Thinking Like Adam Smith

On the Semiquincentennial of The Wealth of Nations

Today marks the 250^th anniversary (the Semiquincentennial) of the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, one of the greatest works of social science. To explore the present timeliness of Adam Smith’s work is to run the risk of anachronism, of wrenching his views out of their historical context. But to ignore its possible timeliness is to consign the study of past thought to antiquarianism. Those most inclined to make Smith into a patron saint often fail to think like Adam Smith because they are satisfied to like what Adam Smith thought (or more often, what they suppose him to have thought). Trying to find the timely in Smith by thinking as Smith thought is a less certain, but potentially more rewarding enterprise. Recapturing how Smith thought was the aim of my book, Adam Smith in His Time and Ours: Designing the Decent Society, first published in 1993. Here, I want to recapitulate some of its key themes. (All references are to Glasgow edition of The Wealth of Nations and of The Theory of Moral Sentiments.)

Smith’s Intellectual Project

Smith did not try to develop a science of economics free of moral judgments or ethical considerations. His policy recommendations were shot through with moral purposes—above all, to improve the material and moral welfare of the great mass of the population – what he called “universal opulence”. But his science of political economy was not a moralistic science: he tried to bring about improvement not by preaching, but by designing institutions that would strengthen incentives to act in socially beneficial ways. Smith’s attention to the gap between intentions and consequences provides a powerful antidote to the tendency of cultural critics to substitute moral indignation for social analysis. Many other social thinkers have tried their hands at using institutions to direct human passions, often with results that were futile when they were not nightmarish. Smith’s success as a psychological institutionalist can be attributed in large part to his insistence on understanding the workings of existing institutions rather than attempting to design entirely new institutions on the basis of purported social scientific knowledge.

Smith as Psychological Institutionalist

Smith saw one of his tasks as that of the traditional moral philosopher, to reflect on the nature of moral excellence.

But, like many Enlightened intellectuals, Smith prided himself on describing man as he really was, not as we might want him to be. His conception of man was not as an intrinsically good creature corrupted by society, nor was it man as irredeemably evil except by the grace of God. His project was to take man as he actually was and to make him more like what he should be, not by the power of government and not primarily by preaching, but by discovering the institutions that made men tolerably decent and might make them more so.

Anticipating Unintended Consequences

Smith’s great analytic motif was the unanticipated consequences of human action. In The Wealth of Nations, this theme is pervasive. Indeed, the book is almost an encyclopedia of the role of unintended consequences in human affairs, a phenomenon (or analytic perspective) which fascinated Smith.

In calling attention to the gap between intentions and results, Smith was not attempting to demonstrate that deliberate attempts to better the human condition were futile. In The Theory of Moral Sentiments, he praised that “superior reason and understanding, by which we are capable of discerning the remote consequences of all our actions, and of foreseeing the advantage or detriment which is likely to result from them.” [TMS IV 2. 6, p.189.] Smith’s science of a legislator was devoted to improving the ability of the legislator to anticipate the previously unanticipated consequences of his actions. The reform of human institutions demanded an awareness that the consequences of human actions were often different from the intentions which motivated the actors.

This was no recipe for the revolutionary replacement of existing institutions by new ones designed by the social scientist. On the contrary, Smith believed that many existing institutions were already highly functional, that others could be made to function better through the influence of the intellectual or of the legislator, and that yet others provided models for institutional innovation.

Many of the institutions which had historically provided the greatest benefit had come about in an unplanned fashion, without deliberate human foresight. [WN IV iv 17 p.422.] But Smith did not intend this as a call to quietism: the purpose of social science as he conceived it was to aid the legislator in anticipating the consequences of his proposed actions.

The visible hand was that of the legislator, who usually preserved, sometimes reformed, and occasionally designed new institutions which channeled the motives of individuals toward socially beneficent ends “as if by an invisible hand.”

The theme of the unintended and unanticipated consequences of human action appears with many variations in The Wealth of Nations, and in additional mutations in The Theory of Moral Sentiments. Smith explores the many ways in which the outcomes of intentional actions are different from those anticipated, in directions sometimes positive and sometimes negative, or positive from the perspective of society but not from that of the actor.

Smith is perhaps best known for his explication of unintended consequences which are beneficial for the actor and for society at large. The most striking version of this theme comes in this passage:

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is the most advantageous to the society.” [WN IV ii. 4, p.454]

Were it not for legislative attempts to direct the flow of investment, Smith argues, individuals would prefer to invest in domestic industries, where they can supervise their investments, and will direct their investments into those industries where there are the greatest profits to be made, that is where the effective demand for any commodity outruns its supply. Smith concludes that

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can.

He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. [WN IV ii 9, p.456]

The image of the “invisible hand” in this passage (the only place in The Wealth of Nations in which the image appears) is a metaphor for the socially positive unintended consequences of the institution of the market, which through the profit motive and the price mechanism channels the self-interest of individuals into collective benefits. There is nothing mysterious about the “invisible hand” -- at least once its functions have been made manifest by social science. And yet, because of the gap between the explicit intentions of the actor and the ultimate result of his action, the notion that the social outcome of the market process is benevolent is counter-intuitive, or contrary to common sense.

The customer knows from his experience that the merchant sells him a commodity for more than the merchant paid for it.

Not only that, but after having tried to purchase it as cheaply as possible, the merchant tries to sell it for the most he can get! How the customer may benefit from a system made up of many such merchants he is at a loss to explain.

The legislator knows from his experience that merchants, manufacturers, and laborers are typically self-seeking, at least in their economic relations. Smith’s claim that the ultimate outcome of all of this self-seeking can further the common good is, at first, puzzling.

Yet Smith goes on in the very next paragraph to offer his most important justification for the superiority of the market in allocating resources, a justification based upon the distribution of knowledge in society.

“What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.[WN IV ii 10, p.456.]”

The legislator, then, is not in a position to have adequate knowledge of the myriad interactions of supply and demand that occur in a sophisticated economy. Nor does anyone else. But individuals have both the motive (of economic gain) and the ability to gather knowledge of the supply and demand for any single commodity in a particular market. Thus, the legislator concerned with the common economic good should, in general, refrain from exercising direct control over prices and production. Much of that can be left to the “invisible hand” of the market, though maintaining, perfecting, protecting, and compensating for the negative effects of the market will require the visible hand of government.

Smith believed that individuals were better judges of local economic opportunities than the distant legislator, and he began from the premise that they were motivated to engage in economic activity by their perceived self-interest. But he never maintained that they correctly perceived their true self-interest, much less than they acted “rationally.” In The Wealth of Nations, Smith explored at length the human propensity to overrate the likelihood of gain and underestimate the likelihood of failure in a variety of professions and economic activities, from soldiering to smuggling. [WN I x b 26-34, pp.124-128.] In the Theory of Moral Sentiments, when Smith used “the invisible hand” as a metaphor for the unanticipated and unintended social consequences of action, it was to portray unintended outcomes which are negative from the point of view of the individual actor, but positive from the perspective of society. The intention in this case is the desire to get rich.

The Wealth of Nations also provides numerous instances of unanticipated outcomes which are negative from the perspective of the interests of both the actor and society at large. Smith argued, for example, that the quality of education at the great English universities had been eroded by the unanticipated effects of philanthropy. The philanthropists who endowed professorships intended to improve the quality of learning. Yet the assured income from these endowments freed the professors from the need to depend upon student fees, an independence, Smith argued, which had destroyed the incentive for professors at Oxford and Cambridge to devote themselves to teaching. [WN V i f 5-9, pp.760-1.] Similarly, pious donors motivated to strengthen the established church had provided endowments for the higher education of its ministers. Yet the donors had unwittingly succeeded in producing clergymen unsuited by their higher education to appeal to the common man, thereby preparing the ground for evangelical sects. [WN V i g 1, pp.788-9.; also V i g 29, pp. 805-6.] In economic policy, Smith showed that time and again legislation intended to boost the production or price of some commodity through government bounties had failed, or had even produced the opposite of the intended effect, because its framers had misjudged its impact.[WN IV iv, pp.499-543.] The attempts by government to increase revenue by raising customs duties could have the opposite of the intended effect, Smith showed, by discouraging the consumption of the commodity in question, or by encouraging smuggling. In such cases, Smith advised the legislators, government might increase its revenue by lowering the level of excise taxes. [WN V ii k 33-4, p.884 ] By taking into account the experience of past legislative errors, the government could adjust and improve regulations so as to bring about the desired effect.

Smith’s most effective demonstration of the role of social science in anticipating the unanticipated consequences of social action came in the long chapter devoted to the theories of the French physiocrats. Here Smith showed how a proposal for economic improvement could be scrutinized to reveal the gap between its claims and its anticipatable results. The intention of the physiocrats was to promote agricultural production, and they urged placing restrictions on domestic manufacture and foreign trade in order to achieve their goal. But the result of implementing the physiocratic system, Smith argued, would be to retard agricultural growth. By discouraging the production of manufactured goods made in the towns, he reasoned, the measures suggested by the physiocrats would remove the stimulus for the landlords and farmers to boost their production. [WNIV, ix, 48-9, pp.686-7.] Proper policy analysis showed that the anticipatable results of physiocratic proposals would yield results opposite to those intended.

Smith’s emphasis on unintended consequences gives portions of The Wealth of Nations an ironic tone which many moralists find disturbing because it seems to mock the fitness of the relationship between motivation and result, while those who pride themselves on their worldliness often find it congenial. It is possible that this tone was intentional. It may have been part of Smith’s rhetorical strategy for converting the reflections of the philosopher into the maxims of the legislator, for it recommended the book’s prescriptions to those worldly men of affairs who in the cynical world of Georgian politics were unlikely to heed more directly moral appeals. By calling attention to the unanticipated consequences of human intentions, Smith makes the reader aware of formerly hidden connections in the social world. This awareness may promote a highly self-flattering sense of intellectual superiority and perspicacity which makes the doctrine all the more attractive.

The motif of anticipating the unintended consequences of social action has been parceled out among diverse academic disciplines and competing political ideologies.

For some economists, there is one great unintended but quite foreseeable consequence of human action: the socially beneficial outcome of market competition. It is among sociologists that the theme of unanticipated consequences of human action has been most explicitly treated, along with its corollary of the “latent” (unintended or unstated) functions of social institutions that exist alongside their “manifest” (intended or stated) purposes. When the actual consequences of government social policy fall short of expectations, it is often because legislators have failed to recognize the latent functions of existing social institutions. Libertarians (and some conservatives) have adopted Smith’s belief in the unintended, socially positive outcomes of the market as their guiding maxim, along with the belief that the unanticipated consequences of government action tend to be negative. Conversely, many liberals and leftists tend to overlook the negative unanticipated consequences of government action, often accepting good intentions as a substitute for good policy.

Smith objected to excessive government intervention in economic and social life because laws are often enacted to serve private interests at the expense of the public interest, and because legislators do not have the information necessary to coordinate economic activity. On these issues he was persuasive, but not dogmatic. Neither of these problems could ever be eliminated, he realized, but they could both be ameliorated.

Psychological Institutionalism Beyond the Market

Smith was far from believing that even well-functioning market institutions would produce a society of decent men and women. That task required other institutions that socialized the individual, taught him to control his passions, and fostered benevolence. The beginning—though not the end— of a Smithian approach to contemporary social policy would exhibit a certain prejudice in favor of those socializing institutions that Smith thought had demonstrated their indispensability. But it would also demand a continual reevaluation of the effectiveness of such institutions in light of changing historical circumstances and the possibility of adapting such institutions to provide incentives for morally desirable and socially necessary behavior. Last but not least, a Smithian approach would consider how government public policy might ameliorate the negative effects of market processes on such institutions.

Smith regarded the family as the first and most effective socializing institution, since it is there that children take their first steps toward self-command. First under the influence of parental authority and then out of the habitual sympathy that arises from frequent interactions with siblings, children learn to curb their passions and accommodate their desires to those of others.

Smith was concerned that processes within commercial society might tend to undermine those very qualities of character which are its greatest achievement and on which its success depends. In arguing against monopoly profits, he noted that wealth acquired too quickly and easily made “sober virtue” seem superfluous. Elsewhere, he argued that the lower ranks of society were threatened by their tendency to emulate the “loose” lifestyle of the rich and powerful, a lifestyle that Smith found morally abhorrent in the upper classes, and socially disastrous when imitated by the lower. In his time and place, Smith regarded these trends more as a potential danger than as an acute threat to the character type he sought to promote. We can readily imagine how Smith would view an entertainment industry in which “life-styles of the rich and famous” have become a staple of mass culture that competes with family, schools, and religion for moral influence.

Unlike thinkers from Plato to Rousseau, Smith did not disparage public amusements, nor did he demand that they promote virtue. He did, however, suggest that the law should prohibit “scandal or indecency” in an otherwise free market for public entertainment. And he spoke of the role of government in “promoting the prosperity of the commonwealth, by establishing good discipline, and by discouraging every sort of vice and impropriety.” But, as Smith also warned, the role of legislators requires “the greatest delicacy and reserve to execute with propriety and judgement. To neglect it altogether exposes the commonwealth to many gross disorders and shocking enormities, and to push it too far is destructive of all liberty, security, and justice.” [TMS, VI,ii.2.18]

Capitalism, Democracy, and the Prospects for a Decent Society

Perhaps the greatest institutional transformation that has taken place since Smith’s day is the diffusion of political influence brought about by the spread of voting rights. Political representation is much broader than in Smith’s day. And democracy, despite its poor historical record, as recounted by Smith in his lectures, has become the norm, albeit in a form much attenuated from the ideals of classical republicanism— and perhaps more successful for that very reason. To a degree rarely articulated in democratic theory, representative democracy may well owe its success to its ability to exercise some control over the governors while safeguarding against an excessively expressive citizenry—a fact appreciated by the framers of the American Constitution. Smith wrote The Wealth of Nations, to encourage politicians to resist the pressures of economic groups attempting to use political power to advance their own interests. The combination of representative democracy and commercial society does not so much eliminate this problem as transform it, as more interests come to exert political influence.

Smith was remarkably prescient in identifying the promise of capitalism, and his work contributed in no small measure to the fulfillment of that promise. The difficulties and dangers to which Smith pointed remain with us. That he did not solve them may reflect the fact that they are incapable of resolution. But some insoluble problems are more benign than others, and it was Smith’s judgment that the problems posed by commercial society are preferable to the alternatives.

Smith believed that such a society is better suited to advance what the stoic philosophers had called the “inferior virtues”—in other words, it was more likely to be morally decent. But he realized that a decent society would not come about through the market alone, nor were even the best-designed institutions adequate to the task. That task demanded that moralists like himself offer an intellectually coherent and emotionally compelling account of the standards of virtue and vice, and of the sources of shared respectability.

The fulfillment of the promise of a decent society depended as well on the willingness of some to pursue the public good, and on the knowledge, wisdom, and prudence of those so motivated. In this sense, too, an awareness of Smith’s work in the context of his time may help us appreciate both its timelessness and its timeliness.

Bibliography

Ryan Patrick Hanley (ed.), Adam Smith: His Life, Thought, and Legacy (Princeton UP, 2016)

Jerry Z. Muller, Adam Smith in His Time and Ours: Designing the Decent Society (rev. ed., Princeton UP, 1995)

Dennis C. Rasmussen, The Infidel and the Professor: David Hume, Adam Smith, and the Friendship that Shaped Modern Thought (Princeton UP, 2017)

Nathan Rosenberg, “Some Institutional Aspects of The Wealth of Nations,” Journal of Political Economy, Vol.18, No.6 (1960), pp 557-70.