Homo Dialecticus Part Three: Why Adam Smith thinks markets are conducive to virtue

The story in the two posts so far in which some foreshadowing of what’s to come is snuck in.

Smith’s great work in sociology and psychology The Theory of Moral Sentiments (TMS) shares a deep logical symmetry with his (now) more famous work The Wealth of Nations (WN). That symmetry can be explained in varying degrees of detail, but at it’s simplest, Smith’s bottom line in both works is this:

For humanity to prosper whether socially, psychologically or economically the power of self-love must be constrained by equally powerful forces.

In TMS the force that tames self-love is ‘sympathy’. Note however that in Smith’s hands sympathy is not ‘benevolence’. It is the need to see ourselves not just as a solitary psychological atom with feelings completely internal to ourselves but rather as a being within a social context. ‘Sympathy’ can act as a civilising counterweight to the power of self-love because, unlike benevolence which is typically weak, sympathy is an elemental and existential craving in our makeup. It is the ‘I’ that must feel part of a ‘we’ and indeed the ‘I’ that cannot exist except as part of a ‘we’.

It is only within society for instance amongst family, friends, acquaintances or strangers that the thirst for the sympathy of others (not to mention their thirst for our sympathy) can be assuaged. This in turn guides people’s psychological development and socialisation as they internalise what others might think of them. The more fully they develop the stronger becomes their conscience an ‘impartial spectator’ which passes judgement on them. Thus people and societies grow together. The filaments of culture that stretch out through a society grow from our cravings for each others’ sympathy just a cattle or sheep path grows from the accumulating effect of each animal’s footfalls.

The same communicative urges underlie the ubiquitous tendency for humans to truck, barter and exchange and it is this which dominates in the economic sphere. Again Smith is more interested in the way in which self interest is constrained in this case by others’ self interest than he is in there being any merit utilitarian or otherwise in self-interest in itself. And not surprisingly this is the foundation of Smith’s case for his system of ‘natural liberty’ and his argument that commerce leads to human betterment both materially and morally.

Why does Smith think that markets are conducive to moral improvement or virtue or rather that they each grow together?

Realise first that Smith is not a Pollyanna. He does not expect his ‘system of natural liberty’ to remake human nature. Instead, he understands human progress to happen slowly as indeed his policy views are shot throughout with gradualism. And his ultimate aspirations are modest and avowedly anti-utopian. Further, the coming of commerce and ‘opulence’ is not ‘all good’ as we say these days.

Nevertheless commerce requires and also rewards probity and good reputation and the sociability of commerce brings these about. Further commerce both benefits from as it rewards parsimony and frugality for, in Smith’s world investment which cannot go ahead without these virtues is the precondition of economic growth. Thus commerce and the ‘impartial spectator’ coalesce to nurture these virtues (which are some of the virtues of self-command) within commercial society.

Smith’s picture is not a ‘white wash’. In ‘softening’ social manners commerce does great good, but it can also undermine the marshall spirit which can render a society vulnerable and effete. Commerce builds the arts and human inventiveness but the deployment of these skills is often at the behest of the greed and vanity of the wealthy and powerful. And Smith’s portrait of the dehumanising conditions within a factory was later much admired by Marx and Engels. Smith hoped that public education would improve things.

Also, Smith gives the strong impression of being dismayed by the lot of the poor and is almost invariably highly sympathetic to them. His policy preferences are favourable to them most importantly the liberation of ‘apprentices’, opposing the ‘corporation spirit’ of monopoly amongst merchants, public education and taxation which is progressive (modestly by our standards).

But beyond these he is wary of disrupting England’s hybrid constitution which in contemporary opinion balanced democracy, monarchy and aristocracy and suspects that inequality and the awe of the poor for the rich and powerful, though corrupting to their sentiments, may be conducive to the public peace. More generally where he is dismayed by what he sees before him he frequently argues that it was worse in other societies. Thus, he argues, “¹he authority of riches, however, though great in every age of society, is, perhaps, greatest in the rudest ages of society, which admits of any considerable inequality of fortune.”

But ‘natural liberty’ in a commercial society makes its contribution to human happiness and civic virtue in a more powerful and ‘structural’ way. It diffuses economic power and in so doing creates the circumstances for greater ‘fair dealing’ between people. For, echoing the ideas presented in the previous part of this essay, their greater security sets the stage for each to deal with each other as is fit and proper.

As he puts it when discussing abuse of power, “I am afraid, the nature of human affairs can scarce admit of a remedy.” Yet, Smith goes on “but the mean rapacity, the monopolizing spirit, of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot, perhaps, be corrected, may very easily be prevented from disturbing the tranquillity of anybody but themselves.”

Thus the evolution of what we now call capitalism is conjoint with a process of diffusion of power. Smith describes the transition from earlier social and economic structures in Europe with his typical irony, power, insight and feeling when he describes how the Lords of Europe “sold their birthright, not like Esau for a mess of pottage”. How?

I reproduce the (edited) text below because it’s a terrific read, but in short, the great proprietors of Europe of days gone by spent their surplus wealth on payments and ‘hospitality’ to their inferiors who, because they were entirely beholden to them, were completely subservient to the proprietors.

Along comes manufactures and the proprietors have a new vent for their avarice and status seeking baubles. Their purchase of these baubles now supports many artisans (and does so to the ends of wherever trade routes reach). And for each of these artisans the great proprietor is but one of many customers. They are thus far more secure and less subservient. The Great proprietors get greedier and demand higher rents from their tenants who can only pay them if the Landlords surrender them sufficient tenure to invest and improve the land which is not something the landlords have been minded to do in the past.

And so:

A revolution of the greatest importance to the public happiness, was in this manner brought about by two different orders of people, who had not the least intention to serve the public. To gratify the most childish vanity was the sole motive of the great proprietors. The merchants and artificers, much less ridiculous, acted merely from a view to their own interest, and in pursuit of their own pedlar principle of turning a penny wherever a penny was to be got. Neither of them had either knowledge or foresight of that great revolution which the folly of the one, and the industry of the other, was gradually bringing about.

It was thus, that, through the greater part of Europe, the commerce and manufactures of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country.

The parties are not brought directly to stark other worldly virtues of benevolence but rather engaged in a process in which certain virtues were nurtured and inequalities of wealth and power are gradually undermined. Thus we get a story in which human freedom and autonomy grow together with sociability and economic productivity. The tenant becomes more productive by acquiring greater autonomy and using it with intelligence and virtue. Smith likewise argued that when slaves or other workers were given better pay and greater freedom to better themselves, they would be more productive and that both master and worker would benefit but that is a (slightly) different story.

Here follows the promised extract: But before that think of this. Adam’s grand theory suggests that children (representing self love before socialisation by the impartial spectator) are more selfish than adults (whose behaviour is conditioned by the impartial spectator).

And it suggests that, far from making people more selfish as is the common conception, markets make people more prepared to trust and co-operate with strangers, even if this requires some sacrifice from themselves. Beginning with a remarkable discovery in 1996 anthropologists’ research appears to corroborate Smith’s suggestions.

But it is late 12.50 pm to be precise, and further elaboration will have to wait till the next exciting episode.
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Adam Smith on the way in which commerce diffused economic power in Europe

²ommerce and manufactures gradually introduced order and good government, and with them the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects. . . .

If ³ surplus produce ⁴ is sufficient to maintain a hundred or a thousand men, he can make use of it in no other way than by maintaining a hundred or a thousand men. He is at all times, therefore, surrounded with a multitude of retainers and dependants, who, having no equivalent to give in return for their maintenance, but being fed entirely by his bounty, must obey him, for the same reason that soldiers must obey the prince who pays them.

Before the extension of commerce and manufactures in Europe, the hospitality of the rich and the great, from the sovereign down to the smallest baron, exceeded every thing which, in the present times, we can easily form a notion of. . . .

But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves. without sharing it either with tenants or retainers. All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles, perhaps, or for something as frivolous and useless, they exchanged the maintenance, or, what is the same thing, the price of the maintenance of 1000 men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas, in the more ancient method of expense, they must have shared with at least 1000 people. With the judges that were to determine the preference, this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest, and the most sordid of all vanities they gradually bartered their whole power and authority. . . .

When the great proprietors of land spend their rents in maintaining their tenants and retainers, each of them maintains entirely all his own tenants and all his own retainers. But when they spend them in maintaining tradesmen and artificers, they may, all of them taken together, perhaps maintain as great, or, on account of the waste which attends rustic hospitality, a greater number of people than before. Each of them, however, taken singly, contributes often but a very small share to the maintenance of any individual of this greater number. Each tradesman or artificer derives his subsistence from the employment, not of one, but of a hundred or a thousand different customers. Though in some measure obliged to them all, therefore, he is not absolutely dependent upon any one of them.

The personal expense of the great proprietors having in this manner gradually increased, it was impossible that the number of their retainers should not as gradually diminish, till they were at last dismissed altogether. The same cause gradually led them to dismiss the unnecessary part of their tenants. Farms were enlarged, and the occupiers of land, notwithstanding the complaints of depopulation, reduced to the number necessary for cultivating it, according to the imperfect state of cultivation and improvement in those times. By the removal of the unnecessary mouths, and by exacting from the farmer the full value of the farm, a greater surplus, or, what is the same thing, the price of a greater surplus, was obtained for the proprietor, which the merchants and manufacturers soon furnished him with a method of spending upon his own person, in the same manner as he had done the rest. The cause continuing to operate, he was desirous to raise his rents above what his lands, in the actual state of their improvement, could afford. His tenants could agree to this upon one condition only, that they should be secured in their possession for such a term of years as might give them time to recover, with profit, whatever they should lay not in the further improvement of the land. The expensive vanity of the landlord made him willing to accept of this condition; and hence the origin of long leases.

Even a tenant at will, who pays the full value of the land, is not altogether dependent upon the landlord. The pecuniary advantages which they receive from one another are mutual and equal, and such a tenant will expose neither his life nor his fortune in the service of the proprietor. But if he has a lease for along term of years, he is altogether independent; and his landlord must not expect from him even the most trifling service, beyond what is either expressly stipulated in the lease, or imposed upon him by the common and known law of the country.

The tenants having in this manner become independent, and the retainers being dismissed, the great proprietors were no longer capable of interrupting the regular execution of justice, or of disturbing the peace of the country. Having sold their birth-right, not like Esau, for a mess of pottage in time of hunger and necessity, but, in the wantonness of plenty, for trinkets and baubles, fitter to be the playthings of children than the serious pursuits of men, they became as insignificant as any substantial burgher or tradesmen in a city. A regular government was established in the country as well as in the city, nobody having sufficient power to disturb its operations in the one, any more than in the other. . .

A revolution of the greatest importance to the public happiness, was in this manner brought about by two different orders of people, who had not the least intention to serve the public. To gratify the most childish vanity was the sole motive of the great proprietors. The merchants and artificers, much less ridiculous, acted merely from a view to their own interest, and in pursuit of their own pedlar principle of turning a penny wherever a penny was to be got. Neither of them had either knowledge or foresight of that great revolution which the folly of the one, and the industry of the other, was gradually bringing about.

It was thus, that, through the greater part of Europe, the commerce and manufactures of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country.

This order, however, being contrary to the natural course of things ⁵, is necessarily both slow and uncertain.

Next Homo Dialecticus Post. 

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2. C[↩]
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4. of a great proprietor[↩]
5. ie not easy as it was proving in America[↩]