If contemporary economists fielded a football team, it would no doubt be named the Smiths, in honor of the illustrious eighteenth-century Scot who is rightly regarded as the founder of modern economic theory. But the team mascot as presented by those economists would have as much in common with the real Adam Smith the as the Washington Redskins’ mascot has in common with a real Native American. Few thinkers of Smith’s stature have been so routinely misrepresented and misappropriated.
George Stigler, a Nobel laureate economist, wrote that Adam Smith’s great work The Wealth of Nations demonstrated that “the efficiency property of competition” was “the crucial argument for unfettered individual choice in public policy.” Politicians and pundits alike regularly invoke Smith’s name to contrast the efficiency of markets in allocating goods and services with what they see as the damage done by government when it constrains “unfettered individual choice.” And in doing so, they regularly misapply Smith’s most famous metaphor, turning the “invisible hand” into an embodiment of the virtues of an unfettered market.
For example, in his 2012 presidential campaign, Mitt Romney’s stock stump speech included this line: “The invisible hand of the market always moves faster and better than the heavy hand of government.” Former vice-presidential candidate Sarah Palin made the same argument in a 2012 interview with Sean Hannity: “The difference that we’re facing in the two parties, and as we approach a general election, is that clenched fist of Barack Obama’s that is forcing the socialist-type field policies that kill jobs, we’re facing that as opposed to that invisible hand in a free market that Adam Smith and more recently Thomas Sole and others speak of.”
At a slightly higher level of discourse, James Dorn, editor of the Cato Journal, recently wrote that, “As Adam Smith long ago explained, the wealth of a nation is best advanced by liberty and markets, not by government intervention and planning. The ‘invisible hand’ of market competition under a just government protecting persons and property is more apt to lead to social and economic harmony than the ‘grabbing hand’ of the state.” Writing in the Wall Street Journal, the well-known economist Michael Boskin assumed that the invisible hand was a short-form summary of how markets work: “In a market economy, price signals automatically steer society’s scarce resources to the uses people value most, and at minimum cost. This is Adam Smith’s famous Invisible Hand.” Even Pope Francis, in his beautifully argued Evangelii Gaudium, assumed that the invisible hand belonged to the impersonal forces of the marketplace.
But all this is the Adam Smith of legend. The real Adam Smith was a sophisticated thinker about moral virtues as well as efficient markets, not a cartoon spokesperson for laissez-faire economic policy. Smith never intended his metaphor of the invisible hand to become synonymous with an omniscient and efficient Mr. Marketplace. Specialists have known this all along, but the caricature version of Smith continues to distort our policy discourse.
Why should we care that many modern observers so fundamentally caricature the man they see as the mascot of free enterprise? One answer is simply out of respect and admiration for the subtlety of Smith’s thought and its continuing relevance to our own efforts to become responsible members of society. But the more important reason to engage with the real Adam Smith is that doing so reveals how impoverished our public-policy discourse has become. Smith’s famous invisible hand has today become a dead hand, stifling meaningful debate over the roles of government and private markets.
SMITH WAS FOR SOME TIME a professor of moral philosophy at Glasgow University; many of his ideas were first articulated through his lectures there. At the time of his death, he had just completed a revised edition of The Theory of Moral Sentiments, a book devoted to how we go about developing our internal ethical compass and regulating our appetites so as to reflect its direction. Smith expected functional adults to exhibit restraint in their appetites, honesty in their dealings with others, engagement with their fellows in a society whose values reflected his ethical advice, and care for the welfare of those less fortunate: “When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self-love might suggest to us, prefer the interest of one to that of many.”
The modern market triumphalism that dominates our discussions of fiscal policy incessantly rehearses a handful of Smith quotations to justify starving government of the resources that could lead to a happier and (surprisingly) wealthier society. In contrast, the real Smith demanded that we behave like mensches, not Stigler’s “self-interest-seeking individual[s] in a competitive environment” whose only measure of personal fulfillment is our wealth, and whose main belief about government is: The less of it, the better.
To be clear, Smith rightly deserves credit for the insights that in the ordinary course of commerce the marketplace allocates goods and services more efficiently than does any other mechanism, and that individuals seeking personal advantage in the marketplace can advance the larger interests of society. In Smith’s famous phrase, “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.”
But this passage does not encapsulate the entirety of Adam Smith’s thought—or of sensible public-policy choices. Research and ordinary experience demonstrate that we live in a world of important market failures, incomplete markets (areas where markets don’t reach), and unlucky persons. Because of poverty or some other disadvantage, some people cannot fully participate in a competitive environment. Or, to put it the language of economics, they cannot maximize their utility entirely on their own. Smith actually understood all this, even if Smith’s contemporary admirers do not.
The Smith of their imagination is really closer to Bernard Mandeville, whose book, The Fable of the Bees: Or, Private Vices, Public Virtues, was first published in 1714. Mandeville saw men as self-directed utility-maximizers, whose personal rapaciousness nonetheless yielded important social benefits. He further suggested that the introduction of moral norms to temper that rapaciousness would only lead to an indolent and unproductive society.
Smith’s The Theory of Moral Sentiments can be read as a direct rebuttal to Mandeville’s cynicism. Smith begins the book with an extraordinary sentence: “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.” In other words, we are not simply “self-interest seeking individuals in a competitive environment;” we are social animals governed by natural laws (“principles”) that cause us to care about others. For Smith, our happiness and prosperity are bound up with the happiness of the society in which we are situated:
Man, it has been said, has a natural love for society.… He is sensible too that his own interest is connected with the prosperity of society, and that the happiness, perhaps the preservation of his existence, depends upon its preservation.
According to Smith’s theory, we begin developing our moral instincts—our “sentiments”—by sympathizing with the pleasures or pains of others through imagining what we would feel in their place. As we become aware of these sentiments, we recognize that we approve of a man’s behavior when his behavior accords with the emotions we imagine we would feel were we in his place. When his actions and our imaginations coincide, we approve of, or sympathize with, his actions. We then observe how others see our own behavior. We learn which behaviors elicit sympathetic responses in others—which of our actions seem to others to be appropriate to the circumstances—and we adjust our own behavior, so as to cultivate praise from others. Finally, we internalize the mechanism. We develop our own “impartial spectator” inside us. We no longer seek the praise of others; instead, we seek to be praiseworthy in the eyes of our own internal impartial spectator. Only at this point are we equipped to become fully functioning members of society.
The Theory of Moral Sentiments is an inquiry into how we go about becoming better persons, living more meaningful lives, and therefore the book focuses only a little on “the propensity in human nature to exchange”—to use the opening line from the most famous passage in The Wealth of Nations, where Smith goes on to explain that we do not rely on the butcher’s benevolence but on his self-love. Nonetheless, when our self-interest conflicts with the dictates of the impartial spectator, it is our self-interest that must yield:
To indulge…at the expence of other people, the natural preference which every man has for his own happiness above that of other people, is what no impartial spectator can go along with…. Though the ruin of our neighbor may affect us much less than a very small misfortune of our own, we must not ruin him to prevent that small misfortune, nor even to prevent our own ruin.
The Theory of Moral Sentiments is ultimately a guidebook to achieving happiness, not wealth. And, for Smith, “happiness” has a very specific meaning. It is not the sum of simple consumption pleasures, but rather the tranquility that comes from living a life of virtue. He consistently deprecates wealth-seeking as an empty pursuit, incapable of resolving the anxieties at the bottom of our souls: “In the languor of disease and the weariness of old age, the pleasures of the vain and empty distinctions of greatness disappear…. Power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniences to the body.”
We live in a secular society, and we think of Smith as a hardboiled student of self-centeredness, so it is easy to overlook that Smith relied on his religious beliefs to explain what he saw as man’s natural inclination toward “happiness,” as he used the term. But we cannot hope to understand Smith’s famous metaphor of the invisible hand, as employed in The Wealth of Nations, without appreciating the role of the Deity in Smith’s thinking, as explained in The Theory of Moral Sentiments:
The happiness of mankind, as well as of all other rational creatures, seems to have been the original purpose intended by the Author of nature, when he brought them into existence…. By acting according to the dictates of our moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind, and may therefore be said, in some sense, to co-operate with the Deity, and to advance as far as in our power the plan of Providence. By acting other ways, on the contrary, we seem to obstruct, in some measure, the scheme which the Author of nature has established for the happiness and perfection of the world, and to declare ourselves, if I may say so, in some measure the enemies of God.
This is a powerful statement, largely ignored by contemporary commentators who trumpet their imagined version of Smith as the prophet of unfettered markets. When we act contrary to the dictates of our moral faculties, we make ourselves the enemies of God. In Smith’s telling, God is motivated entirely by benevolence, and consequently benevolence is chief among the human virtues. But humans are not perfectly benevolent in practice. Smith’s argued that through “sympathy” we develop internal governors that lead to propriety, which in turn advances both the happiness of mankind and the will of God.
Benevolence is a profoundly personal attribute; a Deity imbued with it is not simply the engineer of unfeeling clockwork laws of nature, like those governing gravity. Smith’s Deity does not meddle in the quotidian world through miracles and the like, but the laws—or “principles,” as Smith called them—that govern human nature are instruments shaped by the benevolence that suffuses God’s works. In short, Smith was an “optimistic providentialist”; God had established a world governed by principles through which our innate behaviors and aptitudes, if carefully developed, would naturally lead to our happiness.
WHAT DOES The Theory of Moral Sentiments have to do with The Wealth of Nations? On most of its pages, not much. The two books were intended to be complements to each other, and so there isn’t much overlap. But that fact underscores my main point: If you draw your fiscal policy recommendations solely from a casual reading of The Wealth of Nations, you are looking primarily in the wrong Adam Smith book.
The Theory of Moral Sentiments accepts that men are self-interested, and explicitly rejects any criticism of self-interest—provided, critically, that it is channeled and expressed in ways that do no harm to others. But the fruits of “the propensity in human nature to exchange” are not the subject of that book, which instead focuses on how individuals promote their own true happiness and that of society by developing their ethical faculties, and how government is charged with protecting the happiness of all of society. It is, after all, The Theory of Moral Sentiments, not The Wealth of Nations, that from its title onward presents itself as an ambitious theory of how human being ought to act, in the same way that Newton proposed a theory of gravity, or modern economics posits its own theory of behavior, predicated on Homo Economicus.
For its part, The Wealth of Nations rests on exactly the same premises about human values, although its main subject is different. The more famous of the two books is not primarily about the ordering of society or the sources of its happiness; it is a historical explanation of the factors underlying economic growth, and a plea that the eighteenth-century British government abandon its heavy-handed policy of directly manipulating markets through mercantilist trade policies.
The Wealth of Nations assumes the importance of virtue in the lives of all those individuals trucking, bartering, and purchasing to their hearts’ contents, just as The Theory of Moral Sentiments assumes that there will be a whole lot of trucking, bartering, and purchasing going on. In the few passages of The Wealth of Nations where Smith does directly address “the happiness of the society,” his words are entirely consistent with The Theory of Moral Sentiments:
What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed and lodged.
We can see most vividly the ruinous effects of our distorted understanding of Adam Smith on contemporary discourse by examining our systematic misreading of his famous “invisible hand” metaphor. Smith employed this metaphor once in The Theory of Moral Sentiments, and once again in The Wealth of Nations. In The Theory of Moral Sentiments he wrote:
The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap [of agricultural bounty] what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, they divide with the poor the produce of all their [agricultural] improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants.
In other words, Providence has limited the appetites of the rich so that they are only slightly greater than the appetites of the poor. No matter how the rich gorge themselves, therefore, there still will be enough left over for the poor. The rich simply cannot consume all of nature’s bounty, even if they would like to.
Seventeen years later, the invisible hand reappears, once only, in The Wealth of Nations. Importantly, the invisible hand does not surface in Chapter 2, where Smith introduces his observations on the central importance of markets with the famous passage about the butcher, the brewer, and the baker. So the invisible hand was not part of Smith’s story about how markets allocate goods and services in ways that benefit us all, even when each of us is thinking only of his or her own interests. This would have been a logical place to deploy the invisible hand metaphor as we now generally understand the term, but, significantly, Smith did not use it here.
Instead, the term surfaces hundreds of pages later—and then only to make a very different point. Smith argues that individual risk aversion leads investors to prefer domestic investment over foreign investment. This preference ends up increasing the whole country’s broadly shared prosperity, even though the risk-averse investors were thinking only of themselves:
First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry…and to give revenue and employment to the greatest number of people of his own country…. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic 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.
Smith here actually implies that investors, intent on security, may overestimate the risks of foreign investment; their investment decisions therefore might not be perfectly efficient, but those decisions nevertheless “promote the public interest.”
The risk-averse investor in The Wealth of Nations is like The Theory of Moral Sentiments’ rapacious rich, who cannot eat all the food the earth produces no matter how hard they try. In each case, some underlying “principle” (the constraint of natural appetites, the natural desire for investment security) leads to a result that increases the happiness of society. The key thought in both passages is that men are led by an invisible hand whose purpose is to increase “the happiness of mankind.” The normal preference for domestic over foreign investment, the natural disposition to barter for one’s own advantage—these are merely the principles of human nature by which the invisible hand’s real purpose is realized.
BUT WHOSE HAND is doing the leading? When the two uses of this metaphor are read together, the most straightforward interpretation is that the hand belongs to Providence, “the Author of nature” and designer of the principles that govern our human nature. Smith is not describing a brute natural fact, like gravity, but a pattern that implies intention and intelligence. Contemporary readers here often miss the personal quality of Smith’s famous metaphor. God in our imaginations has hands; gravity does not. Smith’s famous hand is invisible not because it belongs to Mr. Marketplace, but because it is the hand of God.
According to Smith, our job in this world is to act “according to the dictates of our moral faculties.” Of course we truck and barter, and in doing so increase the opulence of society as a whole, but Smith believed that our fundamental instincts have been shaped by a Deity who invisibly nudges us toward personal tranquility and the greater happiness of society. The principles through which the invisible hand operates reflect “the scheme which the Author of nature has established for the happiness and perfection of the world.” In Smith’s view, efficient markets are not ends in themselves; rather, they are marvelous instruments of God’s benevolence toward us—all of us.
For modern market triumphalists, by contrast, the market is the message. They see efficient markets as ends—as “the Author” of our welfare, rather than one instrument through which some aspects of our welfare might be advanced. This explains why market triumphalists are so enthusiastic for unalloyed market outcomes, and so disdainful of other values that might be invoked to mitigate the suffering sometimes occasioned by the workings of the market.
It is a long and painful journey from Adam Smith’s moral zeal to the uses to which his good name is put today. Homo Economicus struts across center stage of our public discourse, claiming direct descent from Smith, and declaring that market outcomes are always optimal. Smith knew better. Although be believed that one’s own private interests in the marketplace often advance the interests of society, he also believed that “we dare not, as self-love might suggest to us, prefer the interest of one to that of many.”
Poor Adam Smith, professor of moral philosophy, is today held captive by those on whom life has showered affluence, and who revel in confusing their good fortune with great virtue. Surely we are better than this.
Edward D. Kleinbard is the Ivadelle and Theodore Johnson Professor of Law at the University of Southern California Gould School of Law. This article is adapted from his new book, We Are Better Than This: How Government Should Spend Our Money, published by Oxford University Press.