Economics and A Theory of Moral Sentiment
Adam Smith is largely responsible for starting the field of economics as an academic subject. His magnum opus The Wealth of Nations is considered the first work of modern economics, and Smith is sometimes referred to as “the father of modern economics.” I tell you this because I think Smith would be at least mildly ashamed of his academic progeny. Smith is perhaps best known for his famous statement on mutually beneficial trade:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.
Smith continues on to write (entirely correctly) about why it makes sense for people to specialize in tasks like butchery or baking and then trade with each other. However, the economics profession as a whole (with notable exceptions) has taken the idea of self-interest much farther than Smith intended. In addition to The Wealth of Nations, Smith’s other major work was A Theory of Moral Sentiments, which Smith opens with these words:
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.
In fact, Smith goes on to argue that the entire basis of morality is sympathy, or ability to project ourselves into the others place and to feel with them either the pain or joy that they are experiencing:
And hence it is, that 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.
Smith the moral philosopher seems radically different from Smith the economist, but Smith’s positions are not contradictory. Some have suggested that The Wealth of Nations, being written after A Theory of Moral Sentiments, represents a change in the direction of Smith’s thought, but in reality the same concerns the Smith expresses in his moral philosophy can be found in his economics. Smith’s analysis of human behavior is much, much more complex and layered than modern classical economics gives him credit for.
Smith, for instance, argues that stockholders often want policies that are not in the interest of the general public. Amartya Sen points out that while Smith believed that self-interest was sufficient to motivate market exchanges, there are problems involved in setting up markets equitably and managing externalities and public goods that self-interest is unable to deal with. To quote Sen:
But in dealing with other problems, those of distribution and equity and rule-following for generating productive efficiency – Smith emphasized broader motivations. In these broad contexts, while prudence remained “of all virtues that which is most helpful to the individual,” he explained why “humanity, generosity, and public spirit, are the qualities most useful to others.” The variety of motivations that we have reason to accommodate is, in fact, quite central to Smith’s remarkably rich analysis of human behavior.
Economists today often draw a distinction between self-interest and selfishness. The self can be interested in ends that are not selfish. To some extent, this is a semantics games, but it is one that Smith explicitly rejects.
Those who are found of deducing all our sentiments from certain refinements of self-love, think themselves at no loss to account, according to their own principles, both for this pleasure and this pain. Man, say they, conscious of his own weakness, and of the need which he has for others, rejoices whenever he observes that they adopt his own passions, because he is then assured of assistance; and grieves whenever he observes the contrary, because he is then assured of opposition. But both the pleasure and the pain are felt so instantaneously, and often upon such frivolous occasions, that it seems evident that neither of them can be derived from any such self-interested consideration.
Fortunately for us, behavioral economics is confirming experimentally most of what Smith already knew. Today, we know that exposure to money and to economics makes people more likely to act selfishly. Smith, however, is already a step ahead of us (he’s pretty spry for a dead guy). He knew that not only was this bad for society, it was bad for the individuals as well.
Society and conversation, therefore, are the most powerful remedies for restoring the mind to its tranquility, if, at any time, it has unfortunately lost it; as well as the best preservatives of that equal and happy temper, which is so necessary to self-satisfaction and enjoyment.
Smith was, no doubt, wrong about many things, but economics could be much further ahead if it had simply paid attention to its founding father. Today, you can get a PhD in economics without ever reading Smith. This is a tragedy for those of us who want to have an economics discipline that recognizes the rich variety in human behavior and is willing to grapple with the tough philosophical issues and value judgments that underlie the calculations and empirical methodologies.