The Morals Of Modern Economics

Christina McRorie urges us to rethink them, going back to Adam Smith to show that there’s more to economic analysis than narrow, self-interested calculations. She reminds us that Smith wrote The Theory of Moral Sentiments before he turned to The Wealth of Nations:

Smith’s moral psychology is decisively operative in The Wealth of Nations, and approaching his economic treatise with that in mind can helpfully challenge the tendency to read it, as Chicago school economist George Stigler does, as “a stupendous palace erected upon the granite of self-interest.” Although a growing number of intellectual histories now bring into question this once dominant interpretation of Smith’s work, Stigler is hardly alone in his interpretation.

In fact, this misreading remains the single greatest reason for Smith’s popular reputation as a conservative neoclassical economist whose pessimism about governments, regulation, and human nature was matched only by his optimism about market outcomes, and who accordingly proclaimed that free markets tidily channel individual selfishness toward the greater public good, as if by an “invisible hand.” Although the heyday of the conservative sartorial phenomenon of “Adam Smith neckties” has passed, most invocations of his name in contemporary politics still focus on his alleged discovery that free markets lead to the greater good by shaping selfishness through some unseen force.

Connecting Smith’s philosophy with his economics militates against this caricature by helping us see the moral ambivalence in his evaluation of commercial society. Take, for example, his claims regarding that “certain propensity in human nature…to truck, barter, and exchange one thing for another.” Pointing out that no one has ever seen two dogs make a “fair and deliberate exchange,” he noted that this uniquely human ability rests on the art of making contracts that are advantageous to both parties: “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.”

With all due respect to George Stigler, I find that reading these famous lines with Smith’s moral psychology in mind reveals that it is the faculty of sympathy on which exchange is built, not self-interest. Understanding another’s advantage through sympathy is what allows bargaining in the first place. Why talk about engaging the butcher’s self-love at all, unless we can imagine and therefore anticipate it? Along with reason and rationality, it is this imaginative capacity that distinguishes humans from animals, and allows us to bargain with each other toward mutual advantage. The two dogs certainly have self-interest, but they don’t have this.