Sunday, January 22, 2006

A Lawyer on Reputation and Smith's "Moral Sentiments"

Bruce McEwen is a US lawyer with degrees in economics and law who hosts a rather remarkable Blog entitled ‘Adam Smith, Esq., (‘an inquiry into the economics of law firms’), a site I visit at least weekly, and good value it is too (www.bmacewen.com/blog/). Last week (18 January) it carried a most interesting piece: ‘Your Money or Your Reputation: Adam Smith, the first behavioral economist’.

Using an article (“Adam Smith, Behavioral Economist?”) by Anne Cullen (‘a business information librarian at Baker Library, Harvard Business School, with a specialty in finance) as the ‘hook’ into his main theme (see “Harvard Business School: Working Knowledge (‘for business leader’)” 16 January, he presents a comprehensive message from Adam Smith’s “Moral Sentiments” (1759) warning his fellow lawyers to avoid compromising their reputations with dubious conduct in pursuit of personal riches.

Anne Cullen, while getting Smith wrong on the invisible hand, states that “Adam Smith's The Wealth of Nations, first published in 1776, helped create the discipline of economics with its conjuring of the invisible hand, self-interest, and other explanations of market forces that have influenced academics, governments, and business leaders ever since”, and goes on to draw attention correctly to his “insights from one of Smith's earlier works, The Theory of Moral Sentiments” which “contribute[s] to modern thinking on everything from our fascination with celebrity to the theory of loss aversion.”

For that alone we can excuse Anne Cullen’s errors (or rather, the errors of the sources from whom she adopted this message) on the invisible hand (a lonely metaphor from Shakespeare’s Macbeth, 3:2) because she makes public in a widely circulating journal an excellent account of the some of the ideas from “Moral Sentiments”.

Bruce McEwen summarises the case well:

But it’s when we come to Smith’s bedrock belief … in the importance pf trust. Concern for fairness, and reciprocity, that the linkage of human psychology to market functioning becomes clear. Smith believed that those value become more, not less, important as markets evolve. For example, with many of the professions, most assuredly including our own [lawyers], clients cannot monitor quality in real time – and the same goes for doctors, auditors, and financial advisors. So trust and reputation stand in where cold economic calculus fails.”

Read it for yourself. It’s well worth the effort should you wish to understand more about Adam Smith’s life's work.

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