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Economics and Ethics: What they don’t say about Adam Smith
While doing some research, I came across this interesting article (PDF) by Peter Ulrich, professor of business ethics at the University of St. Gallen (HSG) in Switzerland (the premier university for business and management studies in Switzerland). Written as a conversation with Adam Smith, the article brings out fabulously some of the problems with our current thinking of economics and free-market operations.
Adam Smith is, of course, known as the father of modern day economics, and regularly quoted for his words supporting the free-market and “the invisible hand”:
lt 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 selflove, and never talk to them of our own necessities but of their advantages.
However, that quote presents only a part of the whole picture. Adam Smith came to economics as a moral philosopher, with views on political economy. Therefore, large parts of his book - The Theory of Moral Sentiments - deals with ethics, morality, and the role of government. Of course, the neoliberals conveniently leave that out.
The result is an economic theory devoid of any conception of morality, ethics, equality, or justice, something never intended by Adam Smith. The weakness of that mutual exclusion of ethics and economics is discussed in detail by Amartya Sen in his book “Ethics and Economics”. He too, brings out in stark contrast, what Adam Smith originally intended. Yet, rather than address this gap in economics, teachers of economics are content to circumvent the weakness simply by saying economics deals only with the positive, not the normative.
There is a problem with holding this limited view of economics. I may not be greedy but if I believe others I transact with are, then I too must act greedy to ensure my survival. Conversely, if I do not act solely in my self-interest I risk loosing to those that do, and in the evolutionary chain of events will be relegated to irrelevance. In essence, this interpretation of economics - of being based on self-motivated individuals - is a self-fulfilling prophecy. Over time, it would turn a theory of how the world works, into the reality of how the world works.
Discussion
5 comments for “Economics and Ethics: What they don’t say about Adam Smith”
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well adam smith was a philosopher. His essential quote, regarding the benevolence of the Baker, if can be applied to intangible returns, can explain almost all human action. Smith in that quote has summarised all human action, which is rooted in self-interest. I think its impossible to act without one’s self interest in mind. So holding this limited view, as you call it might not be wrong after all.
Dweep,
“Of course, the neoliberals conveniently leave that out.”
Exactly. It is either done intentionally or some are unaware of it.
Adam Smith wanted markets to be relatively free then, because during his time all the factors of production were in the hands of the ruling authorities.
I agree with vatsan.
i was taught the entire theory, pros, cons, and the purely theoretical side.
of course a theory is always manipulated by those who come after.
the worse example for me is Keynesianism. applying the theory can lead to massive budget deficits on the long run….but of course, politicians only need to be famous or have a positive impact on the short or medium turn, so they ignore this fact. Asked about the long term consequences of his theory, Keynes is supposed to have answered “who cares, on the long run we are all dead”
well… one thing that is also ignored is the Adam Smith’s original quote was very different than what became popular due to Samuelson’s book. The actual quote conveyed a very different meaning.. After the quote you have mentioned, the next paragraph reads:
“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
In fact, a reading of Wealth of the Nation, actually contradicts everything that is attributed to Adam Smith these days. I had once blogged some of the quotes. If interested, you can read them here:
http://alternativeperspective.blogspot.com/2005/12/will-real-adam-smith-stand-up-please_30.html
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