The Limits of Self-Interest According to Adam Smith

Adam Smith on valuing ourselves to the detriment of others, so that we hurt or injure them:

“When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self–love might suggest to us, prefer the interest of one to that of many. The man within immediately calls to us, that we value ourselves too much and other people too little, and that, by doing so, we render ourselves the proper object of the contempt and indignation of our brethren.l Neither is this sentiment confined to men of extraordinary magnanimity and virtue. It is deeply impressed upon every tolerably good soldier, who feels that he would become the scorn of his companions, if he could be supposed capable of shrinking from danger, or of hesitating, either to expose or to throw away his life, when the good of the service required it.

One individual must never prefer himself so much even to any other individual, as to hurt or injure that other, in order to benefit himself, though the benefit to the one should be much greater than the hurt or injury to the other. The poor man must neither defraud nor steal from the rich, though the acquisition might be much more beneficial to the one than the loss could be hurtful to the other. The man within immediately calls to him, in this case too, that he is no better than his neighbour, and that by this unjust preference he renders himself the proper object of the contempt and indignation of mankind; as well as of the punishment which that contempt and indignation must naturally dispose them to inflict, for having thus violated one of those sacred rules, upon the tolerable observation of which depend the whole security and peace of human society. There is no commonly honest man who does not more dread the inward disgrace of such an action, the indelible stain which it would for ever stamp upon his own mind, than the greatest external calamity which, without any fault of his own, could possibly befal him; and who does not inwardly feel the truth of that great stoical maxim, that for one man to deprive another unjustly of any thing, or unjustly to promote his own advantage by the loss or disadvantage of another, is more contrary to nature, than death, than poverty, than pain, than all the misfortunes which can affect him, either in his body, or in his external circumstances” (TMS, Part 3, Chapter 3, paragraphs 5 and 6: 137-8).

Comment
This and many other instances, show that Smith was not the egoistic bully, indifferent to the welfare of others, as portrayed by such as Ayn Rand, nor Gordon Gekko in Hollywood’s Wall Street. His strictures against such conduct are unrestrained and final.

Interestingly, the bulk of paragraph 5 and all of paragraph 6 were added to the 6th edition of Moral Sentiments in 1789, months before he died, showing that these were his final thoughts of the subject. They deserve wide-spread circulation. Readers are asked to do so when the opportunity arises. (Thank you.)

An Evolutionist's View on Adam Smith

Jason Collins (including his quotes from Robert Trivers) writes (7 February) in Evolving Economics HERE

“Trivers on biology in economics”

In The Folly of Fools: The Logic of Deceit and Self-Deception in Human Life (my earlier review here), Robert Trivers asks “Is economics a science?” He answers:

The short answer is no. Economics acts like a science and quacks like one – it has developed an impressive mathematical apparatus and awards itself a Nobel Prize each year – but it is not yet a science. It fails to ground itself in underlying knowledge (in this case, biology).

Trivers notes the cost of this:
[T]he first piece of reality they should pay attention to – and this has been obvious for some thirty years now – is biology, in particular evolutionary theory. If only thirty years ago economists had built a theory of economic utility on a theory of biological self-interest – forget the beautiful math and pay attention to the relevant math – we might have been spared some of the extravagances of economic thought regarding, for example, built-in anti-deception mechanisms kicking in to protect us from the harmful effects of unrestrained economic egotism by those already at the top.

Trivers also has a short shot at the invisible hand metaphor. He notes that biology has hundreds of examples of where the pursuit of self-interest can have dramatic negative effects on group wellbeing. This reflects the recent arguments of Robert Frank.”

Comment
Jason may be relying entirely on modern representations of the co-called Invisible hand, which readers of Lost Legacy will know is (a) attributed to Adam Smith (a fallacy, invented by the same modern economists from the 1940s and now widely believed), and (b) is usually accompanied by another invention that self-interest has the remarkable quality that it always operates to the benefit of the society, irrespective of the other motives of economic agents, including selfishness.

Neither of these beliefs is accurate. Indeed, Adam Smith was never so unworldly as to assert such a ridiculous notion. In Wealth Of Nations (Books I, II, and III) he identifies over 70 instances of malign outcomes from the personal self-interest of certain individuals, which were detrimental to those affected (to which I could add how in Books IV and V, Smith excoriates European powers for their brutal imposition of colonial rule on the Americas and India).

There was never any question of Adam Smith being starry-eyed about the possible detrimental affect of self-interest on others, themselves and the group.

If Jason Collins and Robert Trivers (and, of course, Robert Frank) believe something to the contrary, I would be interested in where Smith expressed such naïve views; certainly not in his Moral Sentiments or in Wealth Of Nations.

As for possible inexcusable assertions to the contrary, there is no direct lineage of view from Adam Smith to modern neoclassical economics.

Self-Interest is Not Selfishness

James Garvey, editor, writes (17 November) a post in TP Talking Philosophy (founded in 1997 to in 1997 to publish quality philosophy in a readable and enjoyable format for readers both within and outside academe).
HERE

“Mad men and Hippies”

“Spurred on by the Occupy Movement, I’ve been thinking again about the connection between morality and our economic troubles. I thought I blogged something about it at the start, and it turns out I did, in 2008. Maybe it’s interesting reading again (Ethics Stimulus Package). The idea, dredged up from a few lines owed to Adam Smith, is that we’re sometimes self-interested butchers and bakers (and maybe hedge fund managers), but we’re capable of acts of great selflessness too. Capitalism needs at least a dose of the former to work, but it would seem that it needs at least some of the latter too. I wondered then, and I wonder now, what leads us to ‘exercise our benevolent affections’, as Smith puts it. Some ages feel more in tune with those affections, some times seem better placed to express them. The interesting thing is what drives those changes, what pushes us, back and forth, between Mad Men and hippies, Gordon Gekko and … well, I’m having trouble settling on a contemporary name to set against his, but never mind. What is it, do you think, that makes moral sentiments wax and wane?”

Comment
The ‘butcher, brewer, baker’ paragraph is widely misunderstood, including among philosophers. This was not a ‘selfish’ property at work in the act of bargaining. Explicitly it is the opposite!

To persuade the ‘butcher, brewer, baker’ to supply the ingredients of your dinner, Smith advises you, a) not to rely on the tenuous feelings of their benevolence (as if there were unlimited dinners around and everybody was infinitely benevolent), or b) to appeal not to your own self-interest, but to ‘address’ their self love/ self interest. In short, to be other-regarding, not just self-regarding is the necessary quality of Smithian self-interest, a quality ignored by most readers of this passage who centre their attention of the ignorant 'hard' (bully) bargainer who have little experience of read-world bargaining.

A moment’s thought based on many moments observing people engaged in bargaining and persuasion, show the basic good sense of this statement by Smith. Two passionately self-centred bargainers, interested only in their own self-interests, would reach agreement with great difficulty, if at all.

Each self-interested bargainer requires the co-operation of others. The selfish, greedy person (a creation of Ayn Rand, not Adam Smith, and, before Ayn Rand, the creation of Bernard Mandeville, 1724) in failing to persuade others must resort to plunder and violence, or stop eating.

Bargaining is purposeful co-operation, which does not mean that every pair-wise encounter leads to happy bargains, a wholly utopian dream. If sentiments ‘wax and wane’ that is only human. Buyer’s regret and seller’s frustration are normal. But the emergence of market exchanges, from the ’propensity to truck, barter, and exchange’ throughout the long history of human societies from the ‘faculties of reason [Not rationality!] and speech’, took millennia to become common norms, amidst the long history, and longer pre-history, of the various failing and often bloody or tyrannical alternatives, the antipathy of beneficence and benevolence which regarded as major virtues.

Adam Smith’s Moral Sentiments was about an ethical alternative to the ‘bloody or tyrannical’ alternatives, the main roots of which were already present by the mid-18th-century experiences that he observed.

Philip Pilkington On Rational Expectations Theory

Philip Pilkington writing in Irish Left Review (6 August) (HERE):
Nails the erroneous assumptions of neoclassical ‘rational expectations’ and open the way to a more accurate assessment of Adam Smith’s concept of “self-interest” (and the invisible hand).

“Neoclassical Dogma : How Economists Rationalise Their Hatred of Free Choice”

“Rational expectations is indeed an obscure doctrine. It essentially holds that people operating within a market generally act in line with the expectations of neoclassical theory. This tautology – for it is a tautology – can be traced back to Adam Smith’s ‘invisible hand’ which we explore in more detail later on.
But this goes beyond simple tautology. The neoclassical assumptions are themselves especially stringent and seem to be wholly counterfactual to any observer of human behaviour. Rational expectations theory expects people to act, well, rationally. More specifically it assumes that people always act in order to ‘maximise their utility’ and that such actions result in optimal behaviours that ensure that prices are always perfectly in keeping with what they ‘should be’ – that is, an equilibrium price that perfectly balances supply and demand. Prices then become a pristine and perfect measurement; they translate consumer desire perfectly and are beyond question.”

Comment
Philip Pilkington is to be congratulated for asking the right questions and implying scepticism in his assertions. Neoclassical assumptions are not just contrary to the behaviours of human beings in their societies, for the record they are also contrary to how Adam Smith formulated human behaviour. The former, of course, is a more significant criticism of neoclassical rational expectations, but in so far as Adam Smith is drawn upon in support of them, as he is, we should understand this calumny imposed on his legacy.

The use of the metaphor of “an invisible hand” on two occasions in his published Works (1759, 1776) is widely interpreted to be about “markets”, “supply and demand”, and “equilibrium”. Smith made no such claims at all; that is a modern invention, made popular by Paul Samuelson in 1948. Smith never used the IH metaphor in relation to “markets”, etc., but neoclassical authors (and graduates of their courses) wrap up “invisible hands” in their assertions about “miraculous markets”.

In Moral Sentiments, Adam Smith did not restrict behaviour to “self interest” also being solely self-regarding; he also wrote of self-interest” as “other-regarding” too. In Wealth Of Nations he did this very clearly in the oft-quoted passage about persuading the famous “butcher, brewer and baker” to provide our dinners, where he specifically advises us not to “talk of our own necessities” but to address their “self-love”. In short, we serve our self-interests by serving the self-interests of others - in contrast to that nasty libel of Smith’s legacy by Gekko of ‘Wall Street’ fame. His contemporary, Mirabeau, was right: 'we think we serve ourselves by our actions, but we really serve others'.

Great Example of Benign and Non-Benign Self-Interest in Markets

Nicholas Gruen writes in Club Troppo (Australia) Here:

“That makes them [mortgage brokers] like computer salespeople in a department store – people who often know a lot more about the product they’re selling than their clients and able to sell from a range of brands. The good ones try very hard to inform their clients and indeed to get them the best loan possible, both because they like helping people with their skill and because in a competitive marketplace, doing the best they can do for their clients is a pretty good recipe for their own self interest (See Adam Smith, 1776 for further details).”

Comment
I am pleased to say: absolutely correct! This is an example of the correct use and reference to Adam Smith on self-interest motivating some, though unfortunately, not everybody to behave morally in a market.

Indeed, in the context in which Nick writes (follow the link) he explicitly states that other mortgage advisors in Australia do not advise their clients with complete honesty (by disclosing that they receive commissions from a select group of mortgage funders and that, in consequence, they withhold information about the other non-commissioned, perhaps better, deals more suited to their customers).

That fact shows, if such a demonstration is really necessary, that self-interest is not always socially benign from everybody in every instance. That is why indiscriminate belief in ‘an invisible hand’ is so fallacious a construction placed by modern economists (post-Samuelson) on Adam Smith’s singular use of the IH metaphor in the specific instance in which he used it in Wealth Of Nations.

Please note, especially, there is no mention by Nick Gruen of the unnecessary use of the metaphor of “an invisible hand”, which is so easily slipped in today as a (benign) general rule, such as making ‘selfish’ motives unintentionally benign (pace Gekko’s praise of ‘greed’). Yes, it's so simple - why don't modern economists get it?

[Disclosure: I have corresponded with Nick on Lost Legacy since 2005 and regard him as a sound economist. I only saw the contents of this article this morning)]

Once More With Feeling

Once again a reference to John Nash in “Beautiful Mind" that libels Adam Smith (HERE):

“Adam Smith Was Wrong

This scene from A Beautiful Mind is a eureka moment in economics. It debunks the greed is good theory. The way to maximize your benefit is not just seek your own self interest but to seek a way that benefits the group as well."

Comment
Gavin Kennedy says: August 2, 2011 at 3:03 pm:

Sorry, but Adam Smith was right because he never made such a statement as “just seek your own self interest”, but he did say specifically that you should “address the self love” of “the butcher, brewer, and baker” when seeking your “dinner” (Wealth Of Nations, Book I, chapter ii, paragraph 2: page 27).

In short, and generally (and as I have posted on Lost Legacy several times), you serve your own self-interest best by serving the self-interests of other people.

The script writer got it wrong, secondhand from modern economists, who like the script writer had not read Wealth Of Nations either.

[Postscript: I am all in favour of "beyond left and right']