The Independent

The paradox at the heart of Adam Smith’s genius

Is it fair to blame him for the worst aspects of Victorian capitalism, or do we need to look deeper at his writings?

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Adam Smith’s reputation is paradoxica­l. He is celebrated as the author of The Wealth of Nations, perhaps the most significan­t work of political economy ever written, and yet at the same time held almost personally responsibl­e for the worst aspects of Victorian capitalism.

In order to make a fair assessment of his thought, the proper starting point is his early essay on moral philosophy, Theory of Moral Sentiments.

In this work, he argued that while human beings are endowed with the capacity to reason, our behaviour tends to spring from instincts such as the impulse for self-preservati­on and sexual desires predicated upon the need to continue the species. Thus, he wrote of “hunger, thirst, the passion which unites the two sexes, the love of pleasure, and the dread of pain”. However, by putting instincts on the centre stage he immediatel­y runs into a problem: where does morality come from? How do people form moral judgements, even about their own behaviour, indeed perhaps sometimes holding themselves to account?

Smith’s response to this was to invoke a certain conception of empathy. Put simply, he argued that we have the ability to sympathise with other people, to put ourselves in their position, and to judge our own behaviour from their perspectiv­e. In effect, we internalis­e an impartial spectator, which enables us to make judgements about our own behaviour and that of other people. The moral and social order emerges out of a process of mutual sympathy and accommodat­ion between individual­s.

In a free market system, where perfect liberty reigns, people acting in their own self-interest will be guided by an ‘invisible hand’ to the benefit of the social order as a whole

It must be said that it is not clear that these ideas fit too well with the position that Smith takes in The Wealth of Nations. Although the idea that humans are motivated by instincts of selfpreser­vation and self-interest is found in both works, in the later book he claimed that the social and moral order is an unintended consequenc­e of the pursuit of self-interest: in a free market system, where perfect liberty reigns, people acting in their own self-interest will be guided by an “invisible hand” to the benefit of the social order as a whole.

To get a sense of this argument, imagine setting up a shop selling religious books. In doing so, you satisfy a demand (for books) and create jobs for people. Rational, self-interest requires that you price your books at the appropriat­e level, otherwise people will buy them elsewhere; and you have to pay your workers a fair wage, for the same reason: they’ll work elsewhere if you don’t. And if you decide only to publish books by German theologian­s (probably not a good move!), then your competitor­s, in order to maximise their profits, will start to sell the works of Anselm, Aquinas, and the like, in order to exploit that particular market niche.

In theory at least, then, self-interest, together with our ability to respond appropriat­ely to the demands of the market, will facilitate the developmen­t of a stable and mutually beneficial economic system. But, of course, the devil is in the detail, and the trouble is that while this might work beautifull­y “in theory”, it has never worked out quite like this in practice. This has damaged Smith’s reputation. Although it is perhaps unfair that his name is associated with the excesses of laissez-faire capitalism, it is easy enough to understand how this has happened.

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 ?? (Getty) ?? By emphasisin­g human instincts, Adam Smith immediate l y runs into a prob l em: where does mora l ity come from?
(Getty) By emphasisin­g human instincts, Adam Smith immediate l y runs into a prob l em: where does mora l ity come from?
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