Adam Smith (1723–1790), the Scottish philosopher turned economist, is most famous for his 1776 magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations (“Wealth of Nations”). In universities and professional publications across America, if not the globe, Smith is frequently considered the father of capitalism and Wealth of Nations is the capitalist’s bible.
Because of the weight given to his name and words, every adult in the United States needs to have an accurate understanding of what Smith wrote. Or at least not have misconceptions. This is true of every adult who considers him or herself knowledgeable about making money or commerce or the marketplace or any level of government or our society as a whole. This is especially true of everyone who thinks they understand Wealth of Nations because some college professor spoke about it or they read a few passages for an econ class.
Pop quiz time. Yep, really: In Wealth of Nations, how many times does Smith use the phrase “laissez-faire” to describe the place or role of government? No disrespect, but we’d be surprised if you know the right answer before finding it at the end of this blog post. Don’t jump ahead and peek. First, hear what we’re poking at: What are your misconceptions about what Smith wrote? We’re sufficiently overeducated with decades of high-level business experience, and we thought we knew, but we (humbly) learned differently after going directly to the source and studying what the man wrote.
Going directly to the source, to read and understand what Smith himself wrote rather than gleaning from secondary sources and opinion, was an enlightening exercise for us. We came to see the many misconceptions about what Smith wrote, and how those misconceptions lead to deep dysfunctions in our form of capitalism. That experience and understanding is the genesis of this eight-part blog series on understanding Adam Smith. We trust you’ll greatly benefit as you, too, learn a building block toward better capitalism.
Image Credit: AZ Quotes
Let’s start with a summary of one common Smith misconception: That Smith advocates for self-interest and self-interest only because the “invisible hand” and laissez-faire turn self-interest in unregulated markets into economic good. This leads many to completely focus on their own self-interest and ignore the interests of others.
Why is that a misunderstanding? Because that’s not even close to what Smith wrote. Smith does advocate for self-interest, but his view of self-interest inherently and inextricably includes concern for others and the common good. His own words declare that both individuals and governments can and should seek mutual benefit. Smith’s work centers on and repeatedly emphasizes the mutuality of self-interest with other-interests and social good. How do we understand that without cherry-picking verses we like from Wealth of Nations or creating strawman arguments? By reading Wealth of Nations through the same lenses that Smith saw and wrote it.
Smith’s previous bestselling book, The Theory of Moral Sentiments (“Moral Sentiments”), had been published in 1759, 17 years earlier. This thought leader’s first masterpiece, written during the logic- and reason-centric Age of Enlightenment, is all but unknown to modern readers. In Moral Sentiments Smith introduced his social science breakthroughs that explained human behavior, including our economic behavior, as springing from our nature as social creatures. On the strong foundation of Moral Sentiments, Smith erected the economic breakthroughs he introduced in Wealth of Nations. John Rae, among Smith’s earliest and best-known biographers, writes that Smith himself considered Moral Sentiments superior to Wealth of Nations. Despite Smith’s own opinion, Moral Sentiments is absent from the education of American business students, including from those Ivy League B-School grads we know. (Which is itself an incrimination of our education system, but that’s another analysis for another day.)
Given Smith’s clear opinion of his works, one needs an understanding of Moral Sentiments (1759) alongside Wealth of Nations (1776) to have an accurate interpretation of free market capitalism as envisioned by Smith. We should not be surprised then, when our business leaders are unaware that Smith teaches that the turbulent waters of free market economics include favorable currents. Those currents are formed from the inherent values of humankind, which Smith derives and supports from our empathetic behavior as social creatures. Neither should we be surprised when those same leaders crash their organizations and even national economies because they fail to understand Smith through the lens of Moral Sentiments.
We’ll continue understanding Smith in Part 2 by looking at what we call “invisible hand-wringing.” Meanwhile, the pop quiz answer is ‘zero.’ Full credit for answers like ‘never,’ ‘doesn’t,’ ‘nada,’ ‘none,’ ‘nope,’ ‘goose egg’ and all close variations. If you got it right because you knew enough about Smith when the question was pitched, we’re impressed. Kudos to you. Still, we’ve all got more to learn (and practice) about what the father of capitalism really says about capitalism. See you next week!
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