Institutions and “The Adam Smith Problem in Reverse”

It has long been claimed that there is a fundamental inconsistency between Adam Smith’s two books (it’s called the Adam Smith Problem). In one account of the problem, The Theory of Moral Sentiments (TMS) is seen as promoting sympathy and benevolence, while The Wealth of Nations (TWN) is concerned with self-interest. Others have said that TMS deals more with natural rights while TWN is more utilitarian. The two books seem to rest on different views of human nature and their social consequences. So what did Smith really think?

In a recent paper published in History of Political Economy (not free access), Maria Pia Paganelli has an interesting take on the problem. She suggests that, contrary to what is generally accepted, both books account for self-interest and TMS displays a much more favorable account of it than TWN. In TMS Smith examines how self-interest (or self-love) is a force at the foundation of the self-regarding virtues (especially prudence). In TWN, self-interest plays a positive role in the development of commerce and society but is also at the origin of social ills. There is a main difference between the two books: in the first one, the excesses of self-interest are naturally kept in check, while in the second, they are not. As Paganelli puts it:

The two books differ in how Smith presents possible remedies against the abuses of self-interest. The portrait of self-interest in his 1759 treatise is more optimistic and less critical than the one in his 1776 work. In TWN, self-interest cannot successfully be constrained, leaving individuals and society more susceptible to its abuses. In TMS, self-interest is always successfully constrained so that both individuals and society are… unquestionably better off by its presence. This makes TMS, rather than TWN, the book promoting self-interest. (p. 372-3)

This is a very interesting claim, and Paganelli argues well to defend her thesis. One way to understand the difference between the two books is by looking at the role of institutions. The two books present different mechanisms through which self-interest is constrained. In TMS, the constraints are natural: individuals constrain the excesses of self-interest because self-interest tends to develop the virtues necessary to good self-conduct (prudence, etc). In TWN, the natural constraints break down because of the role of government. Government perverts the natural mechanisms that keep self-interest in check and offers (perverse) incentives for people to gain at the expense of others.

The novel idea in Paganelli’s paper is that the whole “Adam Smith Problem” can (perhaps) be solved by paying attention to the institutional story in Smith’s books. It seems to me that it is not so much that TMS promotes self-interest more than TWN, it is that TWN embeds self-interest in the institutions that Smith could observe in his days—institutions which, sometimes, could not prevent the abuses of self-interest but on the contrary magnified them. This leads Smith to conclude that merchants and manufacturers, who are rapacious in their behavior, do not seem to care about their conduct’s negative consequences for society. In TWN, because of government, merchant and manufacturers are willing to obtain the protection of government putting aside the moral rules and checks that naturally would have emerged. As Paganelli puts it:

With the introduction of government protection and the change in incentives they cause, self-interest can hopelessly deviate from a source of virtue and social well-being into a cause of mean rapacity and social impoverishment. (p. 377)

TWN is thus much more a book about public choice mechanisms than I had realized. Moreover, Smith may also hold the view that in the absence of government (i.e. in a state of anarchy) there are natural mechanisms (i.e. virtues) keeping the excesses of self-interest in check. Whether our sense of virtue is enough to make social cooperation in large social orders possible is another debate. In any case, the Adam Smith problem has perhaps never existed… once one understands his work with the filter of public choice.

Comments

[Rafe Champion]

Another way to resolve the apparent dilemma of self-interest versus altruism at the philosophical level is to note that the "dilemma" was created by Plato in the "Republic" as a rhetorical device to promote a theory of collective (social) justice over the individualisttic theory that predated his attack and still lingers (precariously).

Plato’s "Republic" is probably the most influential book on justice until Rawls' big book in 1972. It underpins the programs of both outright totalitarians and also the warm and cuddly program of social justice, which also undermines equalitarian justice in a slower but equally deadly manner. For example, affirmative action policies for various ethnic or racial groups in the US represent the most obvious form of official racism in that nation since slavery was abolished.

For a rejoinder to Plato http://www.the-rathouse.com/OpenSocietyOnLIne/Chapter-6-Platonic-Justice.html

Freudian metaphsychology is probably one of the most influential modern vehicles of the individualism vs altruism meme, along with the meme of reductionism that it shares with behaviorism. (Just to note that the ideas that undermine classical liberalism and Austrian economics are disseminated through many channels and sooner or later we (or allies in the appropriaate disciplines) need to attend to all of them.)

[Geoffrey Lea]

Another take can be found in the work of philosopher James Otteson. See his book, _Adam Smith's Marketplace of Life_ (http://www.amazon.com/Adam-Smiths-Marketplace-James-Otteson/dp/0521016568/ref=sr_1_2?ie=UTF8&s=books&qid=1217704740&sr=8-2).

If you'll indulge me a little shameless promotion, you can listen to a talk Professor Otteson gave on this topic at FEE a couple weeks ago at our Young Scholars Colloquium. Find it here: http://www.fee.org/Audio/YSC/FINAL%20YSC%20-%20James%20Otteson%20-%20Global%20Ethics.mp3

[Roger Koppl]

Paganelli’s paper isn’t directly about resolving selfishness vs. altruism. It’s about Das Adam Smith Problem. She brings something deep and radical to this old problem in the history of economic thought. She shows that TMS contains a more optimistic account of selfishness than TWN. That’s a big surprise, and she shows that she’s right about this point. The argument in TMS is that your vanity and your need to be seen as a good partner in social cooperation come together to create in you the impartial spectator. Thus, your selfish core creates an internal regulatory device that induces pro-social behavior. In TWN you have market competition performing a similar function of transforming inner selfishness into socially beneficial actions. But, Paganelli points out, in TWN Smith recognizes that merchants can and do get hold of the levers of political power and from that *privileged position* they can and do give full liberty to their “rapacious” impulses. In TWN vanity lacks the inhibitory effect describes in TMS because the glory of greatness provides the social approbation that could otherwise be attained only by virtue. In other words, power tends to corrupt . . . When each of us is an equal meeting on equal terms, then each of us must rely on the regulations of the impartial spectator to get the pleasures of approbation and social cooperation. Power removes that necessity. The rapacity of dictators and monopolists are unconstrained and both will happily send other persons' children into war to satisfy their own greed and vanity. Altogether I think Paganelli has made an important and exciting argument in the history of thought and the analysis she has revealed matters for us today as well.

[Roger Koppl]

P.S. I think I'm just restating Frederic's excellent summary.

[propecia online]

I just have one doubt about these strange books,is Adam Smith the true author?

[Custom Thesis Writing]

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