This is the second part to a set of articles exploring Adam Smith’s philosophy.
Having understood the background from where Smith was coming and his enlightened sense of self-interest, let us come back to the issue of self-interest being good. Is self-interest adequate for the good of society? Now that we recognize that the initial understanding of self-interest derived from one sentence from one tiny part of a magnum opus of 4 books, let us look beyond that. Smith believes that we cannot single out only one virtue or quality and say this is the best and from this, progress and evolution will happen. Smith distinguishes between qualities that are important at an individual level such as prudence as well as qualities that are required at a social level such as justice, generosity, etc. Thus, depending on the context, qualities must be exercised.
Then under what circumstances can we achieve the best outcome for society? Smith says it is self-interest in an environment of a competitive market that will help us achieve the best outcome for society. Let us try and understand this better. What is the seller trying to do? The seller tries to get a product at the lowest possible price and sell it at the highest possible price. On the other hand, the buyer is trying to get the product at the lowest possible price. If one seller is selling it at a high price, the buyer simply moves onto another seller. It is important to recognize that here, Smith isn’t against making a profit. The point is to ensure that profits do not become exploitative.
Smith recognizes the seller’s tendency to engage in non-competitive acts. Cartels, monopolies, etc. are non-competitive acts. Nowadays, we have lobbies requesting favourable policies, think tans churning out reports providing evidence for such activities, and so on. A case for protection or monopolies based on the idea of ‘social good’ is often advanced. These are activities that have been taken places for ages. The infamous East India Company is an example of political patronage. The idea of engaging in such acts is very tempting. People will do it wherever they can. In the Wealth of Nations, Smith talks about how when merchants meet, they conspire and try to keep prices high or to discuss ways by which they can exact more from buyers. During his time, guilds were a dominant force in society. They controlled the supply of goods as well as labour. Thus, they influenced price by manipulating the supply.
Why was there so much debate on qualities? Why did Smith, the father of economics and a stalwart in the subject, talk about this? This was a time when people were trying to understand the essential nature of man. Economics is a science that talks about the choices made by men (species, not gender). A hundred years later, Marshall defines economics as “a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man.”. But a similar thought process prevailed during the times of Smith. Since it concerned the activities of man, it was important to first understand man himself. What is the nature of man? What does it mean to be a human being? We recognize that we are different from animals. But what makes us different? What does it mean to be different? This then leads us to questions concerning the intrinsic nature of man. There were philosophers who had (and still do) been contemplating this. For generations, this question has plagued us. David Hume, a person who had a tremendous influence on Smith, wrote a book titled A Treatise of Human Nature in 1738. Many others have also written influential books on similar lines. Thus, it is in this search that Smith talks about these qualities.
It is important to recognize and understand the profoundness with which these issues have been discussed. Like many others, my understanding about Smith’s idea of self-interest was limited. Upon reflecting, I realized the seeds of this misunderstanding are sown in school when we are introduced to the subject. This misunderstanding often continues in a person’s life. It is important to convey the true meaning of what Smith said and provide the entire context rather than a simple quote which deliberately misleads and nudges one to arrive at the wrong conclusion. Economics is performative. It is an extremely powerful way to view the world and understand it. Giving the wrong lens leads to one arriving at erroneous conclusions. It is important that we fix this in our textbooks.
Picture Credits: The Imaginative Conservative