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Monday, June 12, 2006

Adam Smith's Harmony of Interests

There's a new book on Adam Smith:

Adam Smith Bio Recalls Moralist, Hypochondria, by Matthew Lynn, Bloomberg: Economics has become a big deal in book publishing of late. ... Right on cue comes James Buchan's ''Adam Smith and the Pursuit of Perfect Liberty''... Buchan's thesis is that Smith was really a moralist, not an economist. ... It's an intriguing argument, and one Buchan almost pulls off.

Buchan ... doesn't waste too much time on Smith's life, and rightly so. The doings of economists are on the dry side of things, and Smith was a dullish fish even among his own kind. Try as he might, Buchan can't breathe much human warmth into his subject.

Smith ... rarely traveled, was regularly unwell and had a gloomy disposition... ''At Oxford, we have the first signs of the depression and hypochondria that is the ruling principle of Smith's character,'' Buchan writes. The Scotsman never married, nor has Buchan dug up any serious liaisons. ... No matter. Smith the man needn't detain us for long. Smith the thinker is what matters...

Most people these days regard Smith as the founder of free-market economics. He's the hero of the get-the-government-off-our-backs crowd. He's the pin-up boy of the flat-taxers and the business-knows-best crew.

None of this would have resonated in 18th-century Edinburgh and Glasgow, however. Smith was essentially a moral philosopher, and he viewed economics as a branch of that inquiry, as Buchan reminds us. Smith's vision of the ''invisible hand'' of the market grew out of a wider vision of a moral and just society.

Almost two decades before he published ''The Wealth of Nations,'' the book for which he is rightly remembered, Smith brought out ''The Theory of Moral Sentiments,'' to wide acclaim. That volume, which appeared in 1759, went through six editions in his lifetime and was translated into French and German. ''It was not eclipsed by 'The Wealth of Nations' till the rise of political economy amid the battles and factory smoke of the Victorian age,'' Buchan writes. ...

Most people these days accept that a free market is the best way to organize an economy. Yet many increasingly worry about whether it's a moral system... So it's good to be reminded that Smith first started to question government meddling in the economy because he was interested in morality and freedom...

His purpose was to build a just society. When each human is allowed to earn his own living in his own way, Smith argued, he ultimately benefits the society around him... Although Smith will still be remembered primarily as an economist, Buchan is right to try to restore the philosophical Smith to the prominence he deserves.

Let me take this a bit further. Smith understands that unbridled self-interest where, for example, the strong can devour the weak will not lead to an harmonious, just society.

The Theory of Moral Sentiments discusses how sympathy, empathy, benevolence, generosity, compassion, etc., which "Nature has lighted up in the human heart" restrain selfishness in socially optimal ways, and in The Wealth of Nations competition directs the restrained self-interest to the social optimum. This process of channeling self-interest to produce the social optimum through moral sentiments and competition is the invisible hand at work.

When invoking Adam Smith's name to explain, say, CEO pay and the widening income distribution as free market outcomes, it's important to remember that the social optimum will not occur without the appropriate restraints on the pursuit of self-interest in the surrounding social, political, and economic environment.

    Posted by on Monday, June 12, 2006 at 03:04 AM in Economics, History of Thought | Permalink  TrackBack (1)  Comments (12)


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    Mark Thoma has a nice post on James Buchan's new book, The Authentic Adam Smith: [Read More]

    Tracked on Monday, June 12, 2006 at 08:06 AM


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