The real Adam Smith

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2023 is the 300th anniversary of Adam Smith’s birth. This post is part of a series highlighting aspects of Smith’s thought that continue to influence liberal thought in general, and CEI’s work in particular.

Adam Smith is not who too many people think he is. High school civics classes get the basic facts right: division of labor, free trade, the invisible hand, The Wealth of Nations in 1776 and all that. But they usually get the man’s spirit almost exactly wrong, and that is more important than any fact about Smith. Many teachers tell their students that Smith was a selfish calculator of a man who was obsessed with material gain. The real Adam Smith was a much better person.

Empathy is the core of Smith’s thought. He wasn’t obsessed with money. He was obsessed with understanding other people. He was interested in how people get along with each other—and how they don’t. Smith’s two books are a masterclass on human interaction. There is a reason why economics and its offshoots are called social sciences, and Smithian empathy is a big part of it.

Smith wrote quite a bit on self-interest, and this is one reason he is often misunderstood. Many people have a hard time keeping apart facts from opinions. The technical term for this is low decoupling. It’s nothing to be ashamed of, since nearly everyone has it to some degree.

For Smith, it is a fact that self-interest is built into human nature. His opinion was that he did not like this fact. But from a low decoupler’s perspective, to explain something is to favor it. Smith wrote about self-interest, therefore he favored it.

This is wrong. Humans are imperfect creatures, and excessive self-interest is one of our most common imperfections. What fascinated Smith is that, under the right conditions, self-interest can make people more compassionate. The interplay between empathy and self-interest can also make people richer, not just more virtuous.

That Smith thought this way shows in the Wealth of Nations’ full title: An Enquiry into the Nature and Causes of the Wealth of Nations. This wonky title is rarely written out in full, which is another source of misunderstanding. Each word does some work in explaining what Smith is trying to say.

Poverty has no cause. All someone has to do be poor is nothing. Wealth has causes. It has to come from somewhere, and that is Smith’s enquiry. If human nature is the same all around the world, why are some places rich and others poor? Smith has several answers, which all tie together. All of them are rooted in empathy.

People create more wealth by cooperating with each other than they can alone. That idea is where the division of labor comes from. It is also where trade comes from.

If people agree to specialize in different things, they can become fabulously productive. If everyone trades their specialized surplus for things other productive specialists are making, well, then everyone is more productive. That is where the wealth of nations comes from.

But that only scratches the surface. How does that specialization-and-exchange process emerge? Smith’s answer is the invisible hand. That hodgepodge of specialists trading with other specialists is chaotic and unplanned. It clearly works. Paris is fed every day even though there is no centralized food distribution plan, as Bastiat later pointed out. But where does that come from?

To answer that, Smith digs down one more layer and discovers institutions. Readers familiar with my regulatory reform work know that one of my mantras is that institutions matter. A lot of that is Smith’s influence. Think of institutions as the rules of the game. The right institutional structures can give even the most flawed, self-interested people an incentive to cooperate with each other. “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 self-interest,” Smith wrote.

Smith was no purist about institutions. For Smith, a good set of institutions is what he described as the “obvious and simple system of natural liberty,” requiring little else than “peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” Just as people are imperfect, so are the institutions that people improvise while finding ways to cooperate with each other. But they do not need to be perfect to work well.

There is one more layer. Where do institutions come from? At the bottom is empathy, holding up everything else. It’s always about empathy for Adam Smith. It takes empathy to understand other people’s needs and specialize in making something they value. It takes empathy to understand what other people want so you can make them a trade offer they will accept. It takes empathy to respect another person’s dignity enough to trade with them rather than steal from them.

If we step back from Smith’s digging and take in a larger view, we’ll notice that the layers aren’t neatly separated. They are entangled. They shade into each other, receding here and protruding there, much like the ongoing duel between self-interest and empathy in Smith’s real subject, human nature.

High school civics teachers were right that Adam Smith liked free markets. But he didn’t like them because he was selfish. He liked them because empathy was so important to him. That is the real Adam Smith. He deserves to be better known than his classroom caricature.