Wednesday, April 27, 2011

Getting Adam Smith Wrong…and Getting Adam Smith Right

Unlike Tea Party aficionados, Libertarians, and recalcitrant neo-classical economists, Adam Smith (1723-1790), the Scottish moral philosopher and pioneering theorist of political economy, did not indulge in the fashionable nonsense that vociferously claims government is the locus of the worst that ails us, economically and otherwise. Smith understood that for markets to realize virtues of efficiency or freedom, the State, by way of its government, has to make and enforce laws regulating the nature and role of property, rules of exchange and contract, in other words, government is rightfully charged with providing the requisite “background” conditions for market exchange and thus, for example, plays an important role in determining whether or not such exchange will be between true “equals” or arise, say, out of desperation, servitude, or any quality that makes for an ethically disturbing disparate standing between parties to an exchange (e.g., a ‘free labor market’ is the product of state regulation!), hence Smith’s concern, for example, with the coercive nature of labor contracts.

And like Ricardo and Marx (and classical political economists generally), Smith had a corresponding appreciation of the social embeddedness of markets, one utterly at odds, for example, with libertarian-like or abstract neo-classical “imperialist” pictures of the marketplace, one reason Smith could have a nuanced appreciation of how social capabilities may depend on a person’s relative income vis-à-vis those of others with whom he or she interacts (hence the concern with ‘relative’ deprivation and the significance of Smithian economic reasoning in coming to understand why poverty is hard to eliminate solely by raising the average level of income without at the same time addressing issues of inequality of incomes).[1] Smith was likewise sensitive to the coerciveness of labor contracts and aware of the asymmetric power of agents bargaining over the distribution of the social surplus.

Smith did not view the economy, descriptively or normatively, as independent of law, convention or power and thus could in no way believe government was an impediment to all that is good, an anachronistic ideological interpretation that fails to comprehend the basic social, economic and moral views of Smith. For instance, as Debra Satz recently reminded us, ‘[Smith] was tolerant of governmental regulation of wages on behalf of laborers: ‘Whenever the regulation…is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.’”[2] Smith understood the role of “justice and equity” as a sufficient rationale for intervention in markets, labor or otherwise (Smith could, and did, countenance government intervention for the reduction of poverty). Again with Satz, it is important to recall that Smith’s “arguments against government intervention in markets are focused on a specific social order: feudalism. Many of the regulations that he vociferously condemned were vestiges of a precapitalist and undemocratic social order: the narrow interests of monopolistic merchants seeking to protect their inflated profits and the rules of the powerful guilds that restricted the free entry of individuals into professions and trades.”[3]

Smith wrote in favor of taxes on luxuries because it was in this way that “the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor.” As Stephen Holmes remarks, “Redistribution by progressive taxation is justified not by a theory that the rich got rich at the expense of the poor, but on the basis of a more general belief that the rich got rich with the implicit or explicit cooperation of the poor.”[4]

Furthermore, Smith’s views are neither economically or morally compatible with those of Ayn Rand, for example, indeed, were he among us today, one can readily imagine Smith concluding that Rand’s philosophy is conspicuous for its economic and moral repugnance.

A handful of oft-cited quotations from Smith’s An Inquiry into the Causes and Causes of the Wealth of Nations (1776) from conservatives or libertarians typically betray a complete lack of acquaintance with his writings, let alone a deep understanding. A contemporary economist and philosopher, Amartya Sen, is an impeccably reliable source for exposition of Smith’s views, particularly when it comes to clearing away commonplace and superficial ideologically motivated shibboleths. As Sen writes in Ethics and Economics (1987),

“It is important to distinguish between two different issues in the problem of self-interested behaviour. There is, first, the question of whether people actually behave in an exclusively self-interested way. There is a second question: If people behaved in an exclusively self-interested way, would they achieve certain specified successes, e.g. efficiency of one kind or another? Both of these propositions have been attributed to Adam Smith. In fact, however, there is little evidence that he believed in either proposition, contrary to the constant references to the ‘Smithian’ view on the ubiquity and efficiency of self-interested behaviour.”

Sometimes it is claimed, for example, that Smith identified “prudence” with “self-interest.” But this is clearly inaccurate: “As Smith explains in The Theory of Moral Sentiments, prudence is ‘the union of’ the two qualities of ‘reason and understanding,’ on the one hand, and ‘self-command’ on the other. The notion of ‘self-command,’ which Smith took from the Stoics, is not in any sense identical with ‘self-interest’ or what Smith called ‘self-love.’

Indeed, the Stoic roots of Smith’s understanding of ‘moral sentiments’ also makes it clear why both sympathy and self-discipline played such an important part in Smith’s conception of good behaviour. As Smith himself puts it, ‘man, according to the Stoics, ought to regard himself, not as something separated and detached, but as a citizen of the world, a member of the vast commonwealth of nature,’ and ‘to the interest of this great community, he ought at all times to be willing that his own little interest should be sacrificed.’ Even though prudence goes well beyond self-interest maximization, Smith saw it in general only as being ‘of all virtues that which is most helpful to the individual,’ whereas ‘humanity, justice, generosity, and public spirit, are the qualities most useful to others.’

It is instructive to examine how it is that Smith’s championing of ‘sympathy,’ in addition to ‘prudence’ (including ‘self-command’), has tended to be so lost in the writings of many economists championing the so-called ‘Smithian’ position on self-interest and its achievements. It is certainly true, that Smith saw, as indeed anybody would, that many of our actions are, in fact, guided by self-interest, and some of them do indeed produce good results. One of the passages of Adam Smith that has been quoted again and again by the latter-day Smithians is the following: ‘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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’

While many admirers of Smith do not seem to have gone beyond this bit about the butcher and the brewer, a reading of even this passage would indicate that what Smith is doing here is to specify why and how normal transactions in the market are carried out, and why and how division of labour works, which is the subject of the chapter in which the quoted passage occurs. But the fact that Smith noted the mutually advantageous trades are very common does not indicate at all that he thought self-love alone, or indeed prudence broadly construed, could be adequate for a good society. Indeed, he maintained precisely the opposite. He did not rest economic salvation on some unique motivation. In fact, Smith chastised Epicurus for trying to see virtue entirely in terms of prudence, and Smith seized the occasion to rap ‘philosophers on their knuckles’ for trying to reduce everything to one virtue:

‘By running up all the different virtues too to this one species of propriety, Epicurus indulged in a propensity which is natural to all men, but which philosophers are apt to cultivate with a peculiar fondness, as the great means of displaying their ingenuity, the propensity to account for all appearance from as few principles as possible.’

It is a matter of some irony, that this ‘peculiar fondness’ would be attributed to Smith himself but his overenthusiastic admirers in making him the ‘guru’ of self-interest (contrary to what he actually said).

Smith’s attitude to ‘self-love’ has something in common with that of Edgeworth, who thought that ‘economical calculus’ as opposed to ethical evaluation, was particularly relevant to two specific activities, to wit, ‘war and contract.’ The reference to contract is of course precisely similar to Smith’s reference to trade, because trade takes place on the basis of mutually advantageous (explicit or implicit) contracts. But there are many other activities inside economics and outside it in which the simple pursuit of self-interest is not the great redeemer, and Smith did not assign a generally superior role to the pursuit of self-interest in any of his writings. [emphasis added] [….]

The misinterpretation of Smith’s complex attitude to motivation and markets, and the neglect of his ethical analysis of sentiments and behaviour, fits well into the distancing of economics from ethics that has occurred within the development of modern economics. [….] The support that believers in, and advocates of, self-interested behaviour have sought in Adam Smith is, in fact, hard to find on a wider and less biased reading of Smith. The professor of moral philosophy and the pioneer economist did not, in fact, lead a life of spectacular schizophrenia. Indeed, it is precisely the narrowing of the broad Smithian view of human beings, in modern economics, that can be seen as one of the major deficiencies of contemporary economic theory.”[5]

Consider the following from Smith’s The Theory of Moral Sentiments (1759):

“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. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when either we see it, or are made to conceive of it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, I by no means confined to the virtuous and humane, though they may perhaps feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.”

“By the imagination we place ourselves in his situation [that is, of ‘our brother upon the rack’], we conceive ourselves enduring all the same torments, we enter as it were into his body, and become in some measure the same person with him, and thence form some idea of his sensations, and even feel something which, though weaker in degree, is not altogether unlike them. His agonies, when they are thus brought home to ourselves, when we have thus adopted and made them our own, begin at last to affect us, and se then tremble and shudder at the thought of what he feels. [….] That is the source of our fellow-feeling for the misery of others, that it is by changing places in fancy with the sufferer, that we come either to conceive or to be affected by what he feels, may be demonstrated by many obvious observations, if it should not be thought sufficiently evident of itself.” [….] In every passion of which the mind is susceptible, the emotions of the by-stander always correspond to what, by bringing the case home to himself, he imagines should be the sentiments of the sufferer. Pity and compassion are words appropriated to signify our fellow-feeling with the sorrow of others. Sympathy, thought its meaning was, perhaps, originally the same, may now, however, with much impropriety be made use of to denote our fellow-feeling with any passion whatever.” [….]

“But whatever may be the cause of sympathy, or however it may be excited, nothing pleases us more than to observe in other men a fellow-feeling with all the emotions in our own breast; nor are we ever so shocked as by the appearance of the contrary. Those who are fond 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 the assistance of others, rejoices whenever he observes that they adopt his own passions, because he is then assured of that assistance; and grieves whenever he observes the contrary, because he is then assured of their opposition. But both the pleasure and the pain are always felt so instantaneously, and often upon such frivolous occasions, that is seems evident that neither of them can be derived from any such self-interested consideration.” [….]

“And hence it is, that to feel much for others, and little for ourselves, that to restrain our selfish, and 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. As to love our neighbour as ourselves is the great law of Christianity, so it is the great precept of nature to love ourselves only as we love our neighbour, or what comes to the same thing, as our neighbour is capable of loving us.”

“The plaintive voice of misery, when heard at a distance, will not allow us to be indifferent about the person from whom it comes. As soon as it strikes our ear, it interests us in his fortune, and, if continued, forces us almost involuntarily to fly to his assistance.” [….]

“Generosity, humanity, kindness, compassion, mutual friendship, and esteem, all the social and benevolent affections, when expressed in the countenance of behaviour, even towards those who are not peculiarly connected with ourselves, please the indifferent spectator [This is Smith’s name for the model of one who judges with impartiality, a model he derived from the Stoics, and is sometimes used interchangeably with his notion of ‘conscience.’] upon almost every occasion. His sympathy with the person who feels those passions exactly coincides with his concern for the person who is the object of them. The interest, which, as a man, he is obliged to take in the happiness of this last, enlivens his fellow feeling with the sentiments of the other, whose emotions are employed about the same object. We have always, therefore, the strongest disposition to sympathize with the benevolent affections. They appear in every respect agreeable to us. We enter into the satisfaction both of the person who feels them, and of the person who is the object of them.” [….]

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect, persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.”

“We desire both to be respectable, and to be respected. We dread both to be contemptible, and to be contemned. But, upon coming into the world, we soon find that wisdom and virtue are by no means the sole objects of respect; nor vice and folly, of contempt. We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent. To deserve, to acquire, and to enjoy, the respect and admiration of mankind, are the great objects of ambition and emulation. Two different roads are presented to us, equally leading to the attainment of this so much desired object; the one, by the study of wisdom and the practice of virtue; the other, by the acquisition of wealth and greatness. Two different characters are presented to our emulation; the one, of proud ambition and ostentatious avidity; the other, of humble modesty and equitable justice. Two different models, two different pictures, are held out so us, according to which we may fashion our own character and behaviour; the one more gaudy and glittering in its colouring; the other more correct and more exquisitely beautiful in its outline; the one forcing itself upon the notice of every wandering eye; the other attracting the attention of scarce any body but the most studious and careful observer. They are the wise and virtuous chiefly, a select, though, I am afraid, but a small part, who are the real and steady admirers of wisdom and virtue. The great mob of mankind are the admirers and worshippers, and what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness. [….] It is scarce agreeable to good morals, or even to good language, perhaps, to say, that mere wealth and greatness, abstracted from merit and virtue, deserve our respect.” [….]

“When we are always so much more deeply affected by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and exertation. It is from him only that we learn the real littleness of ourselves, and the natural misrepresentations of self-love can be corrected only by the eyes of this impartial spectator. It is he who shews us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the greater interests of others; and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves.”[6]

Notes:
[1] On Smith’s appreciation of “relative deprivation,” see Sen’s discussion in his essay, “Conceptualizing and Measuring Poverty,” in David B. Grusky and Ravi Kanbur, eds., Poverty and Inequality. Stanford, CA: Stanford University Press, 2006: 35-37.
[2] Debra Satz, Why Some Things Should Not Be for Sale: The Moral Limits of Markets. New York: Oxford University Press, 2010: 43.
[3] Ibid., pp. 43-44.
[4] Stephen Holmes, Passions and Constraint: On the Theory of Liberal Democracy. Chicago, IL: University of Chicago Press, 1995: 252. Holmes’ discussion of Smith throughout his book is an antidote to much of the nonsense one finds among contemporary invocations of Smith’s putative views.
[5] Amartya Sen, On Ethics and Economics. Cambridge, MA: Blackwell, 1987: 21-28. See too S.M. Amadae’s chapter, “Adam Smith’s System of Natural Liberty,” in her Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice Liberalism. Chicago, IL: University of Chicago Press, 2003: 193-219.
[6] Adam Smith, The Theory of Moral Sentiments. Washington, DC: Regnery Publishing, 1997 (1759 and revised ed., 1790).

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