Smith's Nuanced View of Self-Interest Benefiting Society

It is not just a pedantic point to make when people are only half right about what Adam Smith wrote, nor is it intended to be critical when they may not see the point that is made. The real problem with being half right (apart from it meaning they are half wrong too) is that they miss the far richer legacy of what Adam Smith was actually leaving behind for his posterity.

Consider this somewhat innocuous summary of Smith’s views from a library that is notifying faculty and students about an accession into their stock of an excellent set of essays by distinguished scholars on Adam Smith:

“Many believe that Adam Smith (1723-1790) was the founder of modern economics. In his book, The Wealth of Nations (1776), Smith established the theory of laissez faire—the principle that society's interests are best served by the pursuit of individual self-interest. If each person pursues his own interest, the general welfare of all will be promoted.”

From: Mildred F. Sawyer Library Blog (‘a communication tool from the Mildred F. Sawyer Library at Suffolk University in Boston, Massachusetts’) that passed my desk this morning advising its customers about the Cambridge Companion to Adam Smith, edited by Knud Haakonssen, Cambridge University Press.

Comment
If what ‘many believe’ about Smith was true, Smith would have been a relatively uninteresting contributor to our knowledge. He didn’t establish ‘a theory of laissez faire’, nor did he state the principle that ‘if each person pursues his own interest, the general welfare was promoted’.

It wasn’t as crude as that. That everybody pursues his own interest may well be arguable, but the pursuit of their own interests does not of itself promote society’s best interests. Some actions and their consequences of some people pursuing their self interests as they see them does promote, unintentionally, society’s best interests in the circumstances, which is not the same as believing that everybody’s perception and promotion of their self interest has that outcome. But on many occasions, people pursuing their self-interest has the opposite effect on society’s best interests. The qualification is important.

People's self-interest can act in ways that undermine society’s best interests. Monopolists pursue their self-interests and narrow the application of capital to fewer opportunities than would occur in the absence of monopoly distortions. Smith makes this point over and over again. Protectionists pursue their self-interests and distort consumer spending by narrowing the range of competing products available to them. This distorts price signals with consequences in terms of real incomes of consumers, altering their behaviour from what it would be in the absence of protectionism. These actions by some people pursuing their self interests do not promote the ‘general welfare’ (and then we have an endless history of what Smith called the 'vile rulers of manking').

Language was not invented by dictat from above. It developed in the uncoordinated actions of individuals creating word sounds to communicate with each other through an emergent order of social evolution over many generations. Markets work in similar ways. In Perfect Liberty they may work smoothly, but, as Smith pointed, human societies did not have to be at Perfect Liberty to progress from savagery to commerce. If that had been a condition for progress we would never arrive at where we are at any particular time. Society’s general welfare emerges from the competing outcomes of myriad self-interested actions, some of which help its best interests to advance and others, many others, which hold it back.

The self-interested corruption of many individuals in developing and non-developing economies conspires to worsen the welfare of their people. When self-interested corruption and criminality reaches endemic proportions, statements that I have quoted above seem somewhat lacking in precision. That is why Smith did not say something to give comfort to those who assert that he did.

The half-right statement from the Library misses the important theme that Smith addressed: political economy is about understanding how specific policies that detract from society’s welfare should be understood first and where practicable, with all due allowance from our common humanity for the time needed for adjustments; legislators should be persuaded of the social benefits of doing so, to allow the benign self-interests of individuals to operate without the distortions from the proclivity for malign self-interests to dominate.