Adam Smith: The Moral Philosopher of the Market Economy

Adam Smith: The Moral Philosopher of the Market Economy

Author: Suyash Rai / Translation and editing: Jafar Kheirkhahan

Source: Issue 6028 of the newspaper Donya-e-Eqtesad

Adam Smith, the father of economics, is primarily known for writing The Wealth of Nations. However, he has another renowned masterpiece; the book "The Theory of Moral Sentiments" addresses how social interactions can be built upon our innate empathy to achieve moral progress.

The background of examining and analyzing political economy dates back to antiquity. Interesting discussions on this subject can be found in the works of writers such as the Greek Aristotle or the Indian Chanakya, while many important theorizations and empirical studies on political economy have been carried out through research programs in which numerous researchers and thinkers have participated over long periods, there are a few thinkers and researchers who have left an unforgettable impact due to the originality of their thought and the depth of their insights. One of these figures is Adam Smith, whose three hundredth birthday has passed, and on this occasion, some of the pioneering ideas from his two masterpieces, "The Theory of Moral Sentiments" and "The Wealth of Nations," are presented in this writing. The first book is a work in moral philosophy and social psychology, and the second is a work in the field of political economy and economics. In this essay, we seek to extract the essence of Smith's works and understand what links his works together in terms of a superior approach to elaborating his ideas and philosophical commitments. An attempt is made here not only to recall and honor Smith's historical views but also to connect them with current socio-economic challenges, so that a dialogue between the past and the present may form, in order to envision and imagine a more just future.

Alfred North Whitehead, in his book "Process and Reality," which was written based on a series of lectures during 1927 to 1928, says: "The safest general characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato... I allude to the wealth of general ideas scattered throughout Plato's writings. His personal endowments, his wide opportunities for experience at a great period of civilization, his inheritance of an intellectual tradition not yet stiffened by excessive systematization, have made his writings an inexhaustible mine of ideas."

It would not be too exaggerated to make a similar remark about Adam Smith's importance for the study of political economy and economics. Smith's intellectual acumen, which he used to observe social and economic life at a time of very important changes before the systematization of ideological debates surrounding those changes, makes his writings a treasure trove of ideas and suggestions, despite three centuries having passed since his birth.

Smith's fame became worldwide with the writing of two masterpieces, The Theory of Moral Sentiments and The Wealth of Nations. The former, published in 1759, is a work in moral philosophy and social psychology, and The Wealth of Nations, published in 1776, is a work in political economy and economics. The Theory of Moral Sentiments deals more with how social interactions can build upon our innate sympathy to achieve moral progress, and The Wealth of Nations is primarily about improving well-being and material welfare through consensual and self-interested exchanges in competitive markets; thus, the primary concern in both of Smith's works is how individual life can be improved through economic and social exchanges, and a secondary concern is how social, political, and economic processes, in interaction with one another, bring about structural changes. Consider this important point: how, in The Theory of Moral Sentiments, Smith bases his arguments upon a conceptualization of the natural sympathy that exists in human beings.

The first sentence of The Theory of Moral Sentiments evokes this core assumption of his: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it." He calls this principle the expression of "sympathy," but its meaning is similar to what we now attribute to the word "empathy." Smith shows how the existence of this capacity for empathy in us humans causes us to expect others to empathize with us as well; when we observe their reactions to our feelings and emotions, we therefore like the opinions of those who agree with us and share in our sorrow and joy, and we feel distressed when someone disagrees with our actions and views and does not go along with our feelings.

Smith argues that such an entanglement also carries a regulatory function. This entanglement can cause a socio-psychological process in which we observe others' reactions to our feelings and then adjust our actions and feelings accordingly. Sometimes, we increase the intensity of these actions and feelings, and sometimes we decrease them to bring them closer to a level that an "impartial spectator" observing our situation would approve of. This type of interaction can create socially beneficial ethics, which Smith explains thus: "To feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety."

In a highly illuminating discussion of the psychological foundations of economic activities, Smith points to an asymmetry in our capacity for sympathy: “Because mankind are more disposed to sympathize with our joy than with our sorrow, we make parade of our riches, and conceal our poverty.” Thus, while wealth may not bring us the happiness we expected through the purchase of objects it enables, it rewards us more through the excessive admiration (and envy) it arouses among others. Since arousing this feeling fuels the competitive, race-like economic activities that can pave the way for further economic growth, it can generate benefits for those engaged in serving these ends. In Part IV of The Theory of Moral Sentiments, Smith invokes the famous idea of the “invisible hand” to show how the pursuit of wealth by the rich can be beneficial to others, even if they did not intend to create such benefits. He writes: “They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.”

In the same context, Smith discusses how general rules should be established by which we can reward socially beneficial actions and punish harmful ones committed intentionally, but he also shows how our conscience plays a regulatory role in our social morality, yet he writes: “The word conscience does not immediately denote any moral faculty by which we approve or disapprove,” therefore conscience requires the creation and development of moral content in order to act upon it. According to Smith, we can elaborate this moral content so that it takes the form of general rules that govern our actions. This process is again based on our capacity for sympathy; we can perceive the effects of our own and others' actions and use this body of information to establish rules for appropriate conduct. Establishing these rules allows us to make decisions each time we face a situation without the need for deep reflection.

These ideas about sympathy are spread throughout the first four chapters of The Theory of Moral Sentiments. The theory that the natural sympathy of human beings constitutes a capability that can be transformed into practical morality was a major theoretical advance, yet it is interesting that Smith does not necessarily view even some of the limitations of this capacity for sympathy—for example, its tendency to overvalue the joys and happiness of others—as harmful, because they can lead to beneficial outcomes for society; thus, these limitations can be turned into advantages.

The Wealth of Nations is a very different work compared to The Theory of Moral Sentiments, but it also fundamentally draws heavily on this basic insight that human labor, trade, and occupations, although stimulated and motivated by peculiar and even delusory conceptualizations of self-interest, can still generate benefits for society. In Smith's view, there is a natural tendency among humans to deal with one another for mutual self-interest, and as long as the transaction is based on mutual consent, both parties will benefit.

Since he was not a pamphleteer merely seeking to win an argument, his thoughts are complex. He analyzes the workings of the market economy in various ways, yet he clearly highlights the advantages of a well-functioning market economy and claims that the market economy has not had extraordinarily negative effects on morality. Both sets of arguments were important. If Smith had only pointed to these advantages in terms of the efficiency gains from market competition, it would by no means have been sufficient. This is because most prevailing views of the market economy were suspicious and hesitant regarding the negative moral consequences of the expansion of a market economy.

Smith explains how market-based interdependence with strangers can be beneficial in a commercial society: “As soon as the division of labour is thoroughly established, only a very small part of a man’s wants can be supplied by the product of his own labour. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” The market enables this coordination and cooperation among strangers, each specialized in particular tasks and activities. As Smith notes, this specialization makes them efficient by allowing them to develop skills through repetition, saving time moving from one task to another, and permitting the use of specialized machinery for each task, which improves the efficiency of the person performing it.

Smith showed how the combination of trade and competition, through the specialization we see in the modern economy, increases efficiency. While trade had existed for a long time, it was usually conducted through monopoly, and tariff restrictions or controls were often imposed when imports began to compete with domestic production. Smith’s judgment that trade is beneficial to both parties was a direct critique of the key mercantilist idea that a country should restrict its imports from other nations. At the heart of mercantilist thought is the notion of viewing a nation’s wealth as money, whereas Smith argued for viewing wealth in terms of economic productivity. Thus, while mercantilists advocated restricting imports to prevent the outflow of money, Smith argued that money is nothing more than a medium of exchange to facilitate trade within a country and across borders. Smith’s argument in favor of trade is largely based on the advantages derived from specialization; the larger the market, the greater the efficiency achieved.

In The Wealth of Nations, Smith strongly opposed the granting of monopolies or the imposition of tariff protections or controls. Even regarding more reasonable instruments, such as drawbacks, Smith warns of the potential for abuse. He extended this even to colonies, which were typically forced to trade only with the colonizing country. A key “self-interest” argument he makes against such restrictions is that they channel the colonizing country’s capital towards the colony, whereas it could be used more efficiently elsewhere.

Similarly, while domestic markets had existed for years, some were distorted by anti-competitive forces such as guilds and trade associations. As Smith argued, since markets are mechanisms for the efficient allocation of resources and automatic coordination between different producers and consumers through price information, any distortion can lead to inefficiency. Smith’s argument, therefore, is that improving efficiency requires the liberalization of foreign trade as well as the removal of barriers to competition within the domestic economy, so that producers are exposed to both domestic and foreign competition.

Upon entering product markets, Smith considers the improvement of land for agriculture to be the primary priority. In his time, which was before the Industrial Revolution, food products were among the few goods considered necessities, and almost all manufactured products were regarded as "conveniences and luxuries" (Smith even calls poultry a luxury good.) Since, as Smith argues, the produce of consumption and subsistence takes priority over conveniences and luxuries, agriculture must be given precedence. Furthermore, he correctly argued for the period in which he lived that agriculture was the main source of surplus that could be invested in the manufacturing sector; nevertheless, Smith was among the first to argue that factory production is a productive activity. Moreover, he also saw value in services, although he considered them unproductive. Most services in his time, except for engineering, architecture, teaching, and the like, did not produce anything durable. The durability and permanence of service products in fields such as the entertainment industry have increased due to technological changes, and new types of services, such as information technology, have emerged that create value for many production processes.

Smith's thinking on the sources of growth includes ideas that correspond with certain aspects of modern growth theories. In addition to the role played by trade, with which Smith has long been associated (Joel Mokyr calls this type of growth Smithian growth), he also emphasized, in a Solovian argument (attributed to Robert Solow), how increased investment, by raising labor productivity, leads to increased growth (he uses the word stock or store instead of capital.) Although Smith was writing in a world before the Industrial Revolution and therefore provided many examples from agriculture, his general model of how the factors of production—land, labor, and capital—come together for productive purposes was apt and flawless. He stressed not only the importance of increasing participation in the labor force but also the role of skills in enhancing productivity.

Smith also highlights the role that institutions play. In a discussion on trade in towns, he shows how commerce flourishes with the establishment of security and order. In Book III of The Wealth of Nations, there is an extensive discussion of public policies that affect economic productivity, with many examples of how certain policies hinder productivity. Smith argues against many types of government intervention in the economy that reduce competition to benefit a limited few, but ultimately have a negative impact on efficiency and productivity. Book V of The Wealth of Nations is largely about the role of government. Smith defends the essential role of the state in ensuring national defense, administering justice within the country, guaranteeing the provision of infrastructure (financed through tolls, local taxes, or general taxes), and public education. He was clearly writing for his own time, but the main theme of this discussion in Book V is the identification of functions that are best performed by the government.

These arguments about the sources of growth can be read in an integrated manner: private investments are encouraged by improving institutions and adequately providing public infrastructure, and in the competitive environment provided by the presence of domestic and foreign producers, these investments enable the use of other factors of production for the most efficient and productive purposes. Smith's thoughts on the consequences of the market economy were more multifaceted and diverse than he is often credited for. While he is famous for explaining the efficiency gains arising from specialization, which market competition necessitates, he also saw very well how this specialization could create the problem of work becoming meaningless for workers. In Book Five of The Wealth of Nations, he writes: "The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur." This is quite similar to the concern Marx expressed years later in his idea of alienation. Smith's proposal to overcome this problem was investment in education, which exposes every human being to learning and aids their advancement.

It is quite clear from The Wealth of Nations that Smith is concerned about the welfare of workers. Smith argues that economic growth is a necessary condition for improving the welfare of workers. He argues that for workers' wages to increase, the income of the firms in which they work must increase. If the economy does not grow and the income of firms does not increase, negotiating for higher wages will be difficult because in a non-growing economy, the owners of capital are in a stronger position, and therefore there are fewer opportunities for workers. However, as he writes in Book One of The Wealth of Nations, even if economic prosperity is necessary to increase workers' wages, workers are often not in a position to understand this fact and propose policies that might improve such welfare and could raise wages. Moreover, he observed that given the way policy was made in his time, the views of workers were rarely given importance. Smith also had a very clear insight into the disproportionate power that owners of capital could enjoy in the policymaking process. After showing why landowners and workers often do not want to or cannot influence policies, he demonstrates how owners of capital have the ability and the incentive to do so.

He argues that their interests may not always align with the interests of society. In a discussion containing a fundamental insight into the "creative destruction" that Schumpeter would write about decades later, he shows how a dynamic economy encourages more investment in capital goods, which means more competition that can affect the profits of those who invested earlier; therefore, owners of capital most often support the expansion of markets while simultaneously reducing competition. Smith writes: "The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention." In a similar vein, Smith writes about how people of the same trade or profession often conspire to raise their incomes at the expense of imposing costs on the public. He writes: "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."

Essentially, Smith seems to argue that a well-functioning market economy requires the adoption of policies in the public interest through a process in which these policies are not monopolized by any single class. Achieving such conditions requires a certain level of independence, transparency, and impartiality in the policymaking process, which many clean and upright governments have adopted in recent decades. Amartya Sen, in his excellent introduction to the Penguin Classics edition of The Theory of Moral Sentiments, writes: "Smith's focus is on actual realizations (not just on institutions and arrangements) and on comparisons rather than transcendental matters. The primary focus in the Smithian approach is on questions such as 'How is justice advanced?'"

Rather than the Rawlsian theoretical mode of "What would perfectly just institutions be?" This is a fundamental distinction in the different ways people think about justice. Since Smith began his work by observing social and economic interactions, he could see how they could be made more beneficial; sometimes gradually and sometimes rapidly. Such a remedial approach, which offers normative and evaluative suggestions based on the observation of practices, is something all those interested in political economy can learn from Smith.

This kind of methodological learning is particularly important when we come to Smith's works because he always emphasized a specific historical understanding of political economy. For example, his account in The Wealth of Nations of how the increased expenditure of feudal lords on luxuries weakened them and created the grounds for the development of the rule of law, which contributed to the birth of modern liberty, is presented specifically in the context of the Europe of his time. Individuals researching a particular political economy environment would do better to learn from the method Smith pursued in his research rather than relying on ideological readings of his works, as such readings offer appealing but ultimately hollow and false prescriptions.