Saturday, January 29, 2011

Adam Smith: He's about More than Capitalism*

This Constitution Day address was delivered at the Presidents and Philanthropy conference at Grand Valley State University, September 17, 2010.

The Three Sectors

Although we are devoting this conference to American philanthropy, I'd like to tell you about a man who was neither an American nor a philanthropist of renown. He is Adam Smith. Hardly anyone links the Scotsman to charitable giving. Given the recent corruption on Wall Street, he seems more like capitalism’s evil genius. People would be forgiven if they thought that his most famous book, The Wealth of Nations, provided intellectual cover for greedy investors pursuing ill-gotten gains in an unregulated market.

It does not. Still, why spend any time on Adam Smith and philanthropy?

First, Smith painted on a much bigger canvas than economics. His work, taken as a whole, mounts a robust defense not just of the market, but of all three major sectors in public life: (1) the market or private sector, which generates wealth, (2) the government or public sector, which draws from private-sector wealth for its revenue, and (3) civil society, those voluntary associations that can flourish when people are making profits in the private sector. His work explored the relationship of all three sectors because he understood that the fiscal fitness of two of them – government and civil society – depends on the health of the economy. Thus all three sectors worked together to improve the human estate, the goal that philanthropy seeks to achieve.

Second, Smith was concerned not just with wealth generation, but with the morals and culture that are most conducive to creating prosperity. His Theory of Moral Sentiments is an exploration of critically important virtues -- trust, altruism, self-discipline -- that are prior to, and above, strictly economic considerations. These are also the virtues that make philanthropy possible.

Third, Smith did not just write about charitable giving. He lived in a philanthropic culture -- a veritable "golden age of English philanthropy" as the moralist-painter William Hogarth would put it. Moreover, Smith himself was generous to those less fortunate. But his private beneficence is not well known to Americans today.

Mention of whom brings me to another reason to talk about Adam Smith -- a bit out of left field. One would not expect a natural affinity between Barack Obama and the Scotsman. Of the U.S. presidents who have served during the past one hundred years, President Obama has the lowest percentage of cabinet officers with experience in the private sector -- by far. In October 2008, the New York Times asked then-candidate Barack Obama to provide a list of his favorite authors and books. He responded with 19 authors whom he regarded as important to his intellectual formation. The most distant author in time and place was Adam Smith. Then-Senator Obama noted that he appreciated Smith not just for An Inquiry into the Nature and Causes of the Wealth of Nations, but also for the Theory of Moral Sentiments.[1]

Mr. Obama is hardly alone. He is in such a long line of admirers that P. J. O’Rourke quips that Adam Smith is America’s “founding dutch uncle.” After all, The Wealth of Nations, published in 1776, makes mention of America more than one hundred times.[2] Early in its history the book served as a guide for Alexander Hamilton who, as our nation’s first treasury secretary, helped set up America’s economic infrastructure during George Washington's first term. Hamilton's major departure from Smith was to argue for protective duties to help the new republic establish its own manufacturing sector. Otherwise, he was a devoted student of the Scottish professor.

Markets and the Providential Arrangement of Things

Adam Smith’s work should be seen not just in the context of the 18th century, when he lived, but also of the 17th century. In that early modern era, when free-market ideas were in the springtime of their growth, capitalism was justified by recourse to God’s providence. One hundred years before Adam Smith was explaining how a better understanding of the division of labor, the price mechanism, and supply and demand could greatly increase the wealth of nations, a Frenchman named Jacques Savary, writing in a more religious age, defended markets as the providential arrangement that insured humans would be dependent on one another:

“By the manner in which Divine Providence has dispersed things throughout the world, it is clear that God wished to create unity and love among all [people], because He imposed upon them the state of always having need one of another. He did not choose to permit necessities of existence to be found in one place, but rather spread out his gifts, in order that men might have to trade together….”[3]
And not only to trade, but come to each other’s aid as well.

Such references to divine intent were frequent among Jesuit-trained Frenchmen in the 17th century. But a reliance on religious explanations became increasingly avoided or critiqued during the 18th century. That’s because in the hundred years between Jacques Savary and Adam Smith, the Western mind underwent a complex transformation we gather under the term “Enlightenment.” Western civilization, shocked by a series of devastating religious wars, was further rocked by science and the new philosophies of Descartes, Bacon, and Locke. Increasingly, thinkers took up the challenge of explaining human behavior not in terms of God’s providence but in terms of man’s reason. Nature rather than the Church would be the new source of authority.

Onto this increasingly secular stage stepped Adam Smith. A professor of moral philosophy at the University of Glasgow, he took up the challenge of explaining how people helped one another despite the contradictory motivations and impulses within them. (1) A free market betters the human condition by channeling self-interest into socially positive outcomes, even when the exchanges occur among strangers. (2) A strong government improves the human condition by acting in the common interest to defend the realm, administer justice, and build infrastructure in a nation. (3) A well-developed civil society makes more bearable the human condition by tapping into the altruism many feel toward those with whom they have (or want to have) some connection. It is all three sectors functioning together that raise the human estate. That is the key thought, the take-away, if you will.

My students are often surprised to learn that Smith is not a champion of unbridled self-interest; not the apostle of greed in an unfettered marketplace. His thought, while much more nuanced and interesting, has been grossly distorted or oversimplified on the cocktail party circuit. So much of what we think we “know” about Smith ain’t so, and so much that’s relatively unknown should become better so. It’s time we move beyond the clich├ęs and acknowledge that Adam Smith was no libertarian as that term is nowadays understood – and he certainly did not wear an Adam Smith necktie!

You probably can sense where I am going with all the misconceptions.

  • Smith was supposed to be the friend of "capitalism" … but in truth he was never the defender of unscrupulous "capitalists."
  • Smith was supposed to be the apologist for self-interest … but in truth he wrote against greed and socially destructive behaviors. He only defended self-interest rightly understood; self-interest that was exercised in an ethical framework informed by the West’s Judeo-Christian spiritual inheritance and Greco-Roman moral earnestness.
  • Here’s the real kicker: Smith was supposed to be anti government … yet in truth he was a government bureaucrat for much of his adult life, and in his writings he mounted a vigorous defense of the necessity of strong states and strong governments if the market were to work properly. To see this for yourself, read Book V of The Wealth of Nations.

(1) The Market

Let’s now look in a bit more detail at how the market is supposed to lead to the betterment of the human condition. For this summary, I am indebted to Catholic University of America economist Jerry Muller’s excellent scholarship on Adam Smith, and in turn I commend it to you.

Smith defined the free market as a social arrangement whereby goods and services are exchanged among people who do not necessarily know one another. Indeed, it is not through altruism but through market competition, the profit motive, unfettered supply and demand, and the understanding of prices that the marketplace absorbs self-interest and turns it to social benefit.

For Smith, the reason a nation should adopt modern free-market techniques is that it’s humane. It will raise the standard of living for increasing numbers of people over time. In The Wealth of Nations, he famously showed how such simple products and wool coats and hatpins could be manufactured in dramatically greater quantities and at substantially cheaper prices so as to be affordable to increasing numbers of people. The metaphor he used to explain the institutional arrangements that channel self-interest into socially desirable goods and services was the “invisible hand.” That’s in essence what Books I-IV of The Wealth of Nations is about – this invisible hand that, through institutional arrangements, channels our selfish impulses into useful, affordable commodities. It’s worth repeating that, by this “invisible hand,” people who have never met one another benefit one another.

But Smith knew that the invisible hand could become an invisible foot, and that is why you have to read beyond Books I-IV of The Wealth of Nations to get a more complete picture of his thought. To understand how it was not just the marketplace that would produce betterment, but ALSO government and ALSO civil society, go to Book V of The Wealth of Nations as well as to The Theory of Moral Sentiments. Let’s briefly tackle these additional sectors one at a time.

(2) The Government

It comes as a surprise to many, but the early chapters of Book V of The Wealth of Nations is devoted to the role a STRONG if limited government should play in tempering the vices of the marketplace. Smith advocates building up a strong national defense, an unimpeachable system of justice to which all citizens have recourse, a well-maintained infrastructure of transportation and communication, and an educational system that can develop the intellectual and moral virtues of the young so that they will not be dehumanized on the assembly line. Without a reliable stream of revenue, there can be no strong government to build up these things. And there is no better way to insure reliable revenue than through a free-market economy that is generating national wealth. It certainly beats the mercantilist policies pursued by most European sovereigns at that time. Their notion of expanding the wealth of nations often involved going to war and stealing wealth from other peoples. Smith thought mercantilism was ultimately self-defeating. He championed free trade as a better, more peaceful way for humans to provide for each other’s needs.

No doubt, free trade would best thrive in a world of strong, not weak, nation-states. For it's robust governments that made good trade agreements when they were also providing for the common defense, administering justice, and building up a people’s transportation and communication infrastructure.

Smith also observed that the marketplace could be brutal to workers. He was writing in the opening act of the Industrial Revolution. In glaring instances, the division of labor had dehumanized the workplace, and in the factory (as he put it) workers were losing their manly virtues. In response, Smith advocated universal education, paid for mostly at government expense, to lift the human estate. He knew that children, while only 25 percent of the population, were 100 percent of the future. Modern nation-states could not shirk the obligation to invest in children.

(3) Civil Society, Philanthropy, Benevolence

The Britain of Smith's day was no stranger to a strong civil society. As mentioned in my introduction, Hogarth called the mid 18th century "a golden age of English philanthropy." About this astonishing observation Rhian Harris, curator of the Foundling Museum, observes that there was a

"great wave of philanthropic activity that took place in England during the eighteenth century. The liberal beliefs of the Latitudinarian branch of the Church of England partly accounted for this; they emphasised benevolent deeds as opposed to mere church worship, coupled with philosophical underpinnings found in the writings of John Locke, who wrote of the utility of virtue. The cult of Sensibility focused on the engagement of an individual's compassion and sense of moral or spiritual duty with the plight of the less fortunate. The impulse towards social reform in London was largely the desire to reduce the terrible waste of life."

This is the culture into which Adam Smith was born. It was a dynamic, exciting period to be sure. But much of the impulse to do good was triggered by the most dehumanizing effects of the Industrial Revolution. In Smith’s view, even a strong government could not always effectively compensate for the vices of an unregulated marketplace. To get a full account of his moral philosophy, one must read his 1759 work, The Theory of Moral Sentiments. The work was specifically prompted by the writing of another philosopher, Jean-Jacques Rousseau. It is devoted to giving a secular explanation, which is to say a social scientific explanation, of how people become moral beings. In the very first sentence Smith asserts:

“No matter how selfish we suppose man to be, there is obviously something in his nature that makes him interested in the fortunes of others and makes their happiness necessary to him, even if he derives nothing from it other than the pleasure of seeing it.”

In Moral Sentiments, then, Smith demonstrates that most of us are moved by altruistic impulses – what he called benevolence. But he recognized that it is a limited impulse in most humans. Typically people show the most benevolence toward those with whom they develop some connection – in their family, among their friends, and amid acquaintances. In the development of civilization, institutions developed in civil society that bettered the condition of people left behind by the marketplace and government.

It bears emphasizing: The ethos to found and establish philanthropic institutions was well established on both sides of the Atlantic during the "golden age of English philanthropy." It was the ethos that emigrants from the U.K. brought with them to British North America. Last night Dr. Richard Gunderman told us about a whole slew of such institutions in Franklin’s Philadelphia – juntos, hospitals, colleges, lending libraries, volunteer fire departments, and much else. These charitable institutions could not exist were it not for the strengths of the marketplace (generating great wealth) and would not exist were it not for the weaknesses of the marketplace (leaving people behind).

Smith, who died in 1790, did not live to see the birth of modern public relations, but he would surely have appreciated the way philanthropic organizations have used various media to connect us with people beyond our ordinary interactions, and thus to better the human condition through voluntary contributions of time, treasure, and talent on a much larger scale.

A Vision of Commercial Humanism

To sum up, Adam Smith presents us with “a vision of commercial humanism” (Jerry Muller’s phrase) that is at once compelling and comprehensive. He details three diverse ways that human beings can better their material condition. In Books I-IV of The Wealth of Nations, Smith analyzed the power of the free market to improve the human estate among people who do not necessarily know each other. In Book V of The Wealth of Nations, Smith championed a strong government if not a big one, to insure adequate defense, justice, roads, communication, and education. He was convinced that in a world of independent nation-states, free trade policies would be the most peaceful way to increase the world’s collective wealth. In his Theory of Moral Sentiments, Smith called for a robust civil society to tap into the altruism we feel for others with whom we have formed some connection. The key point is that each of these three sectors – market, government, and civil society – plays a critical role in bringing about human betterment. Just as you cannot knock any one of the legs out of a three-legged stool and expect it to stand, so it is with the three sectors in the life of a nation. To make a people prosper, it is necessary to perfect the market, government, and civil society – Adam Smith’s Holy Trinity.

* * *

In this ground-breaking conference, we have explored the sources of American philanthropy. We have looked at some pioneering philanthropists who would serve as exemplars at the founding – Benjamin Franklin, Charles Carroll, and George and Martha Washington. We have looked at the institutions of civil society – Burke’s “little platoons” and de Tocqueville’s “voluntary associations” – those lyceums, Chautauqua chapters, mutual aid societies, quilting bees, and barn raisings that characterized American culture from the East Coast to the frontier. Created independent of government, these free institutions were the glory of a free people in the New Republic.

In the course of this conference, we have also explored the importance of the frontier in encouraging the voluntary spirit since there was little government reach and no institutional infrastructure on which to draw. Out in the vast lonely spaces of the West, people had to solve their own problems.

Other factors in the U.S. that contributed to the formation of a robust civil society included periodic Great Awakenings (promoting charity); military engagements (with their camp followers voluntarily doing much of the work); economic panics, depressions, and recessions (calling on better-off Americans to help those worse off); and major decisions of the Marshall Court (McCulloch v. Maryland and Gibbons v. Ogden) that confirmed the national government’s pursuit of a Hamiltonian-style market economy. Thus over the years, the market economy, properly understood, has been a wellspring of American philanthropy. Adam Smith gives us fundamental insights into how the market economies of the West encourage philanthropy and ensure strong nation-states and effective governments. But he also explores the moral nature of man to give us a richer picture of all the ways we seek human betterment. Perhaps that richer picture is Smith's greatest gift of all.

[2] P. J. O’Rourke, On The Wealth of Nations (New York: Atlantic Monthly Press, 2007), p. 119.

[3] Jacques Savary, The Compleat Merchant (first published 1675); quoted in Roger Mettam, ed., Government and Society in Louis XIV’s France (London: Macmillan, 1977), pp. 172-73; quoted in Craig, Graham, Kagan, et al., The Heritage of World Civilizations, 8th ed. (Upper Saddle River, NJ: Pearson/Prentice Hall, 2009), p. 533.


*Throughout these remarks I avoid the term "capitalism" because it never appears in Adam Smith's work. "Capitalism" first appeared in English 64 years after Smith died, in 1854, in William Makepeace Thackerey's novel, The Newcomes.

For more on Smith's theory and practice of charity, see Thomas D. Birch, "An Analysis of Adam Smith's Theory of Charity and the Problems of the Poor," Eastern Economic Journal (24), Winter 1998, pp. 25ff.

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