The Morality of Smithian Capitalism: Its Sources, Logic, and Ultimate Necessity
Long before I read the Wealth of Nations, I sensed that the perfunctory, particularist understanding of Smith’s work cannot be very accurate. Both capitalism’s ardent supporters and zealous enemies tend to reduce the Scottish scholar’s comprehensive work into a simplified, or worse, outright misunderstood metaphor of the invisible hand, ignoring the context in which Smith introduced it. It is perhaps an unsurmountable task to attempt to establish whether one of the most popular, yet flawed interpretations of Smith as a chief proponent of laissez-faire capitalism results from the adulation of supply-side enthusiasts or sharp criticism of the economic and political left. Ludwig von Mises, one of the most renowned economists of the Austrian school, wrote that Adam Smith’s “marvelous system of ideas (..) paved the way for the unprecedented achievements of laissez-faire capitalism.” In Mises’s view, Smith’s ideas “blew up the institutional barriers to the display of the individual citizen’s initiative and thereby to economic improvement. The Austrian economist felt the need to defend his interpretation of Adam Smith because as he saw it, “civilization is today furiously attacked by Eastern barbarians from without and by domestic self-styled Progressives from within.” Interestingly enough, some of the “self-styled Progressives,” to which von Mises referred, were quite ready to share the Austrian economist’s classification of Smith. Lee Ellitott, for instance, shares the view that Smith’s idea of the invisible hand was a crucial component of Smith’s thought. Where he parts company with von Mises is the question of whether letting the individual’s interests to optimize will yield the most desirable result. Elliott writes: “Historically, economics has been known as the 'dismal' science because of its ruthless belief that people are motivated solely by their financial interests. This came from Adam Smith’s notion that if all of us act selfishly, then an 'invisible hand' will guide the creation of the best society possible.” And even though Smith’s work has been criticized by countless writers who through their writing demonstrated a substantial proclivity to perfunctory analyses, even economists of the likes of John Maynard Keynes and Paul Samuelson have largely focused on the topics mentioned above. Keynes, obviously referring to Smith’s thought, wrote: “It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities (…) Nor is it true that self-interest generally is enlightened.” Samuelson echoed Keynes’s critique by writing that “With respect to the level of total purchasing power and employment, Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum.”
The outcome of either outright shallow or merely narrowly-focused analyses of the Wealth of Nations is what Pack calls “the vulgarization and bastardization of Smith” – an inadequate and inherently incomplete depiction of Smith’s work. The effect that this inadequate depiction has had on the general public is one of uninformed reduction of Smith’s ideas into several maxims. I would argue that the biggest damage that these analyses claim as their victim is not necessarily utter misrepresentation, for that is a result difficult to achieve for anyone but an ill-motivated writer. Rather, it is the ignorance of Smith’s nuanced thought and his demonstrated attempt to strike a balance. Such accounts provide us with severely reductionist and thus most harmful interpretations of Adam Smith. It is perhaps this reductionism what has resulted in the perception that Smithian capitalism, and indeed, capitalism as we know it, is a system that necessitates a particular kind of morality – one characterized by unrestrained self-interest, disregard for the well-being of others, and destructive greed. As will be demonstrated in the course of this essay, this view is severely misguided. In fact, as I will argue soon enough, the very (mis)use of the word system and talk of systemic flaws of capitalism give rise to an unsubstantiated notion of a certain causation mechanism that simply does not exist.
Just as misguided is the view that Smith was a proponent of unrestrained capitalism. It was the author of the Wealth of Nations who did not wait a hundred pages into the book to state that “servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole (emphasis added).” It is the same Adam Smith who writes in his magnum opus that
The fund destined for replacing or repairing, if I may say so, the wear and tear of the slave, is commonly managed by a negligent master or careless overseer. That destined for performing the same office with regard to the free man, is managed by the free man himself. The disorders which generally prevail in the economy of the rich, naturally introduce themselves into the management of the former: The strict frugality and parsimonious attention of the poor as naturally establish themselves in that of the latter.
A careful reading of the Wealth of Nations thus evidences that Adam Smith’s work cannot be interpreted as an apotheosis of what later acquired the French name laissez-faire. I will argue that Adam Smith would likely be the last to advocate for unrestrained capitalism. Even though Smith’s analysis leads the critical reader to the conclusion that capitalism is, rather than immoral, an amoral mode of human economic life, the author of the Wealth of Nations demonstrates that the commercial society can only contribute to the overall cooperative social harmony if coupled with a strong sense of morality. Despite the fact that Smith identifies various flaws of character that might burgeon in capitalism, to abandon capitalism itself would not be a proposition he would dare to entertain. Rather, Smith quite inadvertently, subtly, and perhaps even unknowingly illustrates that other crucial values must accompany capitalism in order for this mode of organization to result in not only economically, but also socially desirable outcomes.
This essay is organized as follows: first, I will discuss Smith’s view with regards to the origins that capitalism. This discussion will inform our decision on whether or not it is appropriate to refer to capitalism as a system. Second, I will debunk the laissez-faire interpretation of Adam Smith by arguing that the nature of Smithian capitalism is rather progressive. I will do so by briefly summarizing Adam Smith’s treatment of government regulation and progressive taxation. Subsequently, I will elucidate Smith’s own misgivings about capitalism in order to later demonstrate that in today’s society, quite a large portion of these has been rendered irrelevant. Lastly, I will argue that Smith’s important work of social philosophy – The Theory of Moral Sentiments – illustrates that a morally agreeable character is not only a virtue but also a necessity in a society defined by interpersonal interaction.
The Origins of Capitalism
In Smith’s view, capitalism emerged as a natural stage of human development that, despite certain negative features, has generated an immense amount of wealth and thus trumped all heretofore known forms of economic organization. Smith thought that the commercial society as a stage of human development was predicated on advanced division of labor. Smith’s famous example of a pin factory, where productivity rises as the production of a pin is broken down to specific operations, demonstrates that it is specialization in production and the subsequent exchange of the products of labor on a free market what optimizes the use of resources in a society.
Smith recognized that law and order were essential to the commercial society. When listing the duties of a proper government, the Scottish philosopher remarks that “the duty of the sovereign, that of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice, requires too very different degrees of expence in the different periods of society.” Smith goes on to explain that “among nations of hunters,” which he recognizes as the earliest stage of human development, the need for an institutionalized system of justice is comparatively lower because where “there is scarce any property, or at least none that exceeds the value of two or three days labour; so there is seldom any established magistrate or any regular administration of justice.” In fact, the kind of advanced economic activity that takes place in a commercial society gives rise to modern governance itself. “Where there is no property, or at least none that exceeds the value of two or three days labour, civil government is not so necessary.” It is important to note that Smith attributes the rise of the commercial society to the institution of private property. Human progress, Smith believes, enables humans to accumulate the results of their economic activity and it is crucial for society to establish an institutionalized individual right to the results of this activity. Otherwise, human progress would not be possible and society would regress to a less advanced stage of human development. The above mentioned institutionalized individual right to the results of one’s activity is private property.
I wish to avoid using the word system when referring to capitalism because it usually implies a certain, quite often advanced and direct, degree of human agency. I believe that Smith was right when he concluded that capitalism resulted from human progress and protection of private property rather than from any imposition by a self-righteous ruler. Deliberate human agency is needed to replace capitalism, not to create it. Various definitions will agree that perhaps the only common denominator of capitalism is private property. Even the possibility of free markets follows from the sanctity of private property, for one can never claim to own something if he does not simultaneously command the right to exchange it for another’s property. I wish to avoid the word system because it lowers capitalism to the level of true systems – the more or less preposterous alternatives to capitalism that all have their founding fathers, deliberately designed rules of implementation, more or less centralized regulating bodies, and plenty of inefficiency. I suggest the term mode of human economic life.
The Progressive Nature of Smithian Capitalism
Smith makes a deliberate effort to come across as a moderate reformer, one that carefully analyzes the undeniable benefits of free-market capitalism, relentlessly champions the hard-working classes, and soberly delineates an active, albeit limited, role for the government. Just as is true for the commercial society itself, a greater role of the government was in Smith’s eyes a development associated with human progress. An active government should see its role in
protecting the society from the violence and invasion of other independent societies (..) by means of a military force. But the expence both of preparing this military force in time of peace, and of employing in in time of war, is very different in the different states of society, in the different periods of improvement.
This expense, the author of the Wealth of Nations explains, is greatest in the commercial society where division of labor assigns every member of that society a more or less unique occupation. Since maintenance of safety and security benefits the entire public, it is not only appropriate that a publicly-financed government take care of it, it is equally reasonable to expect that some will pay more than others. In Smith’s words:
The expence of defending society, and that of supporting the dignity of the chief magistrate, are both laid out for the general benefit of the whole society. It is reasonable, therefore, that they should be defrayed by the general contribution of the whole society, all the different members contributing, as nearly as possible, in proportion to their respective abilities.
It is unnecessary to repeat here what has already been elucidated above, i. e. that the maintenance of justice is a proper role assigned to the government, for it is this impersonal institution what is capable of upholding the conditions conducive to societal peace and flourishing commerce. It will suffice to add that in the case of justice, too, Smith calls for the costs to be generally defrayed by contributions of the entire society. Another important task that Smith lays on the shoulders of the government is the maintenance of
those publick institutions and those publick works, which, though they may be in the highest degree advantageous to a great society, are, however, of such nature, that the profit could never repay the expence to any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain.
Though Smith is obviously concerned with roads, bridges and other instances of public infrastructure, what he really refers to is a phenomenon described by economists as public goods – anything that individuals and societies find beneficial, yet the free market is incapable of yielding it. The logic that Smith employs in his discussion of public goods is no different from that of twenty-first-century, mainstream economists. In fact, Smith rendered himself a progressive of his time by suggesting that the public, i. e. government, should concern itself with educating the poor and instituting examinations to test the basics of knowledge.
The publick can encourage the acquisition of those most essential parts of education by giving small premiums, and little badges of distinction, to the children of the common people who excel in them. The publick can impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade either in a village or town corporate.
It is hard to deny that Adam Smith does spend a considerable portion of his Wealth of Nations elucidating the benefits of free markets. His assertion 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,” permeates Smith’s though in that it illustrates the observation that the market, however impersonal, can through its unintended consequences benefit the entire society by channeling the results of the division of labor, a phenomenon that in Smith’s view ushered in an age of unprecedented economic prosperity. It is, on the other hand, a testimony of one’s shallow reading of Smith to argue that the author favored free markets in order to help the rich get richer or to deny the little guy a fair deal. Quite to the contrary, Smith’s opposition to market regulation is, albeit justified by his economic analysis, unequivocally pro-worker. In an entire section titled Inequalities occasioned by the Policy of Europe, Adam Smith argues that “the intention of both regulations [pertaining to apprenticeships] is to restrain the competition to a much smaller number that might otherwise be disposed to enter into the trade.” He goes on to explain that the various guilds and artisans’ associations not only hurt the entire population by raising the price of certain products, but first and foremost make it impossible for ordinary workers to find a job and improve their lot. We are told that “whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters.” Clearly, Smith is not interested in preserving the economic power of a few. In fact, he sees the emergence of collusive arrangements and various monopolies as a danger to the great majority of hard-working folk. How else to understand his acute observation that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices?” If it was not for the anachronistic spelling, one might casually attribute these words to senator Elisabeth Warren.
In order to evaluate what Smith’s criticism of market regulation meant for the average worker, one must not forget the political environment in which Smith was writing. Firstly, the political process in eighteenth-century Great Britain was controlled by the rich and it was thus an accurate expectation to predict that more regulation meant that those already benefiting from the status quo would benefit further. By arguing for dismantling of regulations that prevented access to the market or otherwise perverted the outcome of market forces, the author of the Wealth of Nations asks for reforms that would benefit “the little guy.” The paradox that somewhat less perspicacious analyses of Smith’s thought cannot seem to resolve is rooted in the fact that the dichotomy of market efficiency and social welfare only entered popular imagination long after Smith’s death. In other words, the conviction that deregulating the market must inexorably hurt the working class is a rather recent invention. Understandably, it relies on the contemporary experience with regulation which has centered, perhaps ever since the progressive movements of the late nineteenth century, on consumer protection and social welfare. Only rarely do we find in the Wealth of Nations a statement that does not aim at promoting a moderate stance. Yet, there are some and at least one of them illustrates Smith’s position on market regulation quite plainly: “When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters (emphasis added).”
One can make the argument that on numerous occasions, the chief proponent of Scottish enlightenment actually views equality of opportunity as tantamount to, and indeed necessary for, efficiency. In his treatment of regulations that made it difficult for workers to move in order to pursue employment, Smith uses the word inequality to refer to efficiency. We are told that
the policy of Europe, by obstructing the free circulation of labour and stock both from employment to employment, and from place to place, occasions in some cases a very inconvenient inequality in the whole of advantages and disadvantages of their different employments.
It is rather obvious that an unequal distribution of the different employments of stock refers first and foremost to market efficiency. In Smith’s time, the interests of economic liberals thus often aligned with the demands of those who, like Smith, favored the worker. Nor was the author of the Wealth of Nations an opponent of stringent financial regulation.
But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.
However, a discussion so ambitious as to attempt to provide a comprehensive analysis of Smith’s thought on financial regulation could easily digress into an entire book, which is a temptation we shall carefully resist.
The plight of the poor and issues of inequality, to be sure, were a topic Smith deeply cared about. The above mentioned analysis has illustrated that Smith was certainly more pro-worker than pro-rich. It should thus not surprise the reader to discover that the author of the Wealth of Nations views regressive taxation with contempt. In the course of his treatment of various taxes, Smith denounces the window-tax because “the principal objection to all such taxes is their inequality, an inequality of the worst kind, as they must frequently fall much heavier upon the poor than upon the rich.” Yet Smith’s treatment of taxes does not culminate with his rejection of taxes which are excessively intrusive, administratively burdensome or otherwise inappropriate. He is unafraid to address the core issue which is bound to arise in the course of any serious discussion of taxation – the degree to which different classes of taxpayers should be taxed differently. The author of the Wealth of Nations surprises the contemporary reader with his endorsement of progressive taxation which divides the left and right until this day. Smith, it must be emphasized, sides with the left: “It is not very unreasonable that the rich should contribute to the publick expence, not only in proportion to their revenue, but something more than in that proportion.” Not only does Smith endorse progressive taxations, he also agrees with its underlying logic, known as “equal marginal sacrifice:”
The proportion of the expence of house-rent to the whole expence of living, is different in the different degrees of fortune. It is perhaps highest in the highest degree, and it diminishes gradually through the inferior degrees, so as in general to be lowest in the lowest degree. The necessaries of life occasion the great expence of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expence of the rich; and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable.
Let us compare Smith’s reasoning with that of Alfred Marshall, the author of Principles of Economics, who wrote more than a century after Smith
A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a-year will walk to business in a much heavier rain than the clerk with £300 a-year; for the cost of a ride by tram or omnibus measures a greater benefit to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The benefit that is measured in the poorer man’s mind by the cost is greater than that measured by it in the richer man’s mind.
And finally, let us compare Smith’s position with that of Paul Krugman, one of the most prominent economists of the contemporary left:
After all, if you should happen to end up as a member of the top 1 percent, an extra dollar at the margin won’t mean a lot to you; but if you should happen to as a member of, say, the bottom quintile, an extra dollar could make a lot of difference.
Clearly, no interpretation of Smith’s work could be farther from the truth than that which casts the chief proponent of the Scottish enlightenment as an ideologue who is merely interested in dismantling reasonable government regulation and cutting taxes for the wealthy. Smith’s ideology, if there even is anything of such name, does not proceed from preconceived notions. Rather, his analysis stems from his observations of the underlying dynamic of the commercial society. Smith’s approval of many of the features of the commercial society follows, and does not precede, his analysis. In today’s jargon, Smith composed the Wealth of Nations as an objective and positive work, trying as hard as could to avoid normative statements.
However, we sense that the rational reasoning that Smith employs to favor particular kinds of taxes cannot fully explain his direct criticism of phenomena such as conspicuous consumption. Consider the following statement:
When the toll upon carriages of luxury, upon coaches, post-chaises, &c. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, wagons, & c. the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor, by rendering cheaper the transportation of heavy goods to all the different parts of the country.
Though Smith reasons that the rich are capable of withstanding heavier taxes, he does not speak of their ability to do so. He brings the reader’s attention to the indolence and vanity of the rich. Later in the book, the author of the Wealth of Nations denounces profligacy by observing that
with the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so compleat as when they appear to possess those decisive marks of opulence which nobody can possess but themselves.
In lines like these, Smith eloquently expresses his moral convictions whose relationship to the Smithian understanding of capitalism will be discussed in the last part of this essay.
Smith’s Own Misgivings Regarding Capitalism
Smith was fully aware that the advent of the commercial society, for which he in general terms advocated, would have certain deleterious effects on the various orders of people. Specifically, Smith worried that as the various orders, or classes, of people become accustomed to their respective roles in the commercial society, they will intellectually degenerate. Let us first consider the proprietors of land.
When the publick deliberates concerning any regulation of commerce or police [policy], the proprietors of land never can mislead it, with a view to promote the interest of their own particular order; at least, if they have any tolerable knowledge of that interest. They are, indeed, too often defective in this tolerable knowledge. They are the only one of the three orders whose revenue costs them neither labour nor care, but comes to them, as it were, of its own accord, and independent of any plan or project of their own. That indolence, which is the natural effect of the ease and security of their situation, renders them too often, not only ignorant, but incapable of that application of mind which is necessary in order to foresee and understand the consequences of any publick regulation.
The leading intellectual of the Scottish enlightenment was thus worried that the landlords, living off of their estates, and without any particularly direct relation to hard work, would become indolent and their intellectual abilities would atrophy. Smith reasoned that the landlords could spend their eternally flowing income in two ways. They could either spend it on luxuries in order to indulge in their hedonism, or they could “purchase an additional stock of materials, tools, and provisions, in order to maintain and employ an additional number of industrious people, who re-produce, with a profit, the value of their annual consumption.” The outcomes of the two aforementioned choices are as follows:
So far as it is employed in the first way, it promotes prodigality, increases expence and consumption without increasing production, or establishing any permanent fund for supporting that expence, and is in every respect hurtful to the society. So far as it is employed in the second way, it promotes industry; and though it increases the consumption of the society, it provides a permanent fund for supporting that consumption, the people who consume re-producing, with a profit, the whole value of their annual consumption.
The working class, to Smith’s apparent dismay, could face even more pitiful fate. He observed that the workers would be left with little time and energy to focus on matters beyond their most immediate professional life.
His condition leaves him no time to receive the necessary information, and his education and habits are commonly such as to render him unfit to judge even though he was fully informed. In the publick deliberations, therefore, his voice is little heard and less regarded, except upon some particular occasions, when his clamour is animated, set on, and supported by his employers, not for his, but their own particular purposes.
This condition, Smith thought, was no accidental outcome of the commercial society. In fact, it was rooted in the division of labor itself, the crucial improvement that in Smith’s view contributed to the commercial society’s opulence.
In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations; frequently one or two.
The commercial society in Smith’s time therefore did not widen the workers’ perspectives, it provided for a very narrow and unchanging lifestyle which eventually led to an intellectual degeneration of the worst kind.
He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. (…) His dexterity at his own particular trade seems, in this manner to be acquired at the expence of his intellectual, social, and martial virtues.
This critique is not entirely dissimilar from that of Herber Marcuse, a chief figure of the New Left, who wrote that the average consumer’s participation in what Marcuse termed the industrial society renders him, by limiting and conditioning his imagination, incapable of transforming the society he inhabits. In Marcuse’s words:
To be sure, labor must precede the reduction of labor, and industrialization must precede the development of human needs and satisfactions. But as all freedom depends on the conquest of alien necessity, the realization of freedom depends on the techniques of this conquest. The highest productivity of labor can be used for the perpetuation of labor, and the most efficient industrialization can serve the restriction and manipulation of needs.
Let us now turn to the last order – the employers or, in post-Smithian jargon, the capitalists. They are likely to disregard the general well-being of the entire society because their private gains are not necessarily dependent on it. Furthermore, there is a reason to expect that they will attempt to bend the rules to their own advantage.
But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two. (…) The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
In other words, the commercial society cannot function properly if justice and the rule of law are not upheld impartially. It cannot function properly if some exercise a disproportionate amount of political power. It cannot function properly if some are faced with the results of their actions while others are not, and instead are allowed to reap the benefits and escape the painful repercussions thereof.
The Theory of Moral Sentiments – Smith’s Implicit Solution
Today, the Wealth of Nations is probably the most renown and widely read of Smith’s works, although it was not necessarily so in his times. Smith was initially praised as the author of The Theory of Moral Sentiments – a book in which he outlined his social and moral philosophy. It is important not to neglect this portion of Smith’s thought, for it offers implicit answers to some of the failures of the commercial society which have been briefly summarized above. The Theory of Moral Sentiments, importantly, illustrates that a morally agreeable character is not only a virtue but also a necessity in a society defined by interpersonal interaction. In other words, what capitalism cannot achieve, morality can.
Smith based his analysis on interpersonal sympathy, which in this sense is synonymous with empathy. He observed that humans possess a proclivity to care about others and, in this way, to relate themselves to their fellow human beings despite the fact that such sentiments have no base in physical pain or pleasure. Let us let Smith speak for himself:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. (…) That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instance to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or to the 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.
The mechanism through which Smith’s sympathy operates is one of imagination. The experience of others is imaginatively reconstructed in order for humans to form certain moral sentiments that subsequently inform their behavior. In Smith’s logic, all humans have a certain impartial spectator which enables them to escape the narrow definition of self-interest in order to reflect on the experience of others.
As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is on the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers. They never did, and never can, carry us beyond our own person, and it is by the imagination only that we can form any conception of what are his sensations. (…) By the imagination, we place ourselves in his situation.
Smith is not entirely prepared to abandon the centrality of self-interest, for he says that our family, friends, and country are usually nearest to our heart. Yet he acknowledges that the sentiments we instinctively perceive, and invariably have to follow, may play a greater role.
The administration of the great system of the universe (..) the care of the universal happiness of all rational and sensible beings, is the business of God and not of man. To man is allotted a much humbler department, but one much more suitable to the weakness of his powers, and to the narrowness of his comprehension: the care of his own happiness, of that of his family, his friends, his country.
But though we are (..) endowed with a very strong desire of those ends, it has been entrusted to the slow and uncertain determinations of our reason to find out the proper means of bringing them about. Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst, the passion which unites the two sexes, and the dread of pain, prompts us to apply those means for their own sakes, without any consideration of their tendency to those beneficient ends which the great Director of nature intended to produce by them.
Vernon Smith suggests that the same kind of reciprocity that Smith invokes when he speaks of man’s proclivity to “truck, barter, and exchange one thing for another” comes similarly into play in the social sphere. Smith, this time Vernon, concludes: “whether it is goods or favors that are exchanged, they bestow gains from trade that humans seek relentlessly in all social transactions.” In other words, the same sentiments that Adam Smith attributes to sympathy can be seen as a vehicle to derive social utility and are thus entirely agreeable with an expanded definition of self-interest. It is expanded because it realizes that man’s well-being depends in the long term on the well-being on the entire society. It is perhaps because the average man himself is incapable of realizing this that social instincts, Smith’s moral sentiments, are passed down onto future generations as more or less unquestionable axioms, ultimately tracing their origin to evolution.
The Relationship Between Capitalism and Morality
Let us now focus specifically on the question of morality. Various critiques of capitalism often point to blatant instances of inequality, burgeoning corruption, and ever-increasing power of the rich to argue that these undesirable outcomes are at the very heart of the capitalist system. It is further asserted that greed, lack of empathy, and careless egoism go hand in hand with capitalism’s chase of profits. It is often asserted that these flaws are inherent to capitalism, that they are systemic. A careful reading the Wealth of Nations cannot but identify that Smith’s approach to the relationship between morality and the commercial society, or capitalism, is roughly the following: capitalism itself does not necessitate a particular set of morals but capitalism’s outcomes can be altered in accordance with our moral convictions.
In the course of the first few chapters of his book, Adam Smith does not, for the most part, invoke morality to justify his concepts. Instead, he discusses the various mechanics of the division of labor, the labor theory of value, and the price theory. Almost nowhere do we encounter a normative approach to the topics at hand. Quite to the contrary, we are shown that the market’s efficiency, upon which prosperity largely relies, is a side effect of personal interest. The market, through enabling each individual to improve her personal lot, also benefits the entire society by facilitating exchange, encouraging further division of labor, and optimizing the use of a society’s resources. This beneficial outcome however, is presented as an unintended consequence. Rather than seeing Smith’s discussion of the mechanics of a commercial society as immoral, we will do better by concluding that it really is amoral. That is, morality does not, at least at first, play a major role in Smith’s discussion of political economy.
To be fair, things do change later in the book. Towards the end of book I, when Smith turns to the various Inequalities occasioned by the Policy of Europe, the vernacular with which the author scorns the rich cannot conceal the contempt he feels towards conspicuous consumption and the detached life of the rich. However, despite the fact that Smith’s own value system, whether bolstered by his religion or not, permeates his analysis, it does not drive it. When we read about the ways in which the powerful interests tend to collude in cartels or when we are lectured on the deleterious effects of policies that distort international trade in favor of particular interests, it is the economic analysis of a given issue that always stands at the forefront. Without it, Smith is unlikely to reject a phenomenon entirely on moral grounds only.
As has been described above, Adam Smith did have his misgivings about the effect of capitalism on people’s characters. Smith’s critique of commercial society was, it must be pointed out, in its most important points quite different from that of today’s critics. Smith worried that workers would intellectually degenerate because of long hours and jobs characterized by suffocating repetition. He too, however, did not realize that capitalism would eventually become a very vibrant and ever-changing mode of human economic life where there is no room for stagnant and rigid individuals who forever remain defined by the occupation they perform. Quite to the contrary, individuals in today’s capitalism need to react to the changes that the market channels. As countries develop, average working hours usually decrease. Clearly, countries develop because of capitalism, not in spite of it. Smith’s worry thus seems, at least in today’s capitalism, unfounded.
Smith is also worried about indolent landlords and mischievous businessmen. He does not however, see their questionable behavior as a justification for abolishing the entire commercial society. In the Theory of Moral Sentiments, Smith implicitly suggests that the negative phenomena so often associated with capitalism are likely the result of people’s choice to alienate themselves from their fellow human beings, to prefer anonymous and impersonal interactions in the daily routine. Smith was convinced that capitalism as he saw it could achieve the opposite – a society where constant feedback and the natural proclivity to empathize with others fosters cooperation. In Smith’s thought, sympathy has a role to play both in economic and social interactions. It is this reciprocal sympathy in both economic and social relations that can not only create wealth but also contribute to social harmony.
Our critical analysis of the various ways of organizing human societies among which democracy and capitalism are the most notorious would be much enriched if we were able to resist the temptation to judge these phenomena by their failure to achieve a certain outcome and instead turned our attention to what they successfully manage to prevent. Democracy prevents tyranny, which can otherwise only be removed by revolution, capitalism avoids complete anarchy on the one hand and economic dictatorship on the other. Smith understood that humans are flawed and frailty and saw that, perhaps paradoxically, a mode of human economic life where a plethora of flawed individuals has a relatively equal say will fare much better than that where a few equally mistaken humans “call the shots.” In fact, Smith would likely be appalled to learn that none of the executives responsible for the 2008 financial meltdown saw a prison from the inside. To him, this would be an antithesis to the commercial society. A society where the hard-working folk faces the consequences of its decisions while others do not is not one we can appropriately label as capitalist in the Smithian sense. An elaborate financial system may consist of institutions that are almost too big to fail, yet there is no justification whatsoever for executives that are too big to jail. Smithian capitalism does not despise rules, it cannot survive without them.
I would argue that to blame capitalism for its failure to distribute resources equally, or even in accordance with some socially desirable rationale, is to forget that equal distribution of wealth has never been capitalism’s function. In other words, capitalism cannot distribute wealth equally but it has the potential of creating immense wealth. The various theorists that want to come up with an alternative to capitalism have to first tackle the question of how to create wealth, yet they all too soon focus their imagination on wealth distribution. To blame capitalism on moral grounds, I would argue, is to misunderstand wherein our moral failures, which certainly are real, lie. Capitalism does encourage individualism but does it necessitate egoism? I do not believe so. Whether one wishes to find happiness in purchasing luxury clothing or donating to charity depends much more on one’s free choice rather than on the mode of economic life one happens to inhabit. Many reformers today talk of progressive taxation as a way of reducing inequality. There are very important reasons to argue that this is a bad idea, but clearly, it is not one that Adam Smith would necessarily oppose. Countries from the United States to Denmark are, in the most basic sense, all instances of different forms of capitalism. Yet the talk of systemic flaws of capitalism does not seem to cease. That is very dangerous because by failing to critically analyze what it is that is in need of improvement in our society – namely, our morals – we put ourselves in the unacceptable danger of destroying what is good in it. A careful analysis of Adam Smith’s work cannot but lead the careful reader to the conclusion that capitalism and morality are not mutually exclusive but rather, that they can work hand in hand.
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 Even though Keynes’s and Samuelson’s analyses are certainly poignant, they are only focused on one aspect of Smith’s thought.
 SMITH, Adam. Inquiry into the Nature and Causes of the Wealth of Nations, p. 96
 ibid., p. 98
 ibid., p. 708
 ibid., p. 709
 ibid., p. 710
 ibid., p. 689
 ibid., p. 814
 ibid., p. 723
 ibid., p. 786
 ibid., p. 26
 ibid., p. 135
 ibid., p. 157
 ibid., p. 145
 Which, to be fair, is not shared by all political parties. It has, however, shaped the public discourse in especially those European countries that administer extensive welfare programs.
 SMITH, Adam. Inquiry into the Nature and Causes of the Wealth of Nations, p. 157
 ibid., p. 151
 ibid., p. 324
 ibid., p. 846
 ibid., p. 842
 MARSHALL, A. Principles of Economics. Bk. I, Ch. II
 Ben Bernanke Endorses A 73 Percent Tax Rate. KRUGMAN, Paul. The Conscience of a Liberal: New York Times Blog [online]. 3. 6. 2013 [cit. 2015-12-20]. Available at: http://krugman.blogs.nytimes.com/2013/06/03/ben-bernanke-endorses-a-73-percent-tax-rate/?_r=0
 SMITH, Adam. Inquiry into the Nature and Causes of the Wealth of Nations, p. 725
 ibid., p. 190
 ibid., p. 265
 ibid., p. 294
 ibid., p. 266
 ibid., p. 781
 ibid., p. 782
 MARCUSE, H. One-dimensional Man: Studies in the Ideology of Advanced Industrial Society. Boston: Beacon Press, 1991. ISBN 0807014176, p. 18
 SMITH, A. Inquiry into the Nature and Causes of the Wealth of Nations , p. 266
 ibid., p. 267
 SMITH, A. The Theory of Moral Sentiments, I. I. 1
 ibid., I. I. 2
 ibid., VI. II. 49
 ibid., notes to part II, section III, chapter III
 SMITH, Adam. Inquiry into the Nature and Causes of the Wealth of Nations, p. 25
 SMITH, V. L. The Two Faces of Adam Smith. Southern Economic Association Distinguished Guest Lecture [online]. November 21, 1997.
 In the sense of the word which has been described above.