The Reality Behind the Myth
Adam Smith’s most ardent critics generally start their attacks on Smith’s system of political economy by pointing to his reliance on “self-interest” as the predominant, if not sole, human motivation activating market exchanges. Real human beings, critics insist, are far more complex in their motivations.
Adam Smith would agree, to the chagrin of Smith’s critics.
Nevertheless, to dismiss Smith, critics are inextricably drawn to a
favored pithy passage in
The Wealth of Nations (1776):
“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. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens.”
When that passage is considered in isolation from all else Smith wrote, his theory of markets does appear to lack a moral foundation. It has been easy for critics to equate the pursuit of self-interest—or, worse, self-love–as the pursuit of the most degenerate of human motivations, avarice and greed—with market participants lacking any concern for the welfare of all others, taken individually or collectively, and without (any yet-to-be-mentioned) market constraints on people’s pursuits.
Indeed, the passage could suggest that Smith’s butcher, brewer, and baker would, by presumption, be primed to sacrifice the interests of all others in hot pursuit of their own interests. People can’t be, critics attest, be simultaneously self-interested and other regarding. The general welfare be damned as win/lose trades dominate market outcomes, but therein lies a source of the revolution in thinking that sprang from Smithian political economy.
Self-Interest in Context
The passage, taken out of its immediate context in Chapter 2 of
The Wealth of Nations, and especially when isolated from Smith’s prior work on moral philosophy in
The Theory of Moral Sentiments(1759), gives the impression that Smith was a pipe dreamer: all good things could and would spring from people doing nothing more than seeking their own advantage.
Of course, Smith’s critics ignore the text surrounding the passage. In the same paragraph, he acknowledges that people often do their best to engage all others around them to do their bidding, through “fawning attention to obtain their good will.” However, Smith insisted that such efforts have limited effectiveness, especially among people who have no or limited family and friendship ties and whose preferences are, at best, vaguely known.
In addition, Smith emphasized that people’s pursuit of self-interest takes the form, not of deals forced on others, but rather of “bargains” involving expected mutual gains for the trading partners:
“Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.” Ergo, pursuit of self-interest forces the pursuit of others’ interests.
The Economic Problem for Smith
For Smith, the crux of people’s economic problem is twofold: First, people don’t have the time to achieve what they want by divining and then appealing to other people’s sympathies, especially when they live and work at some distance, and when everyone “stands at all times in need of the co-operation and assistance of great multitudes, while [a person’s] whole life is scarce sufficient to gain the friendship of a few persons.”
Smith points to the brewer, butcher, and baker as suppliers outside buyers’ close circles of family and friends and beyond the reach of appeals to mutual love and beneficence. Pursuit of self-interest powers people’s “propensity to truck, barter, and exchange,” increases the range of people’s cooperation and their real incomes and, coincidentally, adds to the wealth of nations. All the while, pursuit of self-interests induces people to be other-regarding. All of this runs directly counter to what the critics have in mind when they criticize Smith for his narrow focus on “selfishness.”
Second, Smith admired people’s benevolence but adds that it is “vain” for a person to expect to receive all that is wanted from other people’s “benevolence only.” Every person “will be more likely to prevail” in securing what he or she wants by enlisting self-love and showing others that “it is for their own advantage to do for him what he requires of them.” Pursuit of self-interest for Smith has instrumental value, grounded in economy: It is a means (but not the only means) by which people in markets seek to minimize their transaction costs and thereby spur growth in transactions, income, and, serendipitously, “the wealth of nations.”
Self-Interest as a Wellspring of Laudable “Habits”
Smith never meant to suggest that more virtuous motivations than self-interest are absent in market transactions. He places considerable emphasis on the extent to which self-interest can induce laudable, if not virtuous, behaviors: For example,
he writes,
“the habits of œconomy, industry, discretion, attention and application of thought, are generally supposed to be cultivated from self-interested motives, and at the same time are apprehended to be very praise-worthy qualities which deserve the esteem and approbation of every body. . . . Carelessness and want of œconomy are universally disapproved of, not, however, as proceeding from a want of benevolence, but from a want of the proper attention to the objects of self-interest.”
Of course, Smith presumed in The Wealth of Nations that people would carry with them in all walks of life their individual “impartial spectators” (developed in The Theory of Moral Sentiments)who would be on sentry duty in search of personal violations of cherished virtues and ready to provide corrections in behaviors.
One of Smith’s major contributions to economic thought was his observation that in pursuit of their own narrow self-interests, people’s efforts are “necessarily” guided
as if by an “invisible hand toward an unintended end”:
“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
Smith understood that some who are motivated by self-interest would seek exploitive bargains, those that unduly favor themselves. However, the same self-interest (when not abated by trade regulations favoring commercial, political, and religious classes) would cause others to offer improved bargains, which means he envisioned a system of competition-constrained self-interest. Pursuit of self-interest is self-checking (at least partially).
Smith surely recognized that markets depended on such virtues as trust and trustworthiness. Without trust, trades would be more costly to consummate, constraining people’s incomes. Smith, however, developed a startling deduction often overlooked by his critics: People’s pursuit of their self-interest would press them to be more trustworthy in order to facilitate the development of “bargains” at a distance, which could drive up their incomes and wealth beyond what would otherwise be achieved, given people’s other more laudable drives.
READER COMMENTS
Phil H
Jun 20 2020 at 7:48am
I’m not sure I believe this:
”People’s pursuit of their self-interest would press them to be more trustworthy”
I agree that it’s trust that makes economies work and makes everyone richer. But what makes us trustworthy is individual effort, motivated by market forces. It’s the law.
(Human nature didn’t suddenly become trustworthy in the 20th century; instead a set of remarkable social and legal institutions emerged)
That’s all the more true in today’s hyper-developed economies. What enables split-second machine trading on the stock exchange to work isn’t the fundamental trustworthiness of the programmers and computers involved. It’s a massive accretion of legal and technological precedent.
Phil H
Jun 20 2020 at 7:50am
*But what makes us trustworthy is NOT individual effort, motivated by market forces.
sorry, vital typo!
Jon Murphy
Jun 20 2020 at 9:17am
Given that Smith is writing in the 18th Century of developments and patterns in human behavior from ancient to modern (by his standards) times, I don’t understand your point about the 20th Century.
Two points here. First, as McKenzie states in this essay, markets do not make us trustworthy, but rather contribute to the forces that make us trustworthy. Smith points out multiple times that markets help foster virtuous behavior, but there is more going on. You need sympathy as well. Markets are one of the institutions that foster virtuous behavior, but not the only one.
To your second sentence, it’ll depend on what you mean by law. If you mean it as Smith understood it, as the rules and customs people develop in order to live with one another, then there is no disagreement there. If you mean positive legislation from the sovereign, then Smith (and human history) would strongly disagree with you.
Mark Z
Jun 20 2020 at 10:47pm
I can’t say I have ever based my selection of whom to interact with, economically, on legal precedent, because it’s still usually legal to be untrustworthy, but rather on reputation (either informal or on Yelp etc.). There are legal businesses I’ve refused to frequent because they’re demonstrably untrustworthy and there are plenty of illegal businesses (I won’t incriminate myself by saying I’ve ever done anything illegal) that have loyal customers despite no legal or institutional support simply from reputation.
Phil H
Jun 21 2020 at 6:45am
“there are plenty of illegal businesses”
No, I don’t think there are. There are a bunch of obvious examples, but as a fraction of the economy, they are minor. In comparison with the bad old days, when being a highwayman was a real profession, and pirates plagued international trade, illegal business is minor.
“I can’t say I have ever based my selection…on legal precedent“
My point is that you don’t have to, because most of the illegal businesses have been eradicated. You select from a pool of actors who almost all comply with a baseline standard of legally enforced trustworthiness. That legal enforcement is was made the difference, raising the average level of trustworthiness to the point where an economic explosion could take place, not the collective decisions of thousands of consumers.
We know this because those thousands of consumers have always existed, but the massive enrichment of the 20th century only happened after the legal institutions had developed.
Jon Murphy
Jun 21 2020 at 9:09am
Problem with this thesis:
Common law and civil law institutions (the legal institutions predominantly in the wealthiest parts of the world) existed centuries before the 20th Century. Common Law dates back to 1189. Civil Law to 529. The legal institutions are old and revered, even during your “bad old days.”
Furthermore, various private legal systems developed outside of the official codes that lead to great prosperity, such as the Lex Mercatoria.
Jon Murphy
Jun 21 2020 at 10:36am
There is another problem with your thesis, namely that the law in the West explicitly does not deal with most virtues. Law, especially the positive legislation of sovereigns, deals with a singular virtue: justice (in particular, commutative justice). The “loose, vague, and indeterminate” rules of the other virtues are not taken up by jurisprudence but rather by individuals acting in society.
Indeed, in civilizations where law tries to regulate the other virtues (eg the Virtue and Vice police of Saudi Arabia, the Revolutionary Guard of Iran, Red China, Cuba, the hilariously-named CHAZ in Seattle, etc), we see a collapse of order and extreme poverty/stagnation. When law tries to prescribe virtue, it ends up destroying it by undermining the knowledge needed for stability and prosperity to flourish (much of my dissertation is on this topic).
KevinDC
Jun 22 2020 at 3:42pm
Also, Phil, I’m assuming it was just a momentary lapse on your part that led you to say:
Of course, you realize that “post hoc ergo propter hoc” is a classic logical fallacy. It’s simply not true to say “We know that A happened because of B because A happened after B.” If you want to argue for a causal connection between A and B, simply pointing to the chronology and saying “we know this because” of that chronology is kind of embarrassing. There’s a lot of literature out there about the causes of what Deirdre McCloskey calls The Great Enrichment, and its very, very far from clear (to me, at least) that the legal institutions you are giving so much credit to were a major factor, let alone a primary one. If you’re going to jump into that ongoing debate and choose sides and claim credit for 20th century legal institutions, well, you’re free to make a positive case for that and to offer refutations to all the other arguments and literature out there. But you’re going to have to do better than saying we know it because of a timeline – nobody is going to take you seriously if that’s all you have to offer.
KevinDC
Jun 22 2020 at 2:26pm
Hey Phil –
You said:
You seem to be employing a rhetorical trick described by Daniel Dennett, in his book Intuition Pumps, as “rathering,” although he notes that “some ratherings don’t use the word ‘rather.'” But the structure fits in this case (along with many of your previous comments). As he explains it:
Of course, rathering can be legitimate when one is faced with a true dichotomy – when we are in a situation where there are only two possible choices and it must be all or nothing in favor of one of them. (It is not the case that my client committed that triple homicide in Virginia last spring, it is rather the case that he was in Hawaii when the crime occured!) But when describing widespread social phenomenon like social trust, single factor explanations are about as common as blind NASCAR drivers. And the author’s initial statement to which you were objecting was very clearly not making any such all or nothing claim. What he said was “People’s pursuit of their self-interest would press them to be more trustworthy.” That’s it. Saying it’s in a person’s self interest to be trustworthy is a pretty mild statement. It’s not as though he claimed that without self interest nobody would be trustworthy, or that self interest is the only mechanism for developing trust, or that no other organization or factor has any role to play in producing a trustworthy society. If you want to dispute what he actually said you’d need to offer an argument that it’s actually in your best interests to be untrustworthy. But to respond by saying that “people’s self interest doesn’t lead to trustworthy behavior, it’s the law that does that”, is to completely and spectacularly fail to engage with the claim actually being made.
Phil H
Jun 23 2020 at 3:01am
Hi, Kevin.
Sure. I mean, you seem very engaged in spotting my logical errors. Which are real, because there is no answer to this question! Or rather, none that has yet been rigorously proved. So, yeah, of course I’m eliding and jumping about. Did you really think that in a small blog comment I was going to solve *the great* historical mystery?
All I know is that my answer – a gradual accretion of laws and institutions – is a lot better than the answer that McKenzie claims is offered by Smith. Because I can point to precisely which institutions (British and Dutch common law, in particular corporate law) and the reason why it occurred at one time in history and not earlier (because common law gets bigger and more precise over time). The claim that “markets make people trustworthy” fails on both these counts: which people? in what way were they “more trustworthy”? why 19th century England and not 13th century China?
That said, of course my answer is incomplete. You can pick holes in it.
KevinDC
Jun 23 2020 at 3:03pm
Hello again Phil –
I agree that there is no answer which has anything approaching a definitive argument in its favor. And I certainly wouldn’t expect you to provide such a definitive argument in a blog comment. (That would be a very impressive feat!) However, you were the one who claimed that the answer was something we “know” and said then claimed it was known on the basis of post hoc ergo propter hoc reasoning. I’m glad that you’re backing off from that claim, but that is what you explicitly said, so I don’t think my response was unreasonable or uncharitable.
Even more fundamentally, I don’t think there is an answer in the sense of there being a single factor explanation. If there’s to be a discussion about “what makes people trustworthy” then its going to be a discussion of multiple factors and their relative influence. Laws (in the simplistic and primitive sense of legislation written and enforced by states) no doubt have an influence, as do social norms, religious beliefs, self interest, and a litany of other factors. But acknowledging that there are multiple influences undercuts the ability to “rather” the discussion. If multiple factors influence an outcome, you can’t argue that one factor has doesn’t have an influence by pointing out another factor has an influence. So you gain no ground arguing that self interest doesn’t promote trustworthiness by saying that the law promotes trustworthiness. That’s a pretty impotent response.
Regarding the answer you offer regarding common law and corporate law etc, I’m familiar with the argument. It’s also got a lot of holes in it and it’s been subject to some pretty devastating scholarly criticism over the last couple of decades. But I’m not going to pursue that here, because it’s entirely unrelated to the point that was actually being made. The point you originally chose to dispute was “People’s pursuit of their self-interest would press them to be more trustworthy,” which is a pretty mild claim, especially when paired with the caveat that “Pursuit of self-interest is self-checking (at least partially).” If you want to dispute the actual claim being made, you have to offer up a positive argument that people’s self interest never even partially encourages trustworthiness. You won’t achieve that by “rathering” to common law evolution as being a source of trustworthiness – that is an irrelevant response, because this isn’t an either-or discussion. Anything other than you making that case isn’t responding to the argument being made – it’s just you changing the subject and arguing with yourself.
Phil H
Jun 27 2020 at 2:16am
Yeah… What point exactly was it that you think I failed to engage with? There’s a claim there, that markets make people trustworthy. Zero evidence is adduced for that claim, so there isn’t much to engage with.
My rebuttal wasn’t of the form “law makes trust so markets don’t”, it was, “there’s no evidence (here at least) that markets make trust; but there is evidence that law builds trust”.
Blind faith in Smith is as worthless as faith in anything else.
KevinDC
Jun 27 2020 at 4:51am
Hey Phil –
You’re still failing to understand (and engage) the whole point of the post, and still changing the topic. The whole point of the post is made clear by the opening line:
That is to say, this is a post about intellectual history. The topic under discussion is: “What accurately describes Adam Smith’s views?” The topic is decidedly not: “Were Adam Smith’s views correct?” Both are interesting topics in their own right, but they are still separate topics. To respond to an argument about the first claim by objecting that author isn’t providing evidence for the second, completely different claim, fails to engage the actual topic.
But even with that, you’re still not accurate about what was being claimed even while you changed the subject. You said: “There’s a claim there, that markets make people trustworthy.” But of course, that’s just flat out false. Nothing of the sort was ever claimed – the actual claim was very different. The author notes that “Smith surely recognized that markets depended on such virtues as trust and trustworthiness.”
You see the difference between the claim “X depends on Z” and the claim “X makes Z”? The author claimed Smith believed markets depend on trust, and that contrary to many objections, Smith did not believe markets were solely reliant on self interest. Your response is to object that the author isn’t providing any evidence for the claim that “markets make trust”. So even as you’re changing the whole point of the discussion, you’re also changing it to a blatant misrepresentation of what was actually said. And it seems to me that this is something you do a lot.
robc
Jun 25 2020 at 2:11pm
First estimate I got from google puts the underground economy in the US at about 11-12% of GDP. I wouldn’t call that minor.
Phil H
Jun 27 2020 at 6:28am
That’s possible. I’d distinguish between illegal as in violent theft (like the highwayman and pirate examples I gave) and illegal as in grey economy untaxed cigarettes. I think the violent economy is much smaller now than it was. If I’m wrong, then I agree, the argument doesn’t hold up!
vikingvista
Jun 23 2020 at 5:50am
Law can be dichotomized into law imposed by state police powers, and law that is not. Although both evolve and become very complex, I suspect you are referring only to the former.
Your argument then is that we are made trustworthy primarily by the imposition of state force. In particular, provisions of law that may or may not be state-enforced, will substantially contribute to trustworthiness only *when* state-enforced.
Your defense is largely correlative, which others have addressed. But you also suggested a causative mechanism, where state force more effectively suppresses highwaymen and the like.
But what does that have to do with trustworthiness? Vikings, e.g., were merciless raiders and looters, but where did trustworthiness play a part? Perhaps Vikings were as trustworthy as humans could be.
Trustworthiness is inseparable from ‘reputation in agreements’. Forcibly suppressing looters with whom you never had an agreement may (or may not) be beneficial for commerce, but not because it promotes trustworthiness.
Further, forcibly making others honor their agreements may (or may not) be good for commerce but it does not make a person trustworthy.
The virtue of trustworthiness is no virtue at all unless an individual actually seeks it for herself and *wants* (not is forced) to be seen by others as such. After all, a person who must be coerced into such behavior is considered by no one to be trustworthy.
It is markets, by greatly increasing the reward for a trustworthy reputation, that then greatly promotes the virtue (as Smith conceived it) of trustworthiness.
So, I think you are confusing Smith’s use of ‘trustworthiness’ with unrelated actions that you believe make markets work.
That is, you probably should’ve instead replied that you believe force, rather than trustworthiness, is why modern markets work.
D
Jun 23 2020 at 5:52am
It’s not just, or even mostly, Smith’s critics.
The (Selective Reading of) Adam Smith Society and many libertarians and free market right wing people hold up Smith as being all about self interest, free markets and unbridled capitalism and conveniently skip over the rest. (In my experience)
vikingvista
Jun 23 2020 at 4:23pm
Since libertarians are about as uniform in ideology as Sybil is in personalities, I suppose there are some like that. But there are also libertarians (like Randians and Rothbardians) who are highly critical of Smith because of those skipped over things, why they themselves skip over the “self interest, free markets and unbridled capitalism” parts.
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