Thursday, January 31, 2013

Are the two faces of Adam Smith two sides of the same coin?

Most people who have heard of Adam Smith know him as the "father of economics" famous for his 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations (WN). In this book, Smith developed his theories of the division of labor, of trade based on an early version of comparative advantage, of market equilibrium, of public finance, and of the unintended positive consequences of self-interested behavior (the invisible hand idea). Modern day caricatures of Smith suggest he was a proto-Randian who extolled selfishness as a virtue and defended greedy corporations.

But did you know he wrote another book?  His first book was The Theory of Moral Sentiments (TMS), and this book is about how and why people care for other people. That's right, Smith wrote a whole book about how we selfish people care for others. The contrast between the two books has led some scholars to believe that Smith was inconsistent. Consider these two famous passages from each book.

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 ... This division of labor ... is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.
Wealth of Nations (1776; 1909, 19, 20) 
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.
The Theory of Moral Sentiments (1759; 1976, 9) 

How can Smith argue that we get our dinner only by using self-interest (first quote) while saying we also care about each other and our happiness depends on theirs (second quote)?

This is a pretty tough question. Nobel Laureate Vernon Smith tackles it (using somewhat technical experimental economics) in his "The Two Faces of Adam Smith" (from which I lifted the two quotes above.)

For my money, however, the best person to synthesize Smith into one coherent whole was Jim Otteson in his book, Adam Smith's Marketplace of Life. Otteson argues that Smith believed the same principles govern our behavior in markets and in our social interactions. We derive pleasure in markets by successfully providing products for others in order to earn money. That's pretty easy to see. But Smith in TMS says we derive pleasure socially by engaging friends and acquaintances because we imagine ourselves in their situation. When they are happy/pleased/mad/sad we imagine what if feels like to be happy/pleased/mad/sad and thus we share some of that feeling. Since we desire our own pleasure it stands to reason that we also benefit from the pleasure of others. Seen in this light, the selfish Smith in the WN is really the same as the altruistic Smith in TMS. Our pleasure-seeking selves in markets encourage us to truck, barter and exchange and our pleasure-seeking selves in social interactions encourage us to care about the well-being of others.

Smith acknowledges the problem with relying on altruism though when dealing with far off strangers. When complete far off strangers are happy/pleased/mad/sad we do not so readily imagine ourselves in their situation, and thus we do not care so much about them. In TMS Smith wrote,

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, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

The only way for far-off strangers to work for the betterment of each other would, it seems, be through the use of market prices and the signals provided by profits. In the end, we should not ignore the powerful force for good that altruism is. Millions of us benefit daily from the purely altruistic behaviors of our friends, families, and neighbors. But we should also recognize the limits of altruism and tremendous power of self-interest in markets to give us our dinner each night.

So, what do you think? Was Smith inconsistent? What's the best mix of altruism and self-interest in society? Are altruists really just self-interested jerks in disguise? Can we get by without altruism altogether?

N.B. I named my blog Division of Labour in honor of Adam Smith. Does anybody know why use used a bunch of pins for the logo?


  1. This comment has been removed by the author.

  2. I don't think that Smith was inconsistent because the leaders in that school of thought seem wrong. They're grasping at straws seemingly to discredit/topple this giant. I can relate because I've done the same thing in my next blog post, only to Sigmund Freud. There is no doubt that much of WN is obscure, but it was written over 200 years ago, by a less-than-first-class citizen.

    Thank you for writing this, Dr. Bob Lawson. It stretched my mind and related to what I'm trying to figure out in my personal life right now.

    one word: Empathy.