In nearly every introductory economics course, students like myself read Adam Smith’s The Wealth of Nations and learn about the fundamental assumptions of his model. Chief among these assumptions is that individuals (or consumers) behave rationally, optimizing their own welfare subject to resource constraints. Indeed, it is from this assumption that Adam Smith built out his argument for laissez-faire free market capitalism. That is, when individuals are free to act in their own self-interest and are unencumbered by government intervention (except in the case of market failures), profound economic growth will follow and all participants in the market will be better off. This is what economics students (and so many others) learn about Adam Smith and our economy–that pure self-interest promotes the well-being of everyone. At AEI’s Summer Honors Program, I learned that this is not only a misunderstanding of Smith’s argument, but one that has profound consequences that reverberate through our social and economic systems. However, by turning back to Smith with a keener eye and refining our understanding of his fundamental assumptions, we will be able to reverse these troubling trends, building a freer and fairer society.
For many observers of America’s market economy, the mentality of unbridled self-interest has brought about many negative developments in both our civic and economic life. And they are right. By improperly exalting economic liberty and free choice, the tenets of Smith’s free market, we have contributed to the decay of our communities, lost our vision of the common good, and have exercised cold-heartedness towards the poor.
Alan Ehrenhalt, in The Lost City, perfectly underscores the tension between free choice and community life. Ehrenhalt notes that, when communities are at their strongest, choice is often very limited. However, due to the rapid expansion of our economy over the past few generations, people are now faced with nearly infinite choice. That is, we were once bound to shop, dine, bank, and conduct our daily commerce in our communities, but as a result of economic growth and innovation, we are now virtually unlimited by choice. However, this unlimited choice, coupled with our tendency to optimize our resources, came at the cost of our communities. Though Ehrenhalt considers this “technologically inevitable,” he maintains, “that the market is a force for disrupting existing relationships. To argue that markets are the true friend of community is an inversion of common sense.”
The same sort of tension arises when considering how our society treats the poor. When motivated by an ethic of self-interest, those who have means often overlook the needs of the impoverished. Altruism, we have learned from our economics courses, does not fit so nicely into Smith’s understanding of the rational economic actor. Moreover, if we follow Smith’s logic as we have learned it–that self-interest promotes the wellbeing of all–then it only follows that the best way to care for the poor is through the optimization of our own welfare.
Is this really what Adam Smith intended? Are these issues inevitable symptoms of widespread economic growth and leaps in the standard of living? No–in fact Smith argues that the opposite is true.
In Smith’s only other published work, The Theory of Moral Sentiments, he begins the very first chapter (entitled Of Sympathy), by writing, “how selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” The purely self-interested free market capitalist that economics students thought they knew sounds more like an altruistic philosopher. To the surprise of many, Smith’s foremost concern was the promotion of moral and social flourishing.
How, then, are we able to reconcile Smith’s ethic of self-interest in The Wealth of Nations with his discussion of sympathy and altruism? Thankfully, scholars such as Ryan Patrick Hanley have approached this question. Hanley writes, “Smith’s defense of the economic liberty fundamental to capitalism is founded on the belief that economic liberty is not an end in itself, but a means to the greater end of promoting the flourishing of both individuals and societies.” That is, economic freedom is not valuable in its own right–it is valuable when we use it as a tool for moral and social flourishing. The higher ends that we ought to be striving towards, according to Smith, include improving the “conditions of the poor” and “binding [our communities] together” around “one common center.”
The irony here is pervasive; that which many consider to be the direct consequences of Smith’s ethic of self-interest–weak communities and insufficient care for the poor–are exactly what he advocates against in The Theory of Moral Sentiments.
This disconnect occurs because our society has misconstrued his teachings, and has grown to think of economic liberty as a valuable end in itself. When we exalt free choice and optimization of resources, especially at the cost of our communities and the poor, we fail to recognize Smith’s central insight–that economic liberty is valuable only when used as a means to a higher end.
Economic liberty does, however, offer us a tremendous opportunity to rebuild our communities and adequately care for those at the bottom of the economic distribution. It simply requires a closer inspection of Adam Smith, revising our understanding of his assumptions, and rethinking our own role in promoting a more robust civic life and alleviating poverty.
Thomas O’Rourke is a rising senior at Emory University. He was a participant in the 2021 Summer Honors Program course “Caring for the Poor in the Modern Public Square,” taught by AEI Senior Fellow Brent Orrell.
