Great historical figures are only remembered with good reason. They must have a gift, an intellect, or otherwise contribute something foundational to our civilization. Adam Smith was one such person, but his contributions to economics are often read out of context. Before Adam Smith wrote The Wealth of Nations (1776), he was an ethicist, writing The Theory of Moral Sentiments (1759). If modern capitalism has a bad reputation, it’s because the free-market lessons Smith taught are seldom accompanied by his broader moral theory. Freedom, bereft of a clear sense of moral responsibility, always risks great dangers, capitalism being no exception.
The Wealth of Nations argued in favor of economic freedom just as America began a revolution for political freedom. As I have written in Providence, free markets will always be more robust and prosperous than a planned economy. Smith famously wrote that “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Having the freedom to pursue our own self-interest would, in the long term, lead all to greater prosperity.
Yet today, the nuances of Smith’s thought have been obscured. Milton Friedman, famous for defending capitalism, is partly responsible. Friedman often argued for economics modeled on human “selfishness” substituted for Smith’s “self-interest,” but there is a critical difference here. A selfish economic actor takes something at the expense and moral disinterest of other parties. A self-interested economic actor, alternately, takes only what is needed to survive and prosper, but not at the expense of another’s self-interest and rights. That is how a moral free market should operate, with actors maximizing their gain without being intentionally prejudicial to that of others.
But Smith knew human nature better than Friedman. While championing free markets, Smith also wrote in The Wealth of Nations that we should be wary of the narrow interests of merchants. In a sense, Smith knew perfectly well that self-interest without moral restraint could easily collapse into the selfishness that we should avoid. Take this quote on the danger of merchants to illustrate:
The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposed to, that of the public. To widen the market and to narrow the competition is always in the interest of the dealers… by raising their profits above what they naturally would be, to levy, for their own benefit, and absurd tax upon the rest of their fellow citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution… It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.
Smith believed markets can be corrupted by selfish interests. A recent scandal surrounding Christian Dior, now under judicial administration by order of a court in Milan, exemplifies the dangers of a morally unrestrained free market. The French company was manufacturing handbags for $57 a piece and selling them for $2800, while subjecting the workers producing the handbags to inhumane conditions. It is this type of savage exploitation that Karl Marx exposed, but Marx’s assessment of human nature was not as realistic as Smith’s. Marx thought economic transformation could change much of human nature; Smith knew it couldn’t. Instead, Smith’s Theory of Moral Sentiments illustrates a very realist notion about human nature. There he wrote of a hypothetical earthquake affecting China and how it illuminates the precarious limits of human moral consciences:
Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe (would react)… He would, I imagine, first of all express very strongly his sorrow for the misfortune of that unhappy people….and when all his fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure… as if no such accident had happened. The most frivolous disaster which could befall himself would occasion a more real disturbance. If he was to lose his little finger tomorrow, he would not sleep tonight; but provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren.
This is a very realist description of humanity, in line with the views of Reinhold Niebuhr, the great Christian Realist ethicist. While we could be moral, we would never be morally conscientious enough to solve all human problems. Indeed, human nature is affected with a perennial ambiguity: a longing and capacity to be better than we should be, but a trenchant resistance to capture those moral norms after which we strive. Niebuhr illustrated it with a witty maxim: “Man’s capacity for justice makes democracy possible; but man’s inclination to injustice makes democracy necessary.” In terms of Smith’s wisdom, we might rephrase it like this: “Mans desire for freedom makes capitalism desirable, but man’s inclination to selfishness makes capitalism dangerous.” Dangerous, that is, whenever our moral sense of responsibility fails, as at Christian Dior.
We have almost entirely forgotten Adam Smith’s idea of “the moral spectator;” the idea of our human conscience as a third-party spectator, overlooking what we do for moral approval. Indeed, it has much in common with the religious idea of God, an omniscient spectator watching studiously over our moral behavior. The moral spectator, in Smith’s view, is the “ought” which should furnish the capitalist with a sense of human responsibility. While we constantly refer to the invisible hand, a term Smith only used perhaps three times in all his writings, we have forgotten the moral spectator, a main subject of The Theory of Moral Sentiments. In that work, Smith suggests a Christian sense of ethics might bolster the human conscience. Capitalism is a blessing where people are motivated by a true moral spirit, but without a proper moral foundation, it can become an exploitative curse. John Adams famously remarked that “our constitution was made only for a moral and religious people.” Perhaps the same could be said about the American economic system.
