The market as a living institution: Why Adam Smith must be rehabilitated

[French version here]

Ask anyone with some knowledge of economics about Adam Smith, and they will probably tell you that the great economist is the symbol of unbridled and dehumanized capitalism, with his famous “invisible hand”, which seems to turn us into machines at the mercy of a mechanism that escapes us, and his promotion of selfishness. This is the idea that I myself had for a long time. Yet, this view does not reflect his writings, which instead promoted the market as a living institution governed by ethics. Given Smith’s importance in economic thought, and at a time when the societal role of business and the market is in question, it is important that the debate not be based on a caricature of his thinking.

Can the collective interest be served by the pursuit of personal interest? At first glance this seems contradictory. However, the idea was not new when Adam Smith studied the first Industrial Revolution at the end of the 18th century. It had been put forward by the Dutch economist Bernard Mandeville. With his famous Fable of the Bees, published in 1714, Mandeville developed the shocking idea that private vices lead to public happiness. According to him, vice, which leads to the search for wealth and power, involuntarily produces virtue because by freeing appetites, it brings opulence that is supposed to flow from the top to the bottom of society. Thus, he explains that if there were no more thieves, who break windows and padlocks to get in, the glaziers and padlock makers would be unemployed. So, theft is good for the collective wealth.

Mandeville’s reasoning is, however, a sophism, which was rightly denounced by Frédéric Bastiat. The glass broken by the thief, if it does indeed give work to the glazier, is a destruction of assets in the first place; the net result of the operation is therefore a loss for society. Otherwise, it would suffice to raze a city regularly to the ground to produce economic wealth.

The Wikipedia entry on Adam Smith indicates that he was influenced by Mandeville, but fails to mention that he severely criticized the cynicism of the Fable.

Private interest, collective interest

Smith seems to agree with Mandeville, however, when, in a famous passage, he writes: “It is not from the benevolence of the butcher, the brewer, or the baker, that we are to expect our dinner, but from the care of their own interest.” But the agreement is only apparent. By stating that the thief contributes to the public good, Mandeville sees the pursuit of self-interest as a vice, and vaunt the benefits of that vice. His position is both strictly utilitarian – what matters is the collective outcome – and immoral – the end justifies the means. For Smith, on the contrary, the search for one’s own interest is a virtue in its own right (the virtue of prudence). How, then, can it be reconciled with the common good? According to Smith, one’s own interest cannot be pursued while ignoring others. The butcher has to sell us something; we both must be satisfied with the exchange; he expects us to return to his shop soon, and speak well of him to our friends. For that, he needs to understand how we feel, and he needs to build a relationship with us. Building this relationship requires what Smith calls “mutual sympathy” in the old sense of “that which is in relation to, in affinity with”. It is the construction of this relationship that is at the heart of market (and bourgeois) action, and which is also found in the third principle of effectuation, the logic of entrepreneurs, which invites us to co-construct creative action.

The 7 virtues of trade

For Smith, however, the butcher’s reasoning cannot be reduced to a simple utilitarian calculation without an ethical dimension. The butcher does not try to satisfy us only because he expects us to come back tomorrow. This goes far beyond a pursuit of interest understood in the sense of a zero-sum game, of a calculating egoism ignoring tomorrow, or of a logic of predation. Some merchants will undoubtedly reason in this way, but they will probably be less successful in their business.

The butcher’s relationship with us is built under the aegis of several virtues, each with a different dosage according to the protagonists: prudence of course (calculation, self-interest, making sure we come back tomorrow), but also temperance (not pushing too hard on prices, not taking excessive advantage, not ripping us off), justice (mutually beneficial relationship), hope (gain, return of the customer the next day, flattering reputation in the neighborhood), but also love (of one’s work, pleasure of interaction in the shop, pleasure of meeting neighbors and exchanging news), courage (getting up every morning and working hard), and faith, understood as something related to the transcendent, i.e. not reducible to a calculation of one’s interest (vocation, pride in one’s work, professional identity, respect of peers, social recognition).

It is Smith’s main contribution that he emphasized the importance of this ethical dimension in trade. But more generally, he emphasized that we are social creatures, and that our moral ideas and actions are a product of our very nature. The fundamental virtues he identifies are necessary for the survival of society.

Bentham and Samuelson, victory of the calculating machine

Unfortunately, this aspect of his work was eclipsed (for historical and political reasons) and all that remained visible is the pursuit of self-interest (misunderstood as the maximization of one’s own utility), a calculating and amoral vision promoted to the point of absurdity by Jeremy Bentham and later by contemporary neo-classical economics, such as Paul Samuelson. These “modern” economists were the product of dogmatic rationalism. They transformed man into homo oeconomicus, a selfish and omniscient calculating machine, exclusively devoted to his own pleasure, and ignoring the world around him. It is astonishing that an entire discipline has been developed on such a vision, radically distinct from reality. In any case, this was not Smith’s vision. He saw markets as living institutions, rooted in the culture, practice, traditions and confidence of their time, not as dehumanized abstractions. Not only must justice be done to him, but we must undoubtedly rediscover him at a time when the obvious failure of the neo-classical school, with its catastrophic consequences, is no longer in doubt.

The market as a living institution

Between Robespierre’s idealism (to build a virtuous society, we must all become virtuous), Mandeville’s cynicism (a virtuous society results from the free course given to individual vices), and neo-classical scientism (no need for virtue, just calculate), Smith proposes a humanistic vision of economics, in which a virtuous society emerges from a balance that is difficult to find and that is always reinvented by each individual between the different virtues, in himself and in his relationships with others. Let’s bet that you will look at your butcher differently next time…▪️

🔍The source for this article is Deirdre McCloskey’s Bourgeois Virtues (Chicago Press).