Almost Right

In an informative and interesting article in today’s Star Tribune, Minneapolis, USA Fred Kiel and Doug Lennick draw on Adam Smith for some of their points. While agreeing with their main points I critique some other points they make in the interests of restoring Adam Smith’s legacy.

Capitalism: still the best system
Fred Kiel and Doug Lennick
4 July 2005 in Star Tribune, Minneapolis, USA

“The underlying beliefs about our free-market capitalistic system are usually attributed to the Scottish economist and philosopher Adam Smith. In his classic, "The Wealth of Nations," (1776) he said the free market system is the best way to obtain the greatest good. Adam Smith believed that when people act in their economic self-interest, it amounts to an "invisible hand" that creates good for all.
So let's focus exclusively on satisfying our own needs and everybody wins, right?
Well, that's not quite what Smith said. What's usually not mentioned when Smith's ideas are discussed is that he was actually better known as a philosopher who wrote a best seller called "The Theory of Moral Sentiments." In it he stated that we are all born with a "moral sense" -- that is, he believed humans are innately equipped with consciences.
Because of this assumption, he thought that the "invisible hand" of economic self-interest would be governed by the peoples' moral sense. Economic self-interest, yes, but in the context of what's good for all. Smith did not envision the "invisible hand" as a competitive, cutthroat economic system where you take and grab what you can for your personal gain and do your best to destroy your competitors.”

Comments:
“when people act in their economic self-interest, it amounts to an "invisible hand" that creates good for all.”

Sadly, no, that is not what he said. The invisible hand metaphor was not about markets, it was about unintended consequences of human behaviours on some, not all, occasions. People could act in their self-interest and it could produce anti-social outcomes. “Wealth of Nations” is an polemic in many places against the anti-social behaviours of selfish “merchants and manufacturers” showing constant tendencies to act against the interests of consumers by resorting to monopoly, ant-competitive restrictions of supply and the raising of prices. Those who keep carelessly attributing to Adam Smith meanings to the metaphor, invisible hand, meanings that Smith never intended (he only used the metaphor three times, and only once in “Wealth of Nations” and then in respect of circumstances not connected to markets). In modern times, the invisible hand has become a “brand name” associated with Adam Smith, especially in US academe. This has contributed negatively to common understanding of Smith’s legacy.

Smith “wrote a best seller called "The Theory of Moral Sentiments." In it he stated that we are all born with a "moral sense" -- that is, he believed humans are innately equipped with consciences.”

Again, not quite. It was his mentor, the “never to be forgotten” Professor Francis Hutcheson, who thought humans were born with an innate moral sense, like the other senses, and not his student, Adam Smith. Instead, Smith advanced the novel idea that humans were born with an ability to develop moral sentiments by their contact with others in society. This ability came from observing which behaviours pleased and which displeased others and themselves, and through the Impartial Spectator procedure, they gradually acquired as they grew to adulthood, the facility to judge themselves, and others, through what is commonly called a conscience. Not all adults by any means developed moral sentiments. His “Theory of Moral Sentiments” (1759) was about this procedure. An individual’s moral sentiments mirror those of the society he is born into; someone born into a society of “murderers and thieves” would have a different set of sentiments and what was acceptable to some else born into the kind of society Smith was born into.

“Because of this assumption, he thought that the "invisible hand" of economic self-interest would be governed by the peoples' moral sense.”

He did not rank the single metaphor “invisible hand” so highly in his writings or in his system. That is a recent invention by academics who have not read Adam Smith and journalists, who pick it up third hand from half remember High School texts. By constant repetition it has become the norm for anything written about Adam Smith. The relationship between Smith on self-interest and moral sense is certainly there in his two books, but it is somewhat more complicated, though more insightful than presented by Fred Kiel and Dough Lennick in their otherwise most interesting article with which I am inclined to agree broadly.

It is the division of labour (again not discovered, nor claimed by him to have been) by Adam Smith and the propensity for humans since ever to “truck, barter and exchange” that creates the capacity for non-violent relationships based on the total dependence of each of us on millions (now billions) of anonymous others for our everyday needs, wants and desires. The same system operates within moral sentiments which are exchanges between people in much the same manner. We reciprocate non-violent exchanges of moral behaviours, first within our families, then with friends and with acquaintances, distant and close, and finally with strangers.

At the moment of the economic exchange (our dinners with those who supply them) we do so not be appealing to our self-interest (as Smith pointed out in “Wealth of Nations” that would be futile in the main, there not being enough benevolence to go round) but by showing them it would be in their self-interest to conclude a bargain with us. We serve our self interests best by serving the interests of others. That is the powerful binding force of markets. Likewise, in the moral sphere we curb our excesses of self-love and concern only for ourselves by heeding the Impartial Spectator’s distaste of over doing our selfish concerns. We lower our aggression, bad tempers, upsets, and general misbehaviours, etc., to the level which the Impartial Spectator can “going along with”.

“Smith did not envision the "invisible hand" as a competitive, cutthroat economic system where you take and grab what you can for your personal gain and do your best to destroy your competitors.”

Absolutely right. Smith went even further than not envisaging such behaviour, he specifically denounced it (though he was somewhat pessimistic about the ability of “merchants and manufacturers” to constrain their monopolising mischief).

In “Moral Sentiments” (II.ii.2.2: page 83) he wrote:
“In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at en end.”

[The authors Fred Kiel and Doug Lennick are the Minnesota-based authors of "Moral Intelligence: Enhancing Business Performance and Leadership Success," Wharton School Publishing, 2005.
They can be reached at kiel@krw-intl.com and dlennick@lennickaberman.com]