Deconstructing the Adam Smith Problem

Self-interest of individuals is the cornerstone assumption in the discipline of economics. The view of man as a ‘rational being’ rests on man acting upon his self-interest. The transformation of modern economics from political economy and the wedge between ethics and economics began with the introduction of the assumption of self-interest into the analysis of exchange. The pioneer in this process of transformation was Adam Smith. His works stood to transform the discipline and this justifies his claim for the title of “Father of Economics”.

Adam Smith was the first of the early economists to clarify that the notion of self-interest was different from selfishness. The complexity of the Smithian conception of self-interest is greater than the mere semantics associated with it. In context of Smith’s view on the invisible hand, it becomes clear that pursuing self-interest would work in the favour of collective interest. However, Smith in himself was contradictory when he wrote about self-interest in two of his seminal works- The Theory of Moral Sentiments and The Wealth of Nations. This inconsistency in the Smithian literature is often regarded as the ‘Adam Smith Problem’ by scholars.

The fundamental question that arises is whether The Theory of Moral Sentiments and The Wealth of Nations differ in their treatment of self-interest. The Adam Smith problem can be explained in various ways. Firstly, the reasons for such confusion could arise from the fact that The Wealth of Nations is a more popular and widely cited work than the Theory of Moral Sentiments. The perspectives presented in the latter may not have been heavily studied as the former. It is also possible that the contextual factors may be different. The intended purpose of the works could have been different. The Theory of Moral Sentiments consists more of promoting self-interest while The Wealth of Nations presents a critical approach of the same.

Positive benefits of self-interest

Self-interest as a concept presented by Adam Smith has been conceptualised to have various positive benefits associated with it for the individual and for the society as well. We cannot restrict it to the desire to acquire wealth but can also extend it to self-love. Both the works of Smith have discussed self-interest in some capacity. However, the question is to understand how he justifies self-interest as being beneficial to society in both his works.

In The Theory of Moral Sentiments, the earlier work of Smith, self-interest is presented as a larger part of the system of virtues that are self-regarding in nature. Smith discusses the development of moral system in individuals as a process guided by self-interest. It is in the view of the self-interest of a person to control one’s passions (beginning with anger) so that he/she is seen in a more favourable light by society. This self-interest thus acts as a restraint for human emotions and begins very early in life.

In The Wealth of Nations, self-interest is presented as a principle for the generation of wealth and prosperity. Smith argues that a beggar from a commerce-based society is better off than a king from a society that does not engage in commerce. The whole emphasis on commerce comes from the fact that it’s based on self-interest. This view is much clearer and rooted in the social sphere when compared to the Theory of Moral Sentiments which is based on the nature of man. This kind of a differentiation in the justification of the positive outcomes is due to the different perspectives and stand points of Smith in the two works.

Excesses of self-interest

The excess of the self-interest and its abuses are also central to his works. This makes his work holistic as it is considerate of the other aspects of self-interest. The virtue of self-interest as justified by Smith is more or less questionable and not outrageously deniable. Both works have addressed the possibility of deviation between the private interest and the social interest. This essentially means that in his time, this idea was accepted with scepticism but not completely shunned as morally unacceptable. Such was the justification that was provided by Smith. He was able to tie with the larger good and also look at the possibility for abuse, gaining wider approval.

In The Theory of Moral Sentiments, Smith is of the view that half of human troubles originate from self-interest. When engaging in self-interested behaviour, the individual is not only acting in ways detrimental to their society but also to their individual self. People tend to be unmoved by the losses of others and fixate on their losses. Similarly, people put their self above the tragedies of the many. People tend to continue their justification of self-interest without being able to see the consequences of their actions on the self and society.

In The Wealth of Nations, Smith considers self-interest as being abused by 3 groups of people. He states that merchants, the church and educators are individuals who are more likely to indulge in abuse of self-interest. He says that traders’ self-interest results in mercantilist policies. He suspects that it is in the self-interest of the church and educators to restrict the flow of information- mundane and divine to the people. A low quality of education in society can have a dangerous consequence of delusion.

Remedies to excesses of self-interest

The important divergence in the works of Smith emerges with respect to the remedying of excesses. It can be inferred that the self-interested man of The Theory of Moral Sentiments is different from the man of The Wealth of Nations. This portrayal can help deduce that the former was supportive of self-interest more than latter.

In The Theory of Moral Sentiments, there is a possibility for the social interest to be away from the individual interest. The first remedy is from the impartial spectator within each person who is able to be an internal guiding master of the self. This originates from the fact that individuals are motivated to act in ways that are considered to be praiseworthy. The other way to address these excesses is through the fact that individuals are aware of the social sanctions that are imposed on others who have abused self-interest. They work like external standards that regulate human behaviour by a combination of reward and punishment.

On the other hand, in The Wealth of Nations, Smith was unable to come up with effective remedies for abuse of self-interest. Here, he brings in the role of governments and the nexus between wealth and prestige. Merchants by virtue of trade are able to accumulate a lot of wealth and this wealth gives them the power to escape from the consequences of their abuse of self-interest. Smith remarks that the rich man can abuse society through exploitative trade but a fool cannot steal from others because he is hungry.

Laws as a means of restraint fail according to Smith. He was against the excessive interference of the state as it destroys the natural order of operation of self-interest and invisible hand. Moral suasion is the only instrument that works in the Smithian conception of society and this cannot be addressed by law. But moral suasion as a policy instrument is very slow in bringing about change especially when there is a moral abuse of self-interest.

A conclusion to the paradox

The Theory of Moral Sentiments is a work promoting self-interest and The Wealth of Nations is a critique of self-interest. Smith in his former work was a behavioural economist who has explored the depth of human action as being derived from their internal desires. However, in The Wealth of Nations, he was an economist who included the state and the activity of commerce in his analysis. Rather than viewing the differences as an anomaly or a problem, we can view them as serving different intentions and purposes. In this way, it is possible to conclude that Smith has been critical in including both sides of self-interest and has not just blindly propagated it.

Picture Courtesy- Capitalism Magazine

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