical study of experience, synthesis of empirical data into axioms, and analysis of how activities guided by such axioms affect human life are equally crucial elements of a single endeavor to promote individual and collective well-being.

From this perspective, Smith’s The Theory of Moral Sentiments and The Wealth of Nations should be understood as presenting a unified inquiry into human society that seeks to explain people’s behavior in varying social settings. Taken together, these two texts show that people constantly operate in distinct but parallel universes that are considerably less isolated from each other than we realize.

Getting to Know Adam Smith

In their new book Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century (2019), the 2002 Nobel economic laureate Vernon L. Smith and the economist Bart J. Wilson describe the two worlds that Adam Smith explores as “the personal social and the impersonal economic.” They conduct their own exploration of the relationship between these spheres of life by combining careful study of the full corpus of Adam Smith’s works with insights derived from modern, empirical economic research.

On one level, the authors use Smith’s The Theory of Moral Sentiments to illustrate why neoclassical economics, with its relentless focus on utility maximization, cannot account for just how cooperative people are in real life. Drawing on Smith’s explorations of human sociability, they demonstrate how our gradual acquisition of sensibilities such as benevolence, fellow-feeling, and desire for the approval of others helps us grasp how our choices may benefit or hurt others. This in turn leads us to modify our actions, including in the marketplace.

At the same time, the authors maintain that some of the discoveries of experimental economics (of which they are among the world’s leading exponents) validate many of Adam Smith’s explanations for human behavior. Experimental economics, they state, underscores how the standard self-interest model for human action predicts outcomes with great accuracy in markets. But the authors also observe how the application of the utility-maximizing model of action “failed decisively to predict systematically replicable results” in what are known as “trust games.”

Trust games are experiments of choice that seek to analyze the workings of trust in economic decisions. Smith and Barton contend that the habits and virtues identified and analyzed in The Theory of Moral Sentiments help to explain the neoclassical model’s predictive failures in these experiments. Various human sensibilities, it appears, substantially modify the influence of raw utility maximization in many settings, including settings that have a heavy economic component.

Rethinking Economics and the Market

If Smith and Barton are right, then reflecting anew on Adam Smith’s work can provide us with opportunities both to reconceptualize economics as a social science and to enhance our understanding of how people behave in the marketplace.

Take, for instance, the idea of free exchange. In The Wealth of Nations, exchange is presented as a reflection of human beings’ propensity “to truck, barter, and exchange one thing for another.” Mainstream economists have long regarded this as Smith’s way of identifying human beings’ need of others if they are to survive materially, let alone prosper.

Closer textual analysis of Smith’s writings, however, indicates that he has something more expansive in mind when he refers to exchange. When he claims in The Wealth of Nations that “give me what I want, and you shall have this which you want” is the motif underlying every offer to trade, Smith has a particular conception of giving in mind. Vernon Smith and Barton restate it this way: “All such trades are an exchange of gifts in the beneficence sense, that each has to give in order to receive.”

Granted, this is not the same as the self-giving that characterizes relations between, say, a married couple. Nonetheless, the giving described by Adam Smith is very different from taking.

“To give” requires some degree of other-regarding, expressed at least through an awareness of someone else’s needs and wants. That awareness requires a willingness to enter into another person’s world, to put yourself in his place, even if briefly and temporarily. In The Theory of Moral Sentiments, Smith devotes many pages to describing how this occurs. “To take,” by contrast, demands no substantive reflection on another person’s desires, ambitions, or the condition in which that person finds himself. Even if it is an exercise in mutual taking, taking reflects no interest in the condition or well-being of the other.

When we consider the question in this way, we start to see that, as Smith and Barton state, the “trade in markets for goods and services” that The Wealth of Nations describes is an extension of the human sociability that The Theory of Moral Sentiments identifies and analyzes. This insight indicates that the choices that underlie marketplace transactions are more complicated and less narrowly self-regarding than many often suppose. It also suggests that, when we take Adam Smith seriously, he shows us that one cannot construe economics as an empirical system of thought that takes no account either of the effects of human sympathy or of the concerns for justice that emerge from that sympathy. Such a notion of economic inquiry rather inhibits the investigation of economic phenomena.

In short, an understanding of human beings that transcends strictly economistic conceptions of human choice and action turns out to enhance our understanding of economic life. That conclusion should challenge the market economy’s advocates and critics to rethink how they understand both economics as a social science and the free market itself. In this regard, Adam Smith may not have all the answers, but he certainly points us in the right direction.

 

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