Homo Dialecticus: Installment two – Adam Smith and the dialectic of markets

The story so far. . .

Smith’s 1759 The Theory of Moral Sentiments (TMS) builds a picture of people as inherently dialectical beings. As Montes (2004: 55) puts it “The TMS presupposes sympathy as a principle in human nature that fosters a continuous relationship between spectators and agents, a natural interdependence among social beings.”

The dialectic goes on between that part of the personality that represents raw and immature ‘self-love’ (like Freud’s ego) and another aspect of humanity’s social or psychological makeup. Internally within the psyche that aspect is the ‘impartial spectator’, the conscience, the ‘man within the breast’. But this construct is dialectical in itself. It is itself constructed from as it constructs social reality. It is the psycho-social bridge between raw self-love and society the way natural sympathies between people both weak and strong build themselves into social mores and internal expectations of self.

Smith’s grand plan was to publish a trilogy of large works. The TMS complete, his next work was on police (ie policy) The Wealth of Nations (WN). There was to be a final one on jurisprudence but it was never published.

Notes from Smith’s lectures from 1763 make it clear that as was the case with Darwin, who took many of Smith’s ideas into biology, much of what appeared in the great book was in the authors mind for many years before it was finally published.

And as is often the way with such things, certain building blocks of Smith’s thought were more evident in the earlier work, though traces remain to confirm the continuity of thought in WN. There is a chasm in economics between those who focus on the process that occurs within markets and those for whom the market is a ‘black box’ which produces a specified economic outcome given certain inputs. As his later disciple Friedrich Hayek insisted, Smith valued markets as a unique and beneficial process. While most focus has been on Smith’s analysis of the outcomes of this process, careful attention to Smith’s description of the process illustrates important aspects of the way in which Smith conceived of markets as social processes which were apart from their benign economic outcomes socially beneficial.

TMS preached the virtue of people’s relations with each other being appropriate to the circumstances of their interaction to being ‘fit and proper’ to the nature of the relationship. As Smith puts it so beautifully, in civilised society man “stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.” Markets allow all manner of co-operation to take place between strangers to their immense benefit.

Though Smith is speaking about economic outcomes in the passage just quoted the process by which that outcome is achieved is also significant from the perspective of moral and social betterment. For a start the market relation of strangers to one another is fit and proper, allowing a society to “subsist among different men, as among different merchants, from a sense of its utility, without any mutual love and affection”. Again the process between society and economy is dialectical or mutually reinforcing. Civilisation requires that strangers co-operate and the culture that it develops also facilitates it.

And, though Smith is commonly taken to be the apostle of self-interest, something like the opposite is the case. Smith’s focus is on the dialectic of self-interest in a market and thus on the way in which, in a market, self-interest is constantly conditioned and mediated by the self-interest of others.

Smith builds his theory of the market on a simple dialectic between buyer and seller. (Keep in mind that in the eighteenth century ‘the market’ is represented by the village market as well as anything else. It is an institution which is much more social and on a more personal scale than it has become in our own day where brand names and large private collective entities (firms) and their bureaucracies mediate a great deal of the market’s work.)

In WN human society evolves from the innate tendency of humans to ‘truck, barter and exchange’. But intriguingly, Smith traces this tendency back to something more fundamental people’s natural sociability and indeed their desire to persuade and communicate. “If we should enquire into the principle in the human mind on which this disposition to trucking is founded, it is clearly the natural inclination every one has to persuade.”

Here’s Smith’s resulting ‘oratorical’ theory of negotiation:

The offering of a shilling, which to us appears to have so plain and simple a meaning, is in reality offering an argument to persuade someone to do so and so as it is for his interest….And in this manner every one is practicing oratory on others thro the whole of his life.”

In this context the market is not just an economic mechanism producing an efficient outcome. It transforms self-interest the seller’s self-love being conditioned by the buyer’s self-love and visa versa.

Many continually standing in need of the assistance of others, must fall upon some means to procure their help. This he does not merely by coaxing and courting; he does not expect it unless he can turn it to your advantage or make it appear to be so. Mere self-love is not sufficient for it, till he applies it in some way to your self-love. A bargain does this in the easiest manner. When you apply to a brewer or butcher for beer of for beef you do not explain to him how much you stand in need of these, but how much it would be in 1 interest to allow you to have them for a certain price.

And so it is that, driven by regard to their own interests, participants in a market will passionately attend to each others’ interest. Whole divisions of large companies attend to the task of researching what their customers want and how it can be better delivered to them. Customer service becomes a buzz-word, though of course businesses are more interested in what customers really want as demonstrated by their choices in the market place. And the little discount mortgage broker I run strains at the bit to see how it can do that little bit more to serve customers, and build associations with like minded businesses.

The overwhelming extent to which markets dominate our lives makes it hard for us to see it, but that invisible hand (a term which Smith used rarely and usually ironically) is not so invisible. For it is ultimately born of that very direct connection between buyer and seller by which each addresses themselves quite directly to the other’s self-interest though of course they will sometimes, probably mostly, do so from mercenary motives.

Smith is at some pains to insist on how this is both essentially human, and essentially civilised. It is not the indignity “merely coaxing and courting”. It is not the dog begging his master or indeed for that matter the beggar. (Still in a typical touch Smith observes that, once the beggar has been given something, he’s off to market where he’ll attend to his needs in a way which is at once more direct and more dignified.

With the money which one man gives him he purchases food. The old clothes which another bestows upon him he exchanges for other clothes which suit him better, or for lodging, or for food, or for money, with which he can buy either food, clothes, or lodging, as he has occasion.

When I think of Smith’s picture of markets I think of E.M. Forster’s great injunction about life “only connect!”. The participants in a market are connecting. They’re connecting with one another in a way which is not as close but, to use Smith’s expression, is every bit as “fit and proper” to its circumstance as the passionate love of a mother for her child. Here is Smith on how the impartial spectator moderates our self-love in a social context.

Nature . . has not . . . abandoned us entirely to the delusions of selflove. Our continual observations upon the conduct of others, insensibly lead us to form to ourselves certain general rules concerning what is fit and proper either to be done or to be avoided.

If that’s Smith’s psychology and sociology, his economics is founded on the same idea of a dialectic which tames, guides and ultimately transforms rude self-love. Within our minds and in social situations our self-love is conditioned by the impartial spectator. Within a market the self-love of its participants is conditioned by immediate (and not so immediate) engagement with the self-love of others.

Engagement between people who are free but who otherwise owe each other nothing is thus the social and moral foundation of markets. And this explains Smith’s hostility to Monopoly the ‘corporation spirit’ and the general tendency of merchants to conspire against the public interest. For just as those who fail to psychologically mature sufficiently to properly develop their ‘impartial spectator’ in opposition to their raw self-love, so the striving for monopoly is not just an economic conspiracy against the public. Socially it is inappropriate not fitting and proper. Psychologically or morally it is an act of rebellion and pride against the great conditioner of self-love the self-love of the other in a free bargain.

We can use Smith’s language and his ideas to make a more contemporary point about regulation. We can use our oratory on a government official or on the Parliament. We don’t need to be enemies of government or even in favour of small government to appreciate that there is no organic balancing and weighing of relative interests within hierarchical decision making bodies. There is an imbalance of power. In a market, even if their bargaining power is not entirely equal, two parties to a deal must both seek each other’s satisfaction to some extent. With monopoly and within government one side is reduced to the indignity of supplication, to the coaxing and cajoling of the beggar and the animal to its master.

Here endeth this post, but you might be getting a picture of how the masses of people connecting in a market might not just lead to economic efficiency but also in our fallen world to some small improvement in the condition of humanity. But that will be revealed in the next exciting episode. . .

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Red Peter
Red Peter
2024 years ago

I wonder what Smith would make of the disconnection between “firms” and their clients, especially where the need for their product is a given (utilities, for example). Or where “brand” and “marketing” are fairly dislocated from the product. Has the currency shifted somewhat?

Reminds me of the research that suggest buisness execs have a tendency towards the psychopathic…