Adam Smith’s Market Philosophy
Writing in Presbyterian Glasgow in the mid-eighteenth century, Adam Smith reinterpreted Protestant theology in terms of sociological secularism and came to totally different conclusions.
Calvin had explained the role of ‘conscience’ in terms of the etymology of the word: it meant each individual knowing together with God.[112] [113] Smith’s Theory of Moral Sentiments (1759) emphasised instead the role of conscience as mediator between the individual will and community standards of proper conduct. Sir Isaac Newton had explained the universe as a system of ‘natural laws’ and bodies in motion, and Smith believed that the natural order allowed neither for Divine intervention nor for a Divine plan in the Calvinist sense: a rational Providence, the Author and Judge of the World, had designed a rational world that operates according to its own laws, of which conscience, representing the natural basis of moral order, was an integral part.Smith began his moral philosophy with the proposition that the nature of man, as a naturally social being, includes the capacity for ‘sympathy’ with others. The opening sentence of The Theory of Moral Sentiments declared:
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. Of this kind is pity or compassion, the emotion which we feel for the misery of others...28
Smith claimed that morality originates in every individual sympathetically imagining both the pain and the pleasures of other people. Such is the ‘constitution of nature’, and ‘It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each other's assistance, and are likewise exposed to mutual injuries'.[114] Properly informed consciences become the subjective bond of human community when each judges the actions of others - and of oneself - on the basis of whether it is possible to sympathise with a particular conduct and its consequences.
Conscience is the internal ‘third party' that imposes self-restraint: ‘We endeavour to examine our own conduct as we imagine any other fair and impartial spectator would examine it'.[115] [116] [117] Rules of moral judgement result, therefore, from the reciprocal adjustments of individual behaviour^1 they are neither God-given nor exclusively a product either of reason or of custom. Instead, they spontaneously emerge from everyday experience. To be a rational individual, for Smith, meant to possess a fully socialised conscience, that is, the facility of knowing together with other members of the community what moral propriety demands. Among the fundamental virtues of socially responsible individuals, Smith attached the highest priority to prudence, justice and benevolence.In a dialectic of the inner and outer, Smith's theory anticipated Hegel's concept of subjective freedom. Autonomous individual judgments would take into account the legitimate expectations of what the sociologist George Herbert Mead later called ‘the generalised other'32 But socialised individuals, attuned to what others think and experience, would also seek admiration along with moral approval. The result was that the virtue of prudence, or responsible management of one's personal affairs, might grow over into the vice of avarice. Smith retained a Protestant disdain for conspicuous wealth in the belief that human needs are by nature limited. He worried, however, that two elements of human nature pointed to the possible corruption of our moral sentiments: 1) we are all victims of the deception that wealth brings happiness; and 2) as social beings, we all believe that others will respect and envy us because, imagining themselves in our place, they will be impressed with the happiness that our wealth must bestow. In a passage reminiscent of Calvin, Smith wrote:
The rich man glories in his riches, because he feels that they naturally draw upon him the attention of the world...
At the thought of this, his heart seems to swell and dilate itself within him, and he is fonder of his wealth, upon this account, than for all the advantages it procures him. The poor man, on the contrary, is ashamed of his poverty... The poor man goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his own hovel. Those humble cares and painful attentions which occupy those in his situation, afford no amusement to the dissipated and the gay. They turn their eyes away from him, or if the extremity of his distress forces them to look at him, it is only to spurn so disagreeable an object from among them. The fortunate and the proud wonder at the insolence of human wretchedness, that it should dare to present itself before them, and with the loathsome aspect of its misery presume to disturb the serenity of their happiness. The man of rank and distinction, on the contrary, is observed by all the world.[118]Social order and prosperity required that wealth and greatness be respected, for admiration is a powerful incentive to productive activity. But the result, Smith said, is that wealth often receives the respect properly due to virtue, while poverty is treated with the contempt that vice and folly deserve[119] Smith believed that the virtue of justice would encourage restraint, both as an internal moral rule and as the external force of positive law. But if wealth disposes the rich to ‘turn their eyes away' from the poor, how could Smith expect that the rich and powerful, who write the laws, would not be the exclusive beneficiaries? He answered that the order of nature includes an ‘invisible hand' that causes the excesses even of the landlord class, the idlest of the rich, ultimately to benefit the poor. Since ‘the eye is larger than the belly', landlords redistribute their surplus to hire others who entertain and serve them:
The pleasures of wealth and greatness... strike the imagination as something grand and beautiful and noble...
It is this deception which rouses and keeps in continual motion the industry of mankind... [But] the rich only select from the heap what is most precious and agreeable. They consume little more than the poor... in spite of their natural selfishness and rapacity... 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 proportions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of society, and afford means to the multiplication of the species[120]With this reference to the ‘invisible hand', The Theory of Moral Sentiments pointed the way to analysis of the capitalist market in The Wealth of Nations, in which Smith replaced Calvin's Divine plan with objective market laws. Convinced that individual responsibility is a moral advance over feudal hierarchy, Smith found in the market the natural order that he believed must realise his philosophic ideal. The market was morally justifiable because it was the only alternative that history provided in which individuals acquire both the liberty and the responsibility to make their own decisions. The economic theory of The Wealth of Nations was Smith's practical elaboration of moral philosophy.
Smith began The Wealth of Nations with reference to a natural propensity to ‘truck, barter, and exchange one thing for another'.[121] Trade and economic cooperation, through the division of labour, appeared to be ‘the necessary consequence of the faculties of reason and of speech... It is common to all men, and to be found in no other race of animals'[122] But the decisive change in Smith's thinking involved recognition that businessmen are guided immediately by profit - or self-love - not by benevolence or the fellow-feeling of conscience. In the pursuit of profit, the capitalist ‘intends only his own gain', yet he is ‘led by an invisible hand to promote an end which was no part of his intention'^[123] Through the invisible hand of market prices, self-love promotes social wellbeing: ‘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'[124] In order to maximise profit, every businessman, in a competitive market, will try to sell the best possible product at the lowest possible price.Self-love is beneficial because it increases social income and, at the same time, is assumed to be restrained by moral consciousness and public laws. The laws also define the property rights that make accumulation and social advance possible:
Among nations of hunters, as there is scarce any property, or at least none that exceeds the value of two or three days labour, so there is seldom any established magistrate, or any regular administration of justice. Men who have no property, can injure one another only in their persons or reputations... Wherever there is great property, there is great inequality... It is only under the shelter of the civil magistrate, that the owner of that valuable property. can sleep a single night in security. The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government. Where there is no property. civil government is not so necessary.[125]
Smith was perfectly aware that ‘Civil government, so far as it is instituted for the security of property, is, in reality, instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all’[126] [127] But property was necessary for accumulation, and accumulation was necessary for raising living standards. When capital is accumulated, the division of labour is extended and workers become more productive. As a result, the self-seeking behaviour of society’s parts efficiently maximises the income of the whole. Given the presupposition of moral self-restraint and positive law, the market would benefit the whole of society and do so in conformity with the objective requirements of justice. The system of ‘natural liberty’ would reconcile efficiency with justice. The problem remained, of course, that employers would always try to escape competition and monopolise the market. As a group, they also shared a special interest in suppressing wages: Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate. We seldom, indeed, hear of this combination, because it is the usual, and, one may say, the natural state of things, which nobody ever hears of. Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy...42 Workers may respond by attempting to create their own defensive combinations, but the law forbids them to do so, and the masters ‘call aloud for the assistance of the civil magistrate’. And since workmen depend upon employment for their subsistence, any attempts to resist the suppression of wages ‘generally end in nothing but the punishment and ruin of the ringleaders’[128] If the laws favour the rich, where is the justification for Smith’s conviction that economic growth would be to the advantage of all? The answer, Smith believed, is that there must be a competitive market not merely for the sale of goods but also for the hiring of wage-labourers. That condition would prevail with a rapid accumulation of capital: When in any country the demand for those who live by wages... is continually increasing; when every year furnishes employment for a greater number than had been employed the year before, the workmen have no occasion to combine in order to raise their wages. The scarcity of hands occasions a competition among masters, who bid against one another in order to get workmen, and thus voluntarily break through the natural combination of masters not to raise wages... The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. The increase of revenue and stock is the increase of national wealth. The demand for those who live by wages, therefore, naturally increases with the increase of national wealth, and cannot possibly increase without it.[129] In his chapter on the accumulation of capital, Smith concluded that every ‘frugal man', who saves and invests his net revenue, is objectively a ‘public bene- factor’.[130] The market system transforms private accumulation into beneficence with or without the corresponding subjective intention. The capitalist pursues his own gain, but he is led by ‘an invisible hand’ of competitive market prices to promote the public interest[131] The objective design of nature makes the market an inherently moral and moralising order. The virtues of prudence, justice and benevolence, enunciated in Smith’s Theory of Moral Sentiments, are therefore ensured through the activity of self-love, and the seeming contradiction between greed and godliness disappears. The Wealth of Nations, as a practical extension of moral philosophy, gives way to the science of political economy, which demonstrates that to do ‘good’ in the world is to accumulate capital.