Modern economic theory has been attributed to the contributions of Adam Smith, as expounded in the wealth of nations. According to Klein (1992), Smith’s contributions on modern economics can be attributed more on the philosophical foundations; hence, based on this, what is modern economics, and how is Adam Smith relevant to the definition of modern economic theory?
Modern economics has been described as founded on human behaviour; human behaviour was considered to be limited by ends and scarce means, and eventually, how people behave in order to find alternative uses to make these things meet (Robbins, 1932, as cited in Dasgupta, 1998). Based on this, what makes modern economics quite distinct from other economic thought is merely through its interjection of human behaviour in the entire economic concept. Economic thought can be said to be founded on the ideas on market economy and commodity, and eventually, the definition of economics pertain to production, distribution and consumption.
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Economics, in general, can be observed to demonstrate the relationships between and among many factors concerning supply and demand which include the different forces involved especially as this involves the market consisting of producers, distributors and consumers. The injection of human character and behaviour which are the main factors that distinguish modern economics from other economic thought, does point to the philosophical underlying of economics.
In this case, the lineage of modern economics from Adam Smith is indeed established; however, this can be further assessed when it comes to the relationship between economics and morality. As Adam Smith’s writings on economics based on his publication The Wealth of Nations pertain to his establishment of the economic reality which the people are subject to, there are certain moral issues that can be examined as to how economics can create an effect on morality, and how, in turn, morality can also serve as a potential obstacle to economics. All in all, this boils down to a major concern on the extent of self-interest, especially as to how this would meet the economic and the moral interests of the people.
Foundations of Modern Economics and The Wealth of Nations
The aspect of human behaviour in modern economics is further expounded by Dasgupta (1998, p. 4), as follows:
“If modern economics possess a distinctive character, it is that it treats human beings with respect… This is does by trying to illuminate the various pathways through which millions of decisions made by individual human beings can give rise to emergent features of communities and societies”.
Relating modern economics with Adam Smith demonstrates how modern economics is based on the philosophical underpinnings of Adam Smith’s discourse. Interestingly, the association can be initially pointed at Smith’s definition of the “invisible hand” and “natural liberty”; according to Skousen (2001), this invisible hand and natural liberty played a central character during the period of industrial revolution when modern economics would apparently emerge.
There is therefore a strong historical dimension that needs to be considered in order to understand the relationship between the concepts behind modern economics and Adam Smith. Basically, modern economics is not about Adam Smith, nor rather The Wealth of Nations directly described what modern economics was about. The relationship between the two, in addition to the philosophical approach on economic discourse by Adam Smith, can be also seen in Smith’s “inadvertent” discussion of morality and social policy as to the effect of human behaviour on the economy and the society and general.
Adam Smith’s The Wealth of Nations was actually more of an account of the economic realities taking place at that time, which was determined by the industrial revolution; as Dasgupta (1998) pointed out, the economic system identified at that time was capitalism even though the usage of the term at that time merely described the English economic system in 1776. Although The Wealth of Nations addressed the economic and social realities during that period, it can be said that the philosophical underlying of his publication would also reflect what was relevant when The Wealth of Nations was written. This is to say that his discussions on human behaviour with respect to its economic results are strongly highlighted during that period, especially as the society would become more focused on the development of the economy and the individuals’ intention to acquire more wealth.
This therefore brings up Smith’s discussion on what drives human behaviour with respect to economic wealth; Mondigliani (1998) mentioned that these two indicators showed a moral tug-of-war strongly influenced by economics: the need for people to save, and the need for people to experience enjoyment. This human behaviour, interestingly, can be observed to be prevalent in modern economies especially as there is a greater emphasis on the value of personal wealth. Adam Smith therefore raised valid points as to why these two principles that influence human behaviour can be unsettling to individuals.
The need to save is due to the fact that there are economic uncertainties that may prevent an individual to lose the acquired wealth; hence, for instance, a farmer may have collected sufficient funds for a harvest, but since his business depends on the productivity of the soil and the mood of the seasons, it is important to save the collected funds because spending them right away already cancels the guarantee of a more secure economic future. On one hand, the need to enjoy that naturally prompts express is another individual economic reality.
Going back to the same farmer, he may consider throwing a dinner as a means to celebrate his good harvest. Having the money also means giving him the ability to make certain purchases, whether these purchases are investments in nature such as new farming equipment or even completing the construction of a bigger barn, or the purchases are for short-term enjoyment such as a vacation. The need to spend is a basic human reality because of the power money can give to people, and by means of being able to purchase, the individual actually plays an important economic role as the money goes back to the economy for circulation.
These two conflicting principles discussed by Smith can be also pointed to have certain moral aspects that people are bound to face. In a modern economy, these two aspects are basic economic problems that humans face. The strong reason for the need to save, even in the contemporary times, is due to the fact and reality of uncertainty. When people have funds in their hands which they acquired by means of work, an important tendency is to save a portion of the money. The need to save is especially strong these days because of the threat of the possibility of losing one’s employment in the future.
This therefore brings up the economic reality which can be observed to have most also sprung from the industrial revolution; at that time, when people found themselves with opportunities to increase their wealth, they were also faced with the possibility that they could lose their jobs because of the competition in the workplace. Although the industrial revolution presented a period of great momentum, the possibility of threat is due to the economic system that was already established at that time, and that was the reality of capitalism. In such society, especially in England, opportunities were present but they were not for all.
This further points at the economic reality with respect to the opportunities presented by consumption; the other behaviour which Smith discussed was the need to enjoy, thereby leading to expenses. The need to consume or even spend for the purpose of enjoyment illustrates the need for people to be rewarded, and this is supported by psychological theories that define motivation, such as the Expectancy Theory. In this regard, the need to work can be also founded on the need to spend, and saving is just a second priority. Interestingly, the society is designed for consumption; there are many avenues of enjoyment that can be identified as integral to human motivation and in a society founded on the industrial revolution and a capitalist system, the modes of enjoyment naturally cost.
Based on this discussion by Smith on the underlying principles of human behaviour in the context of economics, it can be gathered that human behaviour is strongly influenced by economic and social realities they are subject to. Because of this reality, as Mondigliani (1998) pointed out, people have this need to constantly better their situation in order to minimise the conflict, or at the least, fulfill these desires. Hence, going back to the farmer, it is possible for him to have enough saved for the uncertainty of the future and at the same time, it is also possible for him not to miss out on the things he like to do and would like to buy. The consequence of this, however, leads to the farmer working harder and making smarter decisions when it comes to his farm; this may also lead him to venture to new businesses, find new markets, and even diversify his farming approaches.
This therefore leads to an important seed in Adam Smith’s The Wealth of Nations: how the interests of the farmer can actually lead to the entire economic wheel, and how these self-interests, up to a certain extent, can be eventually beneficial to the economy,
On Human Behaviour, Morality and the Economy
This relationship founded by Adam Smith — self-interests leading to economic activity and economic gain — demonstrates a basic formula that can be regarded to be applicable to the modern economy. Although this may seem simplistic, the complex aspect of the relationship between human behaviour and economics is that this may be only valid up to a certain extent.
It is true that when people are after their self-interests, this may lead them to becoming more successful. In domino effect, an economically successful individual radiates this type of economic success because this individual contributes more to the economy. Hence, if the farmer would start to work harder and ensure that his farm would be significantly productive, this would lead to the farmer becoming more successful and wealthier; his success can then be attributed to his self-interest to be able to both save and at the same time, enjoy the offerings of economic life. As a result, the tendency is that the farmer’s successful business will expand, thereby leading to the employment of more people in the farm.
An expanded business also leads to new purchases of new equipment and machinery; this therefore leads to an expansion of the relevant businesses from which the farmer will buy his new things. These new “things” may also include new purchases from other industries such as new clothing, more food, and even new services for the home. In turn, the success of the farmer is based on how his “beneficiaries” — the shops and individuals from other businesses — actually contribute to his success because somewhere along the supply chain, it was the farmer’s produce that made more food possible. The distinctive factor that makes this particular farmer more successful than the rest is that it was his drive to meet his self-interests that would lead to his economic success.
This now brings up Smith’s “invisible hand”; the “invisible hand” was actually discussed in another publication by Smith, The Theory of Moral Sentiments in which he mentioned this force as “to make nearly the same distribution of the necessaries of life” (Smith, p. 184). From this, it can be gathered that the pursuit for self-interest is something that is allowed because self-interests are founded on necessities. In a way, the “invisible hand” may refer to certain forces beyond human control, which is why possibly, Smith may be referring to God.
In a way, the “invisible hand” may be interpreted as the will of God — in which forces in the market take place as a means to self-correct itself even when the result is not achieved through intervention — or the “invisible hand” can be interpreted as a form of divine providence that somehow gives moral license to be greedy.
The moral danger in Smith’s discussions on self-interests is this can be described can as another interpretation of the ability of people to be greedy, and that given the social and economic realities, it is okay for people to be greedy because as Smith would argue, such behaviour would benefit the economy in the long run. Apparently, self-interests are economic in nature; people pursuit their self-interests as a means to acquire more wealth, and by doing so, the effects of their behaviour are seen as beneficial to the economy. The problem here is that it only looks at the impact of human behaviour on the economy from one side; this is to say that Smith’s argument is true only up to a certain extent. Not all pursuits of self-interests would be beneficial to the economy nor, in contemporary societies, not all self-interests are economic in nature too.
The moral foundations of Adam Smith, as can be seen in The Wealth of Nations and in The Theory of Moral Sentiments demonstrate his belief that “Society is … the mirror in which one catches sight of oneself, morally speaking” (Smith and Haakonsen, 1759 ). Based on this and Smith’s discussion in The Wealth of Nations with regards to the need to pursuit one’s self-interests, it can be observed that instead of demonstrating a conflict in views on the virtues of the society versus the virtues and the nature of human, defense on Smith’s works show that his discourses on morality in the context of the society and the individual should be taken according to the situation.
There are arguments that misinterpretations to Smith’s work may lead to people to believe that self-interests and the “invisible hand” merely meant that it was okay for people to be selfish when in fact, self-interest was discussed according to its benefits both to the individual and the society. According to Smith and Haakonsen (1759 ), human nature becomes the highlight of Smith’s publications, especially as to how this would affect the society; the working economics of these relationships are subject to the fact that both humans and society are subject to the economic realities which is why it is inevitable that the examination of morality is discussed in the economic context.
The economic context, interestingly, show how people in the industrial and modern societies have been subject to many moral issues because morality, once steeped in these socio-economic conditions, become subject to argument. This is not to say that it is right for people to steal because of the economic reality they are in, norit is alright for people to become corrupt because they want to fulfill the need to save and enjoy life at the same time. Smith’s view on economics and morality, however, is closely interlinked; as previously mentioned, morality becomes subject to economics whereas the economy can become immune from morality.
Smith’s view on economics and morality, inevitably, if not about selfishness, is about self love; as Smith mentioned in The Wealth of Nations:
He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them….. 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, and never talk to them of our own necessities but of their advantages.
Hence, people are able to produce because of self-love or self-interest; as Fitzgibbon (1995) pointed out, ‘egoism was a low motive, but it could not be entirely bad if no ego meant no dinner’ (p. 138). Apparently, this shows that self-love motivates people, and wealth is a good motivator. Another important discussion raised by Smith in The Wealth of Nations was meritocracy.
This time, Smith mentioned that it is important for people to better themselves because this would lead to their own advancement; in supplement to Smith’s discussion on the division of labour and the assignment of wages according to this division, one has a better chance of acquiring wealth if one is advanced enough.
Self-improvement is therefore seen as an important self-investment, thereby showing that in order to successfully pursuit one’s self-interests, it is important to become competitive as an individual. In addition, even meritocracy, according to Smith, can lead to a better economy because collective self-improvement can further enhance the division of labour, thereby paving the way for innovation and better productivity.
Conclusion: the Moral Leanings of Modern Economics and the Moral Foundations of Adam Smith
As previously mentioned, modern economics pertain to human behaviour, and human behaviour may be subject to the moral context. In the modern society, human behaviour is understood to be guided by morality, and morality, evidently, is supposed to be not fuelled by greed. Christian teachings, which were even prevalent during Smith’s time, did not and has never promoted self-interests or self-love; although Christian teachings have nothing to do with modern economics, the fact that human behaviour is determined by basic commons sense of morality already challenges Smith’s discourse.
However, this is not to say that Smith was wrong; his argument when it comes to the relationship of self-interests with the economy can be regarded as realistic, especially during his time. Such discourse can be even found relevant or at least, valid in this day and age. The morality aspect, however, is questionable; Smith may present a reality but that does not mean it was morally right.
Linking economics with morality as to dual forces that determine human behaviour may be considered as one of the factors of modern economics but this does not define what modern economics is; this is to say that human behaviour is not determined by the economic/moral combination, but rather, there are other factors that pertain to what really motivates people. Human motivation therefore determines the relevant human behaviour in modern economics, and modern economics can be considered to be more ethically grounded that what Smith theologized.
This therefore shows that Smith’s discourse is ethically challenged; even though his discourse addressed the ‘less-than-perfect balance of the “sentiments:” self-love, justice, and beneficence or benevolence’ (Waterman, 2002), but Smith would provide venues that would uphold self-interest more than anything, such as when he mentioned “The law ought always to trust people with the care of their own interest”. What Smith apparently overlooked is the other part of human nature, and the possibility of people being absent or lacking of morality.
Smith’s works can be therefore regarded to have lineage to modern economics mostly based on the idea that Smith discussed economics in the context of human behaviour and its relationship to the society. However, modern economics would evolve from Smith’s discussions, not mainly as a means to refute his work but more on the need to modify and infuse modern economic thought with important moral foundations as can be seen in the application of ethics in modern economic practices.