Adam Smith and the Ethics of Economic Liberalism

Keith Rankin, 10 November 1998


This month I have come across three quite different texts that relate to the economic philosophy of Adam Smith, the 18th century moral philosopher from Glasgow who is widely regarded as the father of modern economics, or at least the father of the most cherished myths associated with liberal economics.

While reading Brian Easton's excellent book In Stormy Seas, which contains a discussion of Smith's economic philosophy, I checked out the authenticity of the popular version of Adam Smith's famous "Invisible Hand" metaphor. The passage that was taught to a whole generation of economists, including Easton, is in fact a parody of Smith's 1776 text, written in 1948 by reknown American economist Paul Samuelson.

The version of Smith's text found in Samuelson's textbook is: "Every individual endeavours to employ his capital so that its produce may be of the greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than he really intends to promote it."

Smith's original text is twice as long as Samuelson's abridged version, so I'll just reproduce the key sentence here. Smith actually wrote: "By preferring the support of domestic to that of foreign industry, [every individual] 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."

In book 4 chapter 2 of The Wealth of Nations, Smith was arguing that foreign trade is the least beneficial form of economic activity. Smith's (but not Samuelson's) invisible hand directed individuals to favour the domestic rather than the international economy, even on occasions when the profits to be gained from international trade were higher. He believed that a nation's development depended on investment in local manufacturing and agriculture taking precedence over the international "carrying trade".

The second reference to Smith's invisible hand was in a piece in the Business Herald (November 2) about "senior APEC figure" Roberto Romulo, "chairman of the Philippine Long Distance Telephone Company" who is seeking to "create an environment where globalism can move forward" by following "the invisible guiding hand of 18th-century free-trade economist Adam Smith".

Like many others before him, Romulo uses Adam Smith to promote an international policy agenda which is the antithesis of Smith's own nationalism. A modern example of Smith's invisible hand at work is our innate preference for New Zealand assets to be owned by New Zealanders. Smith's invisible hand is actually an instinct towards patriotism; the semi-conscious identification of our individual interests with the collective well-being of our nation.

The third quotation is about Adam Smith in all but name. It is from the Herald of November 6, where John Roughan says that socialists "may be right in their bleak view of human nature, but it is worth pitching higher for a while yet. Liberal economics has an ethical dimension which has been barely promoted".

Adam Smith, as a philosopher, had a somewhat bleak view of the nature of businessmen, who, "silent with regard to the pernicious effects of their own gains ... neither are, nor ought to be, the rulers of mankind". He despised the Netherlands (then a global superpower), a nation ruled by big business interests, believing their model of economic development was exploitative, monopolistic and unsustainable.

Yet Smith's cynicism towards merchants coexisted with a sympathetic view of human beings as social beings. His liberal writings have a powerful ethical dimension, as John Roughan certainly appreciates. Unfortunately Smith's moral sentiments are not widely appreciated by the generation of economists who first learnt about Smith through Samuelson's textbook.

I would like to develop two ethical themes here.

The first is that of truthfulness. There is no ethical justification for either economists or capitalists presenting distorted versions of the writings of dead authorities such as Adam Smith. There are academic conventions governing the paraphrasing of others' writings, and an ethical scholar will follow those conventions. While new right economists and business rationalists are by no means the only parties who fail to acknowledge their selective cropping of works from such sources as Adam Smith's Wealth of Nations, the fact that such distortion is not uncommon among zealous reformers leads me to doubt that the "ethical dimension" has been uppermost in minds of the architects of our post-1984 reforms.

The second theme relates to the meaning of the concept of self-interest.

The most extreme sect who trace their ideas back to Adam Smith are the so-called "objectivist" followers of the late Ayn Rand. The most well-known promoter of objectivism in New Zealand is Lindsay Perigo, broadcaster and spiritual leader of the Libertarianz Party.

The objectivists create a dualism, whereby human nature is seen as either selfish or altruistic. Altruism as a strategy for human behaviour, plays the role of a straw man in objectivist thought. It is presented as unrealistic, naïve, foolish, and socially counterproductive. Altruism, in that context, means making oneself worse off in order to make someone else better off. The objectivists support selfishness, both because it is seen as the only alternative to altruism, and because they interpret Smith's invisible hand as being a general mechanism by which individual unconcern for social outcomes creates social harmony and economic efficiency.

In fact, the key ethical message of Adam Smith's writings is the distinction between two different forms of self-interest. The bleak view of selfishness is that linked to 17th century philosopher Thomas Hobbes, who is most famous for the claim that human life is "poor, nasty, brutish and short". It is true, as John Roughan suggests, that some socialists have adopted that view of human nature. As Hobbes did before them, they proposed a heavy-handed form of government as a means of controlling selfishness.

Smith's view was very different. He believed that, as socialised beings, we naturally interpret acts that are socially motivated as being good for each of us as well as good for all of us. This is neither altruism nor selfishness, but security consciousness. Smith opposed trade protection, not because he favoured international laissez-faire, but because he believed the invisible guiding hand would render protection of domestic economies unnecessary. He believed that humans did not need the means of protection in order to achieve the goals of protectionism. His central ethic was that of patriotism.


© 1998

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