The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Economic Liberalism the Classical View
• 1: The Classical Psychology of Liberalism
• 1: The Theory of Moral Sentiments
• 2: The Lectures
• 3: The Wealth of Nations
• 4: The Achievement of Smith
• 2: The Political Ideas of the Classical Economists
• 1: The Political Philosophy of Hume and Smith
• 2: The Paradox of Economic and Political Freedom
• 3: Human Nature, History, and Government
• 4: The Nationalism of the Economists
• 5: The Structure of Government
• 6: Economic Improvement and Social Progress
• 3: Liberalism In the Great Century
• 1: The Importance of the Nineteenth Century
• 2: The Practice of Policy
• 3: The Meaning of Economic Liberalism
• 4: The Ideas of Policy
• 5: The Theory of Policy In Mill

1

THE CLASSICAL PSYCHOLOGY OF LIBERALISM

There are two elements of classic economic liberalism which, I believe, are more to be studied than any others. One is its ideas of economic psychology in both their positive and normative aspects—how people actually behave and how they ought to behave. Much has been written about these questions, so much in fact that the ideas expressed by the economists themselves have been pretty well obscured. The other is its political ideas, and almost nothing has been written of them. It is informative to study both, because they were directly related to the leading question of this book—What did the liberals believe was the proper relationship between the state and the economic conduct of the individual? This chapter is about economic psychology, and the next is about the politics of the classical economists.

I have chosen to explain Smith’s ideas of economic psychology rather than those of any other economist because his were the most consequential. Indeed, his idea of the economic man—or what was believed to be his idea—is probably the longest-lived, most durable, and most familiar idea ever expressed by an economist. It also is the most controversial, with the exception of the idea of the “invisible hand,” which also comes from Smith. Actually the two are related parts of his conception of economic motivation.

Early in the nineteenth century, there began a reaction against classical economics, including its normative side which is economic liberalism. The opposition has continued, and Smith’s ideas of economic psychology have been criticized repeatedly. The criticism usually has been directed against one or more of three beliefs Smith is supposed to have held: that men are invariably rational and seek to maximize the satisfaction of given economic wants; that in their effort to acquire wealth they are governed by a suprahuman power, the natural law or the invisible hand; and that the consequence of such effort is a quite satisfactory state of affairs, indeed a harmonious natural order. If Smith actually believed all this, his “economic man” would have been a mistaken, even a foolish, idea, and moreover one with implications of mischief.

In contrast to the standard critical view, the point of view here is that Smith described social behavior in a number of different areas, rational conduct being only one of them; that in his final and most mature work, The Wealth of Nations, he abandoned the doctrine of natural law in favor of explaining behavior as the outcome of quite secular motives; and, finally, that he did not believe free economic behavior necessarily produced a desirable social order. In support of this interpretation, I shall describe the chronological development of Smith’s ideas of social behavior and especially of its economic aspect. This interpretation is based almost entirely on what Smith himself said in his writings and very little on what others have said about him. There is not space enough, nor have I the inclination, to contend with his major critics or to quarrel with their particular conclusions. Most readers are familiar in a general way with what has been written about Smith and can if they wish compare this chapter with such writing. I do wish to make it clear that my objection to the commentaries is that they are mistaken. I do not object to them being commentaries. There are purists among the historians of economic thought who decry all commentaries—all books about books—and direct the reader straight to the masterworks themselves, the direction being given in a book of course.

1

The Theory of Moral Sentiments

In Smith’s writings there are three distinct conceptions of economic psychology—three versions of the economic man—and they correspond to the development of the idea in his three major works. The first was The Theory of Moral Sentiments, published in 1759, and there the normative or moral aspect of psychology was predominant. His last work was The Wealth of Nations, 1776, and in it he stressed the positive or factual side of psychology. In between came the Lectures on Justice, Police, Revenue and Arms which he delivered about 1763 but never meant to publish. In his first book, Smith’s main interest was the question of how man distinguishes right from wrong and how he acts upon that distinction—i.e., how do we know what is moral and what makes us behave morally. The answers are fairly simple. Moral behavior is that which is approved by someone else who is not committed to our situation and so can view it objectively. That person is the impartial spectator. Usually he is a mental construction that we make in order to get a disinterested view of our conduct, but we may have an actual person in mind. From him we learn what is moral. He also makes us want to be moral because, according to Smith, each of us wants the approval of our fellow men. It is an innate desire. The idea is an interesting version of “other direction” which David Riesman uses in The Lonely Crowd and is just the opposite of the Stoic moral hero who was completely inner directed.

ECONOMIC MOTIVATION

In this first work, Smith digressed on economic behavior. He explained why men are acquisitive and why that motive is beneficial to others. By an ingenious argument, he traced the motive to both man’s sense of beauty and his capacity for self-deception. In the eternal fitness of things, men find beauty. Wealth is one of the fit means to the good life, the life of virtue and wisdom, and therefore a thing of beauty. It brings men the approval of their morally enlightened fellows (the impartial spectator). But the approval actually is mistaken, according to Smith, because wealth is not as fit a means to the good life as it appears to others to be. Once a man has acquired wealth, he finds it is trivial beside the “more solid” attainments of wisdom and virtue. The impartial spectator happens to be wrong. Nonetheless, it is his approval, not our own, that we want. We continue to acquire wealth because others think we thereby come nearer to the good life. Every person’s wish is to be taken notice of, to be attended to, to be acclaimed. Hence we work to grow rich even after we no longer want riches as much as we want other things. The desire for approval—for a sympathetic response from others—is a stronger motive than the sense of beauty, but it could never be effective if mankind at large was not mistaken. How the economic man might behave under the eye of an impartial spectator who was a rich man is a problem Smith did not write about.

The role of sympathy as an economic motive is perplexing when set against its place in other forms of behavior. Outside the market, a man must feel that he deserves approbation before he can enjoy it. His conscience is stronger than his vanity and hence the appearance of virtue cannot supplant the reality. But on the market, his conscience is less strong than his vanity. He adds to his fortune simply because it gets him the approval of others. The greater is their gullibility, the happier he is. Smith tries to demonstrate that the illusory quality of wealth is providential: it makes, he says, for an abundance of goods and for social peace. Nevertheless his argument has an unfortunate implication: he makes Providence deprive men of their conscience in order that they will not starve or annihilate each other.1

To have avoided the implication, Smith would have had to make utility instead of sympathy the decisive motive of economic behavior and he also would have had to maintain that the possession of wealth is the good life, or at least one of its prerequisites. But this line of argument would have produced an embarrassment in another direction. If wealth is a thing of beauty, what of painting, music, poetry, of man’s nature, the heavens? To give all such things the same importance in the design of Providence—to make poetry and pinball contribute equally to the good life—is undiscriminating, to say the least. Smith, like most (but not all) sensible men, refused to carry his argument to its logical conclusion. What utilitarianism ultimately and offensively implies is that among experiences there are only quantitative, not qualitative, differences. The point was not abstract but personal for Smith. Throughout his writings he expressed a dislike for rich people—for their arrogance and ostentation—and showed it in his manner when writing about them. The dislike is most apparent in The Wealth of Nations but there is enough of it in the Moral Sentiments, the Essays, and the Lectures to indicate it was something he felt always. Why he should have favored an economic system that fosters money-making is one of the questions which every reader of Smith must ask. The answer, I believe, is that he approved of a market economy because on balance it promoted the good life—the life of learning, beauty, personal virtue, and good works. The belief was qualified however, because he also believed that free economic conduct did not always have these effects. When it did not, he opposed such conduct. This is an explanation of the great paradox in Smith’s writings: that he should declare himself for a free market and at the same time oppose many of its results.

ECONOMIC MORALITY

In the Moral Sentiments the economic man acts only in his own interest (which is to get approval) and with a prodigious waste of effort (because the approval is undeserved). Still his behavior has beneficial effects on others. His desire for approbation is stronger than his acquisitiveness and forces him to uphold justice. The material progress of society is promoted by the very uselessness of his wealth. After satisfying his own material wants—which, Smith implies, are not much greater than those of the poor—he spends the surplus on retainers, servants, and others, whereby a general plenty is diffused through society. He is guided by an “invisible hand” to promote the welfare of others. In this as in other ways Providence shows its benevolence.2 The famous words “invisible hand” appear first in The Theory of Moral Sentiments.

For all of his good works, the economic man does not secure the highest approval. It is given to behavior that is moral for a better reason than necessity and is benevolent by intention, not accident. The economic man is respected for the practice of the middling virtue of prudence, which is below justice and benevolence and just above propriety, the least of the virtues on Smith’s ethical scale. As a prudent creature, he lives within his income, is cautious, and follows the path of security, never yields to (never experiences?) the temptation to make and meddle, never seeks preferment. What he does, steadfastly and with clear head, is to add to his estate. His values under scrutiny are of the family cultivated by Poor Richard, except for an inclination to mind his own business.

His accomplishments are commonplace. Still, his position forces him to join knowledge with prudence and to raise both in esteem, and he stands in strong, if uninspired, contrast with the upper classes, who daily experience the conflict between the temptations of wealth and the requirements of wisdom and virtue. Moreover, the behavior of the economic man has vast indirect consequences, not only in providing for those less fortunate than he but in helping to build the kind of an environment in which the virtues higher than prudence can find expression and which together with wisdom are the highest achievements of men. They never could be brought about, Smith believed, in an aristocratic milieu of wealth and power, which was the milieu of his age.

The economic man was in this way given a place in the benevolent design of the universe. Smith’s conception disclosed his faith in the gentleness and wisdom of Providence, a faith which he expressed in his reaction to everything he saw about him. He observed that man was inclined to respect power uncritically and to turn away from the problems of those nearest him; but, he continued, this was fortunate because it supported the class distinctions that civil peace required. Here is an engaging sketch of the “political man,” truckling before his master and ignoring his fellow servants with whom he might unite and become master himself. There is an Italian proverb that says when the poor give to the rich the devil laughs. Being more religious, the Italians have been less inclined to mistake their desires for divine guidance. Not so the Anglo-Saxons. They see nothing impious in believing that what they want is what Providence actually meant them to have. Moreover, by being gratified that Providence is benevolent they are in effect commending its works, giving it their approval. The optimism of the eighteenth century strikes me as conceit rather than as something simple-minded, fatuous, or Panglossian.

When the moralists of the period moved away from a faith in natural benevolence, as was notably done by Smith, they did not become irreverent or skeptical but modest and realistic. They also became more informative. Consider how uninformative are other of Smith’s observations in The Theory of Moral Sentiments. Men, he said, usually look more at the consequences of an act than at its intentions, a habit that seems unjust to those whose good will is defeated and unreasonably generous to those whose good works are fortuitous. Yet what would become of society if approval were granted only for intentions, Smith asks, and answers that every court of justice would become an inquisitorial chamber. At another point he observed that estimable men were often afflicted with an excessive delicacy of sentiment, were more practiced in the “amiable” than in the “manly” virtues, and were unreasonably disturbed by an unjust reproach. Their weakness, however, made the good and the wise indulgent of the failings of others while making them exacting of themselves.

THE MEANING OF NATURAL ORDER

These are features of the natural order which to Smith was the manifestation of the natural law governing social behavior. This order has a much different meaning from the harmony described in The Wealth of Nations. According to the doctrine of natural law, averred by Smith in his early writings, and only there, man is endowed with certain characteristics or moral faculties which in their totality comprise human nature. This nature is common to all men in all places and is governed by a force superior to them. That force is the natural law and it emanates from God. The end is beneficent—the glorification of God as his benevolence is revealed in the happiness of man—and the end is realized when the natural order is established. It is inevitable, and in the movement towards it, nature follows a uniform succession of events. Natural law and that which it creates and governs—human nature and natural order—are discoverable by man through the use of his moral faculties. They show him the path of virtue and guide him along it. The philosopher’s quest, Smith declared in one of his Essays, is to discover the law of nature, to apprehend

What he meant by this idea, he explained in The Theory of Moral Sentiments.

In its economic aspects the idea is not satisfactory, but its defects are inseparable from its merits. The economic man of that book is not helpful in explaining even the main features of economic procedure. He never encounters the problem of economizing because he lives in a world of abundance. If he is successful in acquiring wealth, he also acquires approbation; if not, he is kept from want by the generosity of those who are successful. Having no economic choices to make, the quality of his rational powers is not at issue. If the economic man seeks to maximize anything, it is the approval of the impartial spectator. His choices are moral. He must select the kinds of conduct that will bring him into accord with the natural law. But even that conduct does not necessarily imply rationality. On man’s use of reason, Smith is equivocal. He prefers not to say whether men do good because they are reasonable, or because of original instinct, or “some other principle of nature.” He only states that man possesses moral faculties and is aware of their exercise by the pleasurable feeling that approbation gives. As long as Smith attended only to these kinds of choices, he could not make a plausible or useful explanation of economic activity. When however his interest in natural law subsided and he came to look at society in a secular and critical way, he then began his contributions to economic thought.

2

The Lectures

There are intimations of a new view in the Lectures on Justice, Police, Revenue and Arms that were delivered at the University of Glasgow about the year 1763. Its major difference with The Theory of Moral Sentiments is in making natural rights instead of natural law the governing principle of society. (The idea later was expressed in detail in The Wealth of Nations.) Another and closely related difference is that in the Lectures Smith made environment instead of sympathy the force that restrains self-interest. The economic man as a sensitive creature who pursues beauty in a world of material abundance is succeeded by a pedestrian individual who looks with interest upon only those activities which “pay” and pursues luxuries in a society where they are unmistakably scarce.

NATURAL RIGHTS AND ECONOMIC BEHAVIOR

The economic man of the Lectures, like his predecessor, still is the best judge of his own interests, he is influenced by what he takes to be the feelings of others toward him, and he has a taste for beauty (although it is frail and fleeting). But here their similarities end. The economic man of the Lectures, according to his environment, follows his interest along paths marked out by one or another of two sets of passions. One consists of the “baser” passions of avarice, the instinct for truck, barter, and exchange, the disposition to specialize his labor. They are the more surely grounded, the least in need of any encouragement for their expression. They are traced back to the willfulness in every individual, to his inclination for persuading, imposing upon, and coercing others. As manifestations of self-interest, they usually are regarded with contempt. Yet in the exercise of such “baseness” men discover the more elevated side of their nature, like the sense of beauty, courage, and generosity. These, the other set of characteristics, are delicate and ephemeral. They require much encouragement before they are brought to light, and when they are they attract much commendation.

The individual should be free to express both kinds. It is his natural right to do so. It also is to the interest of others that he do so. His self-interest then will operate to their advantage as well as his own. From the delicate passions comes man’s taste for luxuries; out of it commerce develops, liberty takes hold and is made secure, men are emancipated from superstition and come under the influence of learning and the arts. But the delicacy of man would never have had such consequences if he had not been free to specialize his labor, engage in trade, acquire property—if he had not, in other words, had some economic freedom. Smith believed that one of the achievements of his age was this very freedom. He developed in the Lectures a theory of economic change that explained the accumulation of capital and the rise of representative government as the outcome of this freedom. Actually more than a theory of change, it disclosed Smith’s deep conviction that liberty was both a value in itself and the most effective means of acquiring other values.

A THEORY OF DEVELOPMENT

Toward his ancestors of the Middle Ages, Smith looked with feelings of compassion and also of reproof, frowning upon their waste of time, effort, and wealth; shocked by their depraved pastimes, their callous attitude toward the poor and weak, appalled by their superstition; yet at the same time tolerating their vices in the belief that the environment permitted nothing better. In that period, the more elevated side of human nature could not develop. The inequalities of ownership and opportunity, the restrictions placed upon exchange, the primitive form of agriculture, and the contempt with which most economic activity was regarded—all turned man’s baser instincts away from those activities which in time would supply him with the means of indulging his finer nature. His animal spirits, not to be denied, found an outlet in oppressing the weak and in making war against the strong. But eventually his avarice broke down the obstacles to exchange and he then was able to turn his efforts to providing more than the necessities of life. With the appearance of “luxuries” (which Smith called all those goods beyond what are required for a bare subsistence), the aristocracy found a new use for its income and turned out its retainers, servants, and other dependents. When Smith wrote The Wealth of Nations he enlarged upon this view of the decline of feudalism and related disdainfully how the aristocracy had squandered its birthright for trinkets and baubles. It finally was forced to turn to commerce out of a “principle of avarice” and in so doing struck away the final restraint on enterprise—the disesteem with which it had been regarded by the ruling class. Meanwhile those who had been dependent upon the nobility were forced into productive occupations, and their characters improved remarkably. Once slothful because they did not have to work, demeaning before their patrons and insolent to inferiors, depraved in their tastes and amusements, they now became industrious, prudent, honest, and enterprising. The transformation of the economy and of social standards brought with it the development of representative political institutions. As opportunities grew for accumulating wealth, men demanded security and the rule of law: the protection of every man in his person and his property, and the opportunity to trade and acquire wealth. As men became materially more secure they were able to look beyond their immediate affairs and to devote themselves to learning and the arts, to throw off superstition, and to pursue virtue.

These ideas are what today would be called a theory of economic development and in the past was called a theory of progress. They can be compared instructively with today’s theory. Smith’s explanation of how a market economy came into being is a piece of speculative history, a statement of how it could have originated, not of how it did in fact originate. Smith meant his theory to be the latter and cited some facts to support it. But they only illustrate it. The practice of mistaking illustrative for demonstrative evidence is common among historians who present great and inclusive generalizations to explain historical change. The failing is a part of a more basic—and actually a rather simple—error, which is to suppose that because something could have happened in a certain way it must have happened that way, especially if there is no conflicting evidence or recognition of any. About the reasons for the development of capitalism there is a great deal of conflicting evidence, so much that any conjecture like Smith’s is unsatisfactory.

What can be said of today’s theories of how an industrial system can develop in a backward country? An industrial system is not, to be sure, identical with a market economy. But that is immaterial, because what we want to compare is the method of today’s economists with that of Smith (not today’s explanation of the origins of capitalism with that of Smith). Except for the area studies made today, which often are quite empirical, the doctrine of development in its conceptual aspect does not have much more empirical foundation than Smith’s theory had. Today’s doctrine is mainly deductive, consisting of models of development that are made of propositions from micro-and macro-economics relevant to conditions in which per capita output is rising or can be made to rise. The propositions are logical statements, describing what could happen, not what probably will happen.

What is even more interesting is to compare the two doctrines in their normative aspect. Why should a country develop? Modern economists said originally that development is a necessary and probably a sufficient condition for democratic government. More recently they have said development is a necessary condition of political stability, and political stability is prudently left undefined. Some to be sure do say that political stability will be conducive to world peace, and others that development will keep a country independent of the Communist bloc (or blocs).

The view of Smith is, by comparison, a grand vista, a panoramic conception that includes economics, politics, morality, knowledge, and the arts. He believed in development because he believed it to be a condition for political progress, for an improvement in other social relations, for elevating the moral quality of a country, for progress in knowledge and in the arts. In short, he believed an increase in income made the good life possible.

What is most often criticized in Smith’s theory of development is the assumption that self-interest will operate beneficently when it is expressed in a free market. If the theory seems simple-minded, one must recall that Smith here was engaged partly in a polemic against restrictions on commerce and partly in expressing his optimistic convictions. When it is summarized so briefly, many of the insights are glossed over, and the rich lesson it held for future generations is discernible only by implication. If any one aspect is to be singled out for emphasis, it is Smith’s belief in the power of free economic behavior to produce free, enlightened men. (That this power was not always used wisely Smith was fully aware.) Nothing corrupts an individual so much, he said, as to make him dependent on others for a livelihood and security, and nothing more increases his self-reliance than the opportunity to find his own way in the freedom afforded by equal laws.

There was nothing new in the idea that material dependence is debasing. Vauvenargues said as much in his epigram, “Servitude degrades men even to making them love it.” It was a current coin of eighteenth-century thought. So was the apothegm, “He who controls a man’s subsistence controls his will.” But it was Smith who first emphasized that only through a free market could men emancipate themselves from dependency. Not even Hume, to whom Smith credits the idea, showed so clearly and in such detail the relationship between economic and political freedom. The political institutions of a country are not to be explained, Smith said, by the nature of the governed. That is much the same everywhere. If a Frenchman acts differently from an Englishman, the reason is that the self-interest implanted equally in them finds expression in different economic orders.

In the Lectures Smith regarded free government as the product or effect of the free market, not the other way around. Government had important work to do, and that was to protect the free institutions that the free market had brought into being; but it was a passive or protective agency, not one that initiated improvement. This conception departs considerably from Smith’s earlier belief that government exists because men find pleasure in submitting to authority; in the Lectures, the penchant for authority is merely mentioned and no more. There, the excellence of a government is to be measured by the protection it gives to the natural rights of the individual, and a government which does not provide such protection should be overthrown.

ECONOMIC MORALITY

Not everyone took so favorable a view of the free market as Smith did. He knew that very well. As if in anticipation of what has become a common objection to laisser faire, or to settle with himself the conflicts between the Lectures and The Theory of Moral Sentiments, he examined the question of justice in relation to economic activity. The economic man of the Lectures is virtuous simply because he believes virtue pays. His acquisitiveness is restrained not by the desire for moral approbation but by a disinterested calculation of the returns to be expected from moral as compared with immoral conduct. The calculation shows that on balance there is a net in favor of virtue. By transferring the origin of virtue from man’s moral sentiments to his profit and loss statement, Smith worked a very great change indeed in ethical doctrine. Nevertheless he did not touch the reality of virtue itself, nor did he question the comforting notion that whatever prompts men to action the action itself can only be beneficial.

How an individual would act if the calculation by some perverse stroke went in favor of immorality is a troublesome question. And Smith did not evade it. In fact, his willingness to consider the problem of monopoly suggests he was aware of the question. In a monopolistic market, the economic man is not restrained by the rule that honesty equals profitability. By acquiring exclusive privileges of sale or purchase, he can turn dishonesty to a profit, and by carefully managing his power he can so far reduce the menace of potential competitors and outraged customers that his dishonesty can be capitalized for an indefinite period. Smith’s solution to the problem was not convincing. He seemed to think that potential monopolists would behave themselves once they realized that monopoly is a game everyone can play and one that in the long run produces losses all around. Neither of these observations happens to be true but they were as much as Smith had to offer in the Lectures. In The Wealth of Nations, however, there is much more.

An unsure sense of justice is not the only weakness of a free economy. For all of its material, political, moral, and cultural superiority over early forms of economic organization, it was not ideal. The specialization upon which it is based produces a number of undesirable effects, Smith said. The upper classes become preoccupied with acquiring wealth or exhibiting it and they lose sight of the end it should serve: the development of moral and intellectual excellence. They neglect their responsibilities to others, being particularly remiss in the military arts. He took the neglect of military duty to be serious because he believed national defense and power were more important than wealth. The rich are remiss about other responsibilities, and their greatest failing is to become so attached to their wealth that it becomes their sole mark of distinction. In the ostentatious use of wealth Smith saw what was to him perhaps the most unbecoming side of self-seeking. He remarked on it in almost all of his writings, and nowhere more expressly than in an essay on the Imitative Arts:

The quotation is also interesting because it contains the idea of conspicuous consumption and, what is close to it but not identical, the idea of commodities as status symbols.

The lower classes also are injured by specialization. Although it improves their living conditions, it also confines their views and blunts their imaginations, turning them to vulgar diversions, leaving them witless and without spirit. By making the employment of children profitable, it puts obstacles in the way of education and weakens the family. The neglect of education leaves the great mass of the people insensible to the more creative forms of leisure and abandons them to the alehouse. So he argued.

It is instructive to contrast Smith’s attitude toward the working class with that of the mercantilists, which is described in the other volume. Smith deplored the condition of the workers, regretted their weakness before the greater power of businessmen, hoped that in some way the development of the market would make them richer, freer, wiser, and more virtuous. He expressed his good will toward the poor and weak in the warmest, most generous language. He could find something admirable even in the most lowly, as when he found the coal heavers to be superb specimens of manhood and when he observed that the Irish prostitutes of London were the most beautiful women, “perhaps,” in the British empire. The mercantilists, on the other hand, were constantly at the workers, admonishing them, rebuking, scolding, wheedling, cajoling, punishing, and preaching virtues of the early-to-bed, early-to-rise variety. They showed they had very little of the tolerance and generosity expressed by Smith. Yet it was the mercantilists who came forward with explicit and practical proposals for improving the condition of the workers. Whatever one may think of the proposals, either by the standards of their own time or by ours, one must acknowledge that they were an effort to improve the condition of the poor. Indeed, the very harshness that is so repellent today was an indication that the mercantilists cared about the working class (in the same way a stern parent cares about his children). One does not scold and want to improve those to whom one is indifferent. Nor does one urge diligence, enterprise, and self-reliance upon those whom one wishes to become obedient servants of an all-powerful state (which is a common misinterpretation of the mercantilists’ views of the laboring classes).

Smith, for his part, did not go much beyond expressing a generous attitude toward the poor. They had his good will in abundance and little more. He did not offer any particular advice about how they could better their condition, either by their own efforts or with the assistance of the state, except to imply that progressive taxation would be desirable. His strongest proposal was to increase the wealth of the nation. When that happened, everyone—the lowly along with the middling and the great—would improve his position. An interesting question is why he did not have practical proposals for helping the poor. The answer may seem to be that he adhered to laisser faire and hence was opposed to trade unions or the regulation of labor markets by the state. But that will not do, because in fact he did not adhere strictly to laisser faire, as this chapter explains farther along. His successors in the nineteenth century were most of them in favor of repealing the prohibition against union organization (the Combination Acts). That does not make them advocates of unions, but does indicate they believed the workers should have the right to form them.

Another direction in which Smith’s sympathies lay is disclosed in his frequent comparisons of merchants and manufacturers with the landed gentry. By the time he wrote The Wealth of Nations he had no fondness for businessmen, but he still believed their avarice could be turned to public advantage with no great injury to private liberty. He thought quite otherwise of the landholders. He believed their interests were in direct conflict with those of workers and businessmen. When one compares what he wrote about businessmen and land owners, one can see that he considered the businessman more useful to the nation. His attitude was unusual for the age. To claim that a merchant and manufacturer were entitled even to as much esteem as a landholder was uncommon. To claim they were entitled to more—because they were superior in prudence, energy, social usefulness, learning, and morality—was notable.

NATURAL RIGHTS VERSUS NATURAL LAW

Smith noted some major failings of a free market when he gave the Lectures and many more of them in The Wealth of Nations. Nevertheless he has been described repeatedly as the great apologist for laisser faire. His doctrine is said to rest on a faith in a natural order in economic affairs. Actually the idea of nature appears only remotely in the Lectures. Its hand is more than invisible; it is unpredicitable and capricious. One of the two distinctive features of the Lectures, which marks it off from The Theory of Moral Sentiments, is the ambiguity surrounding the idea of natural law. The other is the appearance of the idea of natural rights. Smith refers to the natural right of each person to his life and to security against violence, the natural right of inheritance, and the natural right to private property. He refers also to the political analogues of these rights, the most important of which is the natural right of each man to associate with others on terms agreeable to all of them. As Smith uses the term, a natural right is the liberty each man should have to act in a way that is consistent with his inclinations, to some of which he is disposed by psychological traits and to others by choice. The belief that each man possesses undeniable rights necessarily implies that he must respect the rights of others. It also implies that all men together must so arrange their social behavior that each may have what is due him. Since man is psychologically disposed to specialize his economic effort, he has a right to exchange his product for that produced by the specialized effort of others. It follows that there can be no legitimate interference with exchange, either by private persons or by public bodies. In the property which a man acquires by his activity he has a natural right, and when the property passes to his heirs they too have a natural right in it. Because the free exercise of individual inclinations depends most fundamentally on personal security, the right of each man to his life is the primary natural right. Any interference with the free expression of individual desires is a deprival of natural rights. Any serious attempt to stifle them is therefore a signal for justifiable if not obligatory resistance. In liberal philosophy from Hooker onward, the greatest menace to freedom was thought to dwell in the state, or in those agencies like monopolies that Smith thought derived their power from the state.

Just where natural rights originate is not made clear. There is evidence that they simply are the data of social behavior. All of man’s traits and desires when taken together exhibit a harmonious design. All fall into one of two categories of “passions” which serve to reinforce and complement one another. Smith gave the Lectures not many years after The Theory of Moral Sentiments was published and he may still have thought of nature as incorporating mankind in its harmonious design. Whatever is the origin of the “passions,” they are not, in the Lectures, governed by nature. They may be its work but no longer are its “darling charge.” Many of the Lectures are taken up with showing how natural characteristics are stifled or distorted, with showing the difficulties encountered by self-interest, and with the reforms that should be made in order that man can be free to express himself. If Smith had really believed (as he has been said to have believed) that the will of nature inevitably is realized, there would have been no reason for him to condemn the effort to obstruct it and no reason for him to suggest ways in which its work could be made easier.

THE NATURAL ORDER AS COMPETITION

A more plausible interpretation is that Smith gave a secular explanation of human behavior, not one derived from natural, or suprahuman law. The Lectures say that the way men behave depends on their environment and that human nature is governed by the interaction between the individual and society. In this idea there are the beginnings of a new conception of natural order. Natural order is no longer the expression of divine will. It now is the kind of social organization that develops when men can use their traits in their own interest. The conception is radically different from that in The Theory of Moral Sentiments where the natural order is the outcome of man’s bringing his moral sentiments into accord with God’s will. The world that results has no economic problems because it experiences no scarcity. The concern Smith shows in the Lectures for the protection of natural rights connotes a new conception of economic behavior. He no longer believed in natural abundance. He did say that if man wanted no more than subsistence he never would engage in economic activity. But he does want more. To get it he utilizes his talents for specialization and exchange, thereby obtaining a greater satisfaction than he would acquire by producing for his own use. In this idea is the suggestion that the meaning of economic behavior is the maximizing of returns from scarce means.

The effective use of talents is not, however, realized only by specialization and exchange. It depends also on the conditions of exchange. In order to satisfy wants most effectively, the products of specialized effort must be exchanged on a free market. For this reason, Smith condemned monopolies and restrictions on international trade. With disarming candor, he asked, “Unless we use the produce of our industry, unless we can subsist more people in a better way, what avails it?”5

From these considerations of the role of natural law and natural characteristics in the Lectures, one can infer that the natural order is the competitive market. The natural order has little or no relation to a purposive nature disposing and ordering the social relations among individuals. It is ideal, not because it reveals the design of nature but because competition is the most practicable (thus, “ideal”) method of protecting the natural rights of individuals and of providing the greatest possible wealth to the nation. Stated in a somewhat different way, competition is the ideal instrument for securing freedom as a value in itself and as an effective means to other values.

3

The Wealth of Nations

In The Wealth of Nations Smith developed in detail the idea of natural order. There the natural order is offered as the ideal organization of society. That is because it represents man’s greatest opportunity to realize his desire for freedom and his best effort to utilize for himself and for society his natural endowments. It is not ideal in being the handiwork of nature, because in fact nature has little to do with its origin or being. If this natural order was offered by Smith as the best of all possible worlds, as some critics have contended, it must be understood to be no different from the least undesirable of worlds. In it Smith placed the third economic man to appear in his writings. The behavior of individuals is brought into harmony by competition. But now competition is not the exclusive instrument of control, and the exceptions taken to it are numerous and substantial. Smith in The Wealth of Nations is conditional in his judgment, skeptical, and sometimes sardonic. He imputes no natural goodness to men. He implies that if anything is natural it is more than a little ignobility. Their behavior is made harmonious by a process of mutual negation. The evil they wish and do injures no one but themselves, and the vast energies which their self-seeking releases are turned to the nation’s advantage. The essential difference between this natural order and that described in The Theory of Moral Sentiments is in the conception of justice. Justice is no longer regarded as the charge of a benevolent deity but as the particular care of government which exists for the very mundane reason of protecting property.

AVARICE, INDOLENCE, AND ECONOMIZING

The economic man of Smith’s last work differs from his predecessors of the other two works by the very great power of his material self-interest. He is driven relentlessly to improve his material condition, there being scarcely an instant of his life when he is not looking about for ways of adding to his fortune. Smith is extravagant in emphasizing this interest. In one passage he makes government and law crumble before it; in another, it is a universal trait uniting all men of all lands in a common humanity of self-seeking; in still another, it is a biological fact independent of environment and transmitted through successive generations by heredity, as when he writes that the desire to better our condition comes with us at birth. These passages have formed the conventional impression of the economic man. It was summarized by one of the more entertaining of the critics of classical economics, Thomas Love Peacock, in Crochet Castle, where the formidable Rev. Dr. Folliott is made to say:

Despite the connotations of Smith’s statements, self-interest is not directed only to material ends. An individual may find his interest in coddling his vanity; in exercising a natural desire to deceive and impose upon others and a just as natural desire to be gulled himself, in upholding his social position; in furthering animosity against his fellows; in supporting prejudices even more mischievous against foreigners; or simply in indulging his indolence. Indeed, the economic man may turn his efforts away from acquiring wealth and toward satisfying any inclination that may strike him. But among all of his desires there is no desire to be just and benevolent—an omission which can hardly pass unnoticed in view of the cardinal place these virtues have in The Theory of Moral Sentiments. In The Wealth of Nations the personality traits of individuals motivate their economic conduct; the motivation is not, as in The Theory of Moral Sentiments, a moral sense. One instructively can examine the relationship between the trait of indolence and that of pecuniary self-interest, because the relationship tells us much about Smith’s final conception of economic psychology (namely, that expressed in The Wealth of Nations). Smith said men love their ease and find labor to be painful. That is different from his saying men are driven into pursuing wealth—different but not inconsistent. Between the desire for wealth and the desire for a life of ease, the former is the stronger. But avarice does not eliminate indolence, rather is conditioned by it. Men look for ways of minimizing the effort necessary for acquiring wealth. They are, therefore, confronted with the problem of using scarce means to achieve unlimited ends. The economic man is a great respecter of the maxim, It is better to play for nothing than to work for nothing—a maxim, one may remark, that expresses the psychological disposition at the basis of the labor theory of value and all “pain cost” doctrines. The psychological setting in which Smith placed the economic problem does not make the problem any more real. Even if men were not indolent, they still would wish to use their time as efficiently as possible. But a characteristic of the age in which Smith wrote was to trace all problems back to the data of human nature.

Out of the relationship between avarice and indolence Smith developed his view of economic behavior, calling on certain other traits as the occasion required. In the interest of efficiency, men specialize their efforts and engage in exchange. Specialization enables an individual to impose on others a portion of the disagreeable labor which is inseparable from the pursuit of wealth. Far from scrupling to impose on others, he is led to it naturally. The economic man values his specialized talents in proportion to the amount of toil they enable him to escape and to shift upon others. He values his own product not by the labor it cost him but by the labor he would have to expend if he were to produce himself what he obtains in exchange. The labor he would have to use to produce what he buys is always greater (certainly never is less) than the labor he uses to produce what he sells. Viewing labor effort in this subjective way is perhaps a clue to the ambiguity in the more technical aspect of Smith’s theory of economic value. The view makes clear some of the statements in the first book of The Wealth of Nations where “labor command” and “labor quantity” are used interchangeably. Others, unfortunately, resist this interpretation.

The belief that man is naturally inclined to impose on others is of more significance, however, in suggesting a different view of economic motivation than for the light it may throw on the labor theory of value. This inclination can be taken as something that supports specialization and in other ways promotes economic activity, or it can be taken as a disposition that finds a reward in its own exercise. Smith occasionally verged on saying that men engage in specialization because it is an outlet for their egoism, which is to say that labor is its own gratification and not a means to something else. It cannot then be painful—unless individuals are afflicted with some sort of perversity which drives them to make life unpleasant for themselves or for others. Though Smith was skeptical of the quality of human motives, he seems not to have been interested in ferreting out perversity. His suggestion that the market is governed by egoism is significant for anticipating the modern notion that economic activity can be its own reward, that it often has the character of a game played more for its intrinsic interest than for its prize.

Smith, however, did not pursue the idea. He placed specialization predominately at the service of pecuniary desires and he made egoism the ultimate motive of all behavior. He strongly suggested that if men are observed closely, whether on the market, in politics, in the classroom, or in casual association, their self-seeking will reveal itself. Among the lower classes, egoism is necessarily directed toward making a living, and the behavior of the workers is governed mainly by economic circumstances. Their success in acquiring the materials of life has much to do with their moral and intellectual merit. If they escape poverty and are secure about the future, the masses will turn to the practice of virtue and wisdom. If, however, they are poor and uncertain about tomorrow’s wage, their need to make a living will overwhelm all other interests, and any other activity will be beyond their power. What Smith implied is that for the greatest part of the population, happiness, truth, beauty, and goodness depend on real income. This idea, one should notice, is just the opposite of the idea expressed in his first work that wealth does not bring happiness and that those who pursue it will be disappointed.

Although their behavior is more thoroughly colored by it and their outlook is wholly dependent on it, the common people are not alone in being materialistic. The same characteristic is disclosed in men of all classes and nowhere more certainly than in their political behavior. This is apparent in Smith’s remarks on government, the point of which is that cupidity explains most conduct—or, more accurately, misconduct. When he said that avarice is the occasion for most wrongdoing, he was repeating what his age took from Cicero, one of its political mentors. Cicero said that men usually are led to do wrong by their egoism and that “in this vice, avarice is generally the controlling motive.”6

Notably missing from The Wealth of Nations is the ingenuous psychological explanation of sovereignty which is in The Theory of Moral Sentiments and is intimated in the Lectures. In its place, there is a theory of government which at times is materialistic enough for an economic determinist. The pathetic political man of Smith’s first work is pushed aside by a calculating individual who respects the authority of government because it protects his wealth—or because he thinks it does. Although he agrees to respect the property rights of everyone, especially those who are richer than he, he does so only because he fears that disrespect for authority will expose him to the cupidity of those beneath him.

• No thing in use by man, for power or ill,
• Can equal money. This lays cities low,
• This drives men forth from quiet dwelling-place,
• This warps and changes minds of worthiest stamp,
• To turn to deeds of baseness, teaching men
• All shifts of cunning . . .

These lines of Sophocles express the idea that was a starting point for most of the political speculation of the seventeenth and eighteenth centuries. The Enlightenment infused the idea with a faith in the capacity of men to know that their long-range interests required them to respect authority and to know that these interests were more likely to have a satisfactory outcome in an environment governed by the free market.

SELF-INTEREST AND DISHARMONY

When Smith passed from discussing social activity in the large to examining its minutiae, he again stressed the power of the pecuniary interest and was quite frank in noting that it frequently had undesirable consequences. Because the remuneration of lawyers and their clerks was proportioned to the length of the documents they prepared, they so extended them as to confound the language of the law. Since university professors received a guaranteed stipend, they were lax in their instruction, and education fell into a wretched state. Wealthy families of the time engaged traveling tutors for their sons—than which nothing could be worse for both tutor and pupil, Smith declared (possibly out of experience because he had been a traveling tutor). But to allow the pecuniary interest to operate among the clergy would produce a particularly odious form of competition, because if the income of a clergyman were to depend on the size of his congregation the advantage would go to those who played on the superstition of their charges, leaving religion to suffer and zealotry to flourish. About the value of competitive behavior in the professions, Smith was pragmatic. In certain instances, such as education, he felt that pecuniary sanctions had been too far removed, while in others he was opposed to applying them—at least to applying them as strongly as in the market for ordinary goods and services.

But Smith did more than question the social merit of the desire for gain. In the passages that were not expressly about economic policy he often questioned the power of the desire and occasionally its very reality. There are few chapters in The Wealth of Nations which do not in some way qualify the idea that the acquisitive instinct is relentless and invincible. The economic man is much affected by his environment and most liable to passing fancies. He is, Smith observed, a very vain creature. Although vanity is an expression of egoism it does not lead him to a successful maximizing of economic values. Indeed, it often defeats the pecuniary interest, turning men away from prudent investment to an ostentatious use of wealth. They carry their pride to the market place and take absurd risks with their fortunes. Smith observed that a common failing, not only of the vain but of every person in tolerable health and good spirits, was to overestimate the chance of gain, to regard himself a favorite of fortune. Sometimes, however, conceit is restrained by the desire for security, especially after a few spectacular failures have chastened an individual’s conceit. He then may be averse to taking even a reasonable risk. In addition, there are other traits which stifle or divert the operation of the pecuniary interest, such as irrationality, error, ignorance, indolence, and inertia. All of them turn an individual away from the most economic use of his talents and occasionally from gratifying any desire whatever. Of the many examples which Smith provides, two may be cited. A merchant may so avidly desire to monopolize the market that he fails to anticipate the monopolistic behavior of others, and all may find their avarice disappointed. Individual workers do not always seek out the market in which the highest wages are paid, because they may be ignorant of alternative opportunities or they may be held to their jobs by sheer inertia.

The environment of an individual as well as his distinctive psychological traits modifies the expression of the acquisitive instinct. Smith stated again in The Wealth of Nations that the form in which agricultural land was held during the Middle Ages impeded economic progress and the accumulation of capital. He observed that social custom casts some occupations into disrepute and makes for differences in wages and profits—differences which could not exist in an impersonally perfect market. Finally, the form of government and the character of the laws interfere with the maximization of returns, this influence being shown most clearly in national animosity against foreigners and unavoidably in the requirements of national power.

One can easily cite many more instances in which the pecuniary interest fails to operate perfectly or does not operate at all. These however should be sufficient to show that the economic man of The Wealth of Nations was not the creature he is reputed to be. Indeed, in those passages where Smith is not exposing the futility of political efforts to restrict the pecuniary interest he is as often as not explaining that the interest either operates imperfectly or to the disadvantage of society. The “uniform, constant, uninterrupted effort of every man to better his own condition” is in fact not uniform, is inconstant, and frequently interrupted; the acquisitive instinct which “comes with us from the womb, and never leaves us till we go into the grave” is really not that basic at all.

When Smith wrote of the great power of material self-interest, what he probably meant to do was to describe a tendency of behavior; and when he said this interest was beneficent, he probably meant that to control it was risky. The beneficence in fact depends mainly on environment. He observed that if obstacles were placed in the way of the pecuniary interest there would result a great waste of resources. That, he believed, had happened in the medieval era. Because men had little opportunity of turning their efforts to profit, they were indolent. The resulting economic loss was a misfortune, and so too was the kind of moral atmosphere that indolence and dependence breeds. In writing of his own age, Smith implied that its superiority lay in the measure to which the pecuniary interest was given a wider area of freedom and operated under more equitable laws. Freedom brought an increase in the wealth of the nation, and with the general plenty that ensued there was, he felt, an elevation of moral and intellectual standards.

Nevertheless he did not offer his age as a model. It was neither ideal nor the best to be had. This conclusion is implied in his strictures against the economic behavior of his times and in those remarks in which he intimates his conception of the ideal as opposed to the economic man. Where Smith’s age failed to achieve all within its power, its failure was the result of stifling the pecuniary interest or of allowing it to operate unequally. Hence, his condemnation of political attempts to control the “industry” of individuals; his excoriation of monopoly, as a denial of the equality of a competitive market; his clearly evinced sympathies for the poor as victims of the inequitable effects of “industry,” and his implied proposals for something resembling progressive taxation.7 These criticisms were the negative side of his conviction that the free market is the best possible method of organizing—and controlling—economic activity. If there is a free market, the expression of the pecuniary motive usually produces a desirable effect. However, if the market is not free the result may be outrageous, and the only remedy for too little freedom may be even less of it. If, for example, society is so unfortunate as to practice slavery and is averse to abolishing it, Smith suggests that the proper policy is for the government to interfere with the free use of property rather than to look on indifferently while the master treats the slaves as he pleases. The faith in a benign arrangement of social relations, which is manifested unequivocally in The Theory of Moral Sentiments and often ascribed to Smith’s last work as well, is disclosed in The Wealth of Nations only in the belief that economic freedom can produce a harmonious (i.e. acceptable) social order. Although far from ideal, the order is the best within man’s limited capacity.

But man’s poor powers left Smith restive. In going over the more critical passages of The Wealth of Nations, one feels that Smith’s private ideal was different from what he urged on the world. He was dismayed by much economic behavior even when it was competitive. He reiterated in his last work all of those deficiencies of the enterprise economy which he had put down in the Lectures: the feeble sense of justice, the disregard for wisdom, the flamboyant use of wealth, the indifference to social responsibility, the dispirited outlook of the lower classes. The good life, according to Smith, seems to have meant the performance of good works and the cultivation of knowledge. His aversion to the habits of businessmen had become so pronounced in his final work as to leave little doubt that however practicable he thought competition to be, he did not thereby approve of the psychological traits that produced it. “Of the money-making that depends on troublesome going about and seeing people and doing business” he had little use, no more than Plutarch ascribes to the Spartans under Lycurgus. If there is a common theme running through all of Smith’s works, it is an underlying disquietude with the moral and intellectual tenor of a commercial society. In view of the uses to which The Wealth of Nations has been put and of the place it gave Smith in history, this is paradoxical. The philosopher who did more than anyone to justify the ways of the free economic man found him personally distasteful.

THE COMPETITIVE HAND

The natural order which is the achievement of the economic man is a system that on examination turns out to be almost identical with the conception of perfect competition in modern price theory. Exchange to be effective must be impersonal, Smith stated in demonstrating the folly of bilateral trade. There must be mobility of factors of production and a free movement of goods between regions and countries. Buyers and sellers must know the conditions of the market in order for their activity to have the most desirable effect. Finally, there must be many buyers and sellers.8 All that is missing, as a student of price theory will notice, is a homogeneous product.

Competition is possible only in the presence of certain political conditions. In prescribing them Smith was decidedly negative. Laws must be established to make property secure, including the property each man has in his own labor, and security calls for an exact and equal administration of justice. The political reforms for which Smith asked did not call for the passage of as much new legislation as of the repeal of old, such as the laws supporting monopolies, the tariff and other restrictions on international trade, and the ill-conceived efforts of the state to regulate production and consumption. Let the governors look after their own affairs, and the people can be trusted to look after theirs—so Smith summarized his negative position. Actually many of the restrictions he wanted to remove had been allowed to lapse by the refusal of the courts to enforce them, even though the laws that authorized them had not been repealed.

It will be observed that the economic and political elements of the natural order are not the work of a divine power. They are produced by wholly secular forces. The harmony in this order comes from the mutual advantage of exchange. The advantage in turn comes from the specialization of labor and the exchange of its product. Specialization makes for an efficient use of resources. It does so by allowing each individual to cultivate his particular genius and so obtain maximum efficiency; by permitting him to produce as much as he pleases and so secure the disposition between effort and leisure most satisfactory to himself; and by allowing him to exchange his product for that of others of dissimilar abilities on terms satisfactory to all of them. Each man knowing he can exchange his product for that of others will exert his industry in order to obtain as much as possible for himself, and with all men doing this a “general plenty diffuses itself through all the different ranks of society.” This idea is usually criticized by disputing the contention that the maximizing of individual incomes necessarily maximizes the real income of society. An individual, it is pointed out, may obtain a greater income by restraining his industry than by exerting it. This is of course quite true, but it is not a refutation of Smith’s conception of natural harmony. Indeed, it confirms what he had to say. If competition does not rule, the restricting of effort may raise the incomes of monopolists, and that was why Smith opposed them.

The competitive harmonies reveal themselves on the market in the system of relative prices. As consumers, individuals pay the lowest possible prices for what they buy, and producers are able to sell at low prices because of the efficiency that competition forces upon them. The wages of labor rise to their natural level (that which permits the population to maintain itself), because no single employer can force them down. Capital, being free to enter the areas of greatest yield, becomes allocated to the most productive uses. Harmony, it must be repeated, is not produced by any benevolence inherent in individuals, or by the wisdom of government, or by the generous disposition of nature. It is the outcome of the pecuniary interest operating under conditions that make no other outcome possible. The famous invisible hand of The Wealth of Nations is nothing more than the automatic equilibration of a competitive market.9

There were two sides to Smith’s argument for competition. One was that competition serves the material interests of the individual. The other was that competition adds to the power of the state by increasing the national output. Both sides of the argument elucidate his thesis that only through freedom can the welfare of the nation be increased and can individuals realize their natural rights. In this sense did he believe that what was good for the individual was good for society.

He was not, however, optimistic about achieving such a social order. If the entrenched prejudices of the public against competition could be overcome there would remain the more formidable resistance of vested interests, the defeat of which he thought was very unlikely. This alone should dispose of the notion that he believed the competitive order was part of the ineluctable workings of benign nature. Not only was he far removed from such a faith but he was far also from having much confidence in the ability of individuals to know their own welfare. If he was at all optimistic, he was so only in thinking that the economic man, as frail as he was in understanding and frailer still in execution, still knew his interests better than his governors could know them, and in thinking that the economy would be better off if each individual looked after his interests in his own way.

There is still another qualification which must be made to the beneficence of the pecuniary interest. Even when the interest is expressed in a competitive market, it has only a tendency to produce a harmonious order. Smith did not say that competition invariably produces the greatest possible wealth and the most desirable distribution of it. (And of course he denied with even greater force that the operation of avarice is desirable in every kind of an environment.) In the most free of markets, individual enterprise will not find the supplying of certain indispensable goods and services to be profitable, and they must be supplied by the state or not at all. Apart from this failing, free enterprise divides the national wealth in a way that is deficient by most standards of distributive justice. Individuals will receive what they are worth on a free market, but the way in which the market values their services and the way in which they should be valued will be two very different things if power is unequally distributed.

4

The Achievement of Smith

By relating Smith’s views of social behavior to the questions raised in the opening pages of this chapter, one can find four different areas of conduct described in The Wealth of Nations and in those parts of the Lectures that are most consistent with it. He stated that one part of the behavior of men is like the behavior of all biologic organisms seeking to gratify physical tastes; this area is not described in detail. More important is the behavior of the individual as a psychological mechanism, and throughout Smith’s work this behavior receives the greatest emphasis. Man as a self-interested creature is described in great detail. He is proud, vain, willful, indolent, acquisitive, and, in viewing other persons as useful in getting what he wants, he is immoral in the fundamental sense of treating other people as means instead of as ends. As a psychological mechanism he pursues his interest in a way that is governed by his environment, the economic aspect of which interested Smith most. One element in the constitution of the economic man is compounded of these psychological traits. His behavior in this area is purely mechanical, following an invariable pattern of stimulus and response. He observes an opportunity to become richer and unconsciously adopts certain conventional means in order to take advantage of it. His behavior here is not rational; it is more like that of an automaton than that of a calculating creature.

The third area of conduct is that in which the individual deliberates about the best means of achieving certain given ends, such as fortune or fame. Here the economic man ponders the best way of laying out his fortune and talents in order to acquire the largest returns. The returns are not entirely economic and some of them are not economic at all. He may desire prestige, ostentation, power and other marks of social superiority as well as an increase in his wealth, but whatever is the goal he seeks he does not question it. In the fourth area of conduct, the individual deliberates about the objectives which he ought to pursue. The nature of conduct in this area is such that men consider the most suitable use for wealth; they examine ways of best using their freedom and of increasing it. As a result of such deliberation, their environment is consciously changed, and behavior in all other areas, which assumes given means or given ends, or both, is altered.

So much for what Smith did believe when he wrote The Wealth of Nations. It is instructive to consider what he did not say, by way of contrast and also in order to summarize his principal views of human nature and society. (a) He did not say that the economic man was a rational creature who invariably pursues his pecuniary interest and is uniformly successful in realizing it. He may be acquisitive or not, depending on his environment and on other traits and desires; he may be a rational creature or he may be a passive agent, depending on his ability to rise above the level of mechanical behavior. (b) Smith did not say that the economic man was moved by a providential force and was preordained to occupy a harmonious social order. The economic man is governed by human nature, expressing itself in manifold ways, and how it came into being Smith does not say. In view of the salient omission of any reference to natural law as the origin of human nature, one reasonably may assume that human nature is a datum. The natural order of the economic man is the product of his pecuniary interest seeking expression on a free market. The natural order is simply competition. As competition has its origin partly in the psychological constitution of men and partly in their natural rights, it had a more compelling justification than any alternative form of economic organization. (c) The economic man is not benevolently inclined, and the good works which he performs are no part of his intention. Even in the most competitive of markets, the consequences of his acts can be undesirable and require social intervention. (d) Finally, the economic man is not a free agent with the right of producing what he pleases, selling where he pleases, and of doing with his wealth what he pleases. He is subject to the severe discipline of competition and the more formal restraints imposed by law. His freedom of enterprise stops short of the privilege of denying freedom to others.

None of the conceptions of economic behavior offered by Smith in his three major works conforms to the accepted version of the economic man. If any of Smith’s abstractions resemble this fiction, it is the economic man of The Theory of Moral Sentiments, but even here the resemblance is slight, consisting only in their both being governed by natural law. In Smith’s later works, which contain little or no reference to natural law, his conception of economic behavior is radically different. In The Wealth of Nations particularly, Smith presented a twofold justification of economic freedom. Reasoning from the doctrine of natural rights, he declared that each man should be free to pursue his material interests in his own way. He also said that the psychological traits of man led him to specialization and exchange. The consequence was a social order in which freedom was respected as a value in itself and as the most effective means to other values. Even though he could not be in sympathy with many of the motives and tastes of the economic man, Smith accepted him in preference to those who previously had dominated society. As rough and imperfect as he was, his vigor held more promise than the behavior of the aristocracy. Smith raised the economic man from the class of pariahs, giving him a new status as well as a new freedom, because in competitive behavior he saw the requisites of cultural progress. He gave a new emphasis to individualism by making free economic behavior a natural right, by asserting that men should be free to seek their own welfare because they were men and were not agents in the hands of an inexorable nature, however benevolent, or of a powerful state, however benign.

[1] Adam Smith, The Theory of Moral Sentiments (London, 1892), pp. 119, 264-265, 332.

[2]Ibid., p. 264.

[3] Adam Smith, “The Principles which lead and direct Philosophical Enquiries; illustrated by the History of Ancient Physics,” Essays on Philosophical Subjects (London, 1795), p. 106.

[4] Smith Essays, p. 143.

[5] Adam Smith, Lectures on Justice, Police, Revenue and Arms, ed. Edwin Cannan (Oxford, 1896), p. 205.

[6] Cicero De officiis, trans. C. W. Keyes, i, 7.

[7] Adam Smith, The Wealth of Nations, ed. Edwin Cannan (New York, 1937), pp. 683, 794.

[8]Ibid., pp. 59-60, 128-129, 460.

[9] See F. H. Knight, “The Sickness of Liberal Society,” Freedom and Reform (New York, 1947), p. 377.