In 1776, Adam Smith published the book, An Inquiry into the Nature and Causes of the Wealth of Nations. The Wealth of Nations established a reputation for Smith that lasts to this day. Smith has become known not just as the father of economics, but as the defender of free trade and an advocate for limited government in economic affairs.
In The Wealth of Nations, Smith takes human beings as self-interested and explores the implications for commercial life when self-interested people “truck, barter, and exchange,” Smith’s phrase for trading locally and globally—our search for a good deal. Unfortunately, some have misinterpreted Smith as saying that greed is good and that selfishness (and not just self-interest) underlies our economic system.
Smith would be horrified to hear himself portrayed as a defender of greed. Smith’s first book, published in 1759 was The Theory of Moral Sentiments. In that book, Smith explored how it is that self-interested individuals who naturally want to put themselves first, can put the feelings and desires of others before their own and act altruistically. He argues that we care deeply about what other people think of us: “Man naturally desires, not only to be loved but to be lovely.” By “lovely” Smith meant respected, honored, admired, and praised. Smith’s perspective on human motivation creates a world of insights into how we treat others and what leads to true serenity and happiness. He deals at some length with various virtues. Greed is not on the list.
In my new book, How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness, I explore the implications of Smith’s neglected masterpiece for modern life. Smith has timeless insights into celebrity, technology, family, and how to deal with the turbulence of life—it’s successes and tragedies—when interacting with those around us. At the end of my book, I look at what Smith has to say about how to make the world a better place. And in the last chapter, I look at the connection between Smith’s two great books.
One, The Wealth of Nations, takes us as self-interested and deals with grand themes such as trade policy, monetary policy, and the sources of prosperity. The other is about how we treat our friends, relatives, and colleagues and takes a more expansive view of what we care about beyond ourselves. At some level, these two books seem at best unrelated to one another, at worst, contradictory. In this excerpt from the last chapter of my book, I try to reconcile Smith’s views of humanity in his two masterpieces.
Before Einstein discovered relativity, before Rodin sculpted The Burghers of Calais, before the Eiffel Tower and the Chrysler Building, before Brutus of Troy founded London, before the first human being realized you could plant a seed and wait for it to grow, before the ambition deep within us caused all these changes in the human condition, we were, it appears, hunters and gatherers in small bands and clans. Subsistence was the most one could hope for, and it was not easy to achieve. Life was fragile; death came early and often.
In such a world, how we interacted with those around us made the difference between life and death. There was no insurance company to insure your spear. There was no government to provide disability payments if you broke your leg chasing dinner. People must have leaned heavily on each other. Trust was essential. Failure to chip in, to help out, to do your share must have been punished relentlessly and cheaply, through shame and anger the first time, but eventually with expulsion and exile if such behavior continued. Every family, every extended family, and maybe every band and clan shared what they had with each other out of necessity.
Primitive life had very small social circles. You saw the same people every day over and over again. Such repeated interactions made it easy to punish those who acted cruelly or selfishly and reward those who helped out the rest of the clan. But it wasn’t some paradise out of ]ean-Jacques Rousseau. Scarcity was the nature of physical existence. There often-maybe almost always-wasn't enough to go around. Trading with others, either within the family or with nearby bands or clans, must have begun at some point as a way to increase what was available. That would have expanded the circle of interaction a little wider. But not by much.
Ultimately, you had to trust those nearest you and fear those farther away. It had to be that way. The difference between life and death was small. There was little margin for error. You hoarded what you had among those closest to you and made sure that those you did not know could not take it away. Your relationships with those around you were every thing. There was hardly anything else that mattered.
Modern life is very different. As Adam Smith pointed out in The Wealth of Nations, specialization is both the cause and the effect of prosperity, and it creates the modern economic life that allows us to move beyond subsistence. Small groups of people—no matter how talented, no matter how skilled or strong or smart—cannot be wealthy by modern standards over any sustained period of time.
Imagine that you are going to be marooned on a very large, uninhabited island. The good news is that the island is rich in minerals and natural resources. It has flocks and herds of domesticated animals. Its soil is fertile, its climate temperate and pleasant. There are rivers and streams teeming with fish and natural beauty.
More good news: you don’t have to go alone. You get to take ninety-nine people with you, and you can choose who they are—people who are good at fishing, and at building and surviving. People who understand electricity and metallurgy and many of the skills our modern lifestyle depends on. They will bring their knowledge and insight and wisdom. They can bring their books and notebooks detailing any aspect of modern manufacturing and agriculture.
How long would it take for one hundred incredibly smart, skilled, talented, resourceful people to create prosperity? A decade? A century? A millennium? My imaginary island may prosper eventually, but only if the population grows and markets emerge to organize the skills and knowledge of the people to allow them to work productively. Why is the size of the population so important? Working on my own, I might be able to craft twenty pencils a year. But with cooperation and refinement of the production process, twenty people working for a year can produce thousands and, with the right technology, hundreds of thousands of pencils. That’s possible because each person can specialize in a small part of the production process.
That specialization unleashes incredible productivity. Individuals can work on a part of the process they’re good at; when they specialize, they can get better and better, and technology can be applied to each part of the process, leveraging the physical and mental ability of any one person.
So rather than make my own pencil, I work at something else and use the money I earn to buy pencils. By relying on others for almost everything we enjoy—our food, our clothes, our house, and so on—we can enjoy an amount of stuff that dwarfs what our ancestors could enjoy just a century ago.
That increase comes from the productivity and innovation unleashed by specialization and trade across billions of people around the world. Without that specialization and innovation—if we had to depend on, say, just our family and friends, regardless of their talents—we would be close to subsistence, the economic reality for most of human history. The poorest people in the world today still struggle, no matter their talents, because they are connected economically only to those who are nearby.
What we call civilization—the comforts of heat, electricity, transportation, medical care, communication, and every thing else-requires us to interact with millions of people on a daily basis whom we can never meet or know. Our modern form of economic activity is very different from that of our ancestors. It requires a very different set of social norms and legal institutions that allows us to transact with each other.
As the author Leonard Read pointed out, even an extremely simple product, the pencil, requires the uncoordinated cooperation of millions. The power of cooperation that emerges without a coordinator or manager, through the human propensity to truck, barter, exchange—is often called “the market,” but the textbook version of this idea is sterile and mechanistic. Smith understood it as a rich organic process.
In The Theory of Moral Sentiments, Smith argues that we care more about the people around us than we do about others who are farther away. That’s why you can sleep well when millions die in an earthquake on the other side of the world. An earthquake across town is a different matter. One that takes the life of a favorite relative is a different matter still. The Theory of Moral Sentiments is overwhelmingly a book about the people closest to us, the ones we can actively sympathize with—our family, our friends, and our immediate neighbors. The Theory of Moral Sentiments is a book about our personal space—how others view us and how we interact with them. It’s not a book about strangers. It’s a book about the people we see frequently, some every day, and how our interactions with those around us shape our inner life and our behavior.
In The Wealth of Nations, Smith is writing about how we behave in a world of impersonal exchange, which is inevitably a world of strangers. In Smith’s day, you knew your butcher, but you did not know the farmer who raised the cow. You did not know the wagon driver who took the cow to the slaughterhouse. You did not know the steel forger who made the knife that slaughtered the cow. Most of the people responsible for the piece of roast or mutton that arrived on your plate in 1759 were unknown to you and un knowable. Today I know even fewer of the people who create the products I enjoy; the power of specialization has been unleashed to a degree that might surprise even Smith.
In a world of impersonal exchange, in a civilized world of global trading, in a modern economy, exchange is often impersonal except at the very end of the exchange, and in today’s world, when I order something over the Internet or buy it at Costco, the checker might be the only person I interact with, and even that face-to-face contact is being eliminated by technology. Other than at a farmers market or a crafts fair, I may see none of the people who are involved in creating what I purchase.
If I cannot see the people I truck, barter, and exchange with, it’s hard to care about them. I may care a little; I may pay a premium for a cup of coffee hoping that the people who grew the beans are making a little more money than they otherwise would. But, in general, my interactions are almost, by their very nature, self-interested. It would be unlikely for someone to overpay for a car out of concern for the carmaker or even the salesperson she haggles with face-to face at a local dealership.
Some view this lack of interpersonal interaction as a great loss. Perhaps it is. But it is the unavoidable price of modernity and wealth. Trading only with people we care about or are able to see and interact with would leave us with a very limited number of people to trade with. And that would mean we would be very poor. The “buy local” movement has been successful with a very limited number of products—food and some handcrafted items. The ability to broaden the scope of the movement is very limited. We tried buying local once; it was called the Middle Ages.
Of course, people were poorer then than now for many reasons. But one reason people were poor in the Middle Ages was that when you mostly trade with people who live nearby, you are bound to be very poor. There just isn’t enough specialization possible with a limited set of trading partners. Self-sufficiency is the road to poverty.
Writing in The Wealth of Nations, Smith was interested in how people behave when they trade at a distance. He wasn't just writing about trade with foreigners, though a good chunk of the book is about what we call international trade. He was writing about all kinds of trade with strangers, both within our borders and outside them. When thinking and writing about that world, it is best to assume that people are primarily self-interested. And so The Wealth of Nations is a book that deals with our self-interested side.
But our interactions with others go far beyond the commercial and the material. We have various circles of friends and family associated with our work, our hobbies, and all the ways we join with others to create community and recreation, pleasure and meaning in our lives. It is those interactions that Smith studies in The Theory of Moral Sentiments. It would be absurd to assume that in all our various interactions-as siblings, parents, cousins, co-workers, congregants, bike club members, gym attendees, and every other role in which we interact face-to-face-we are only self-interested.
Smith didn't see us as saints. He saw us clearly. Yes, even in those roles where we interact face-to-face with people we care about in varying degrees, we often think about our selves more than we do of others. We may fool ourselves about the loveliness of our behavior. But we do care about those around us independently of ourselves, sometimes a great deal, and we certainly care, as Smith explains with great precision, about what they think of us.
The Theory of Moral Sentiments simply has a different focus from that of The Wealth of Nations. It doesn’t represent a different view of human nature or a different theory of how people behave or a more optimistic vision of humanity. It's about a different sphere of human interaction. The author of The Theory of Moral Sentiments and The Wealth of Nations is the same man with a consistent view of humanity. He is mostly interested in how people actually behave, not how he’d like them to behave. He’s interested in understanding human behavior. So in the two books the emphases are different because he is writing about two very different spheres of life.
Excerpted from How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness by Russ Roberts, in agreement with Portfolio, an imprint of Penguin Random House. Copyright © Russell Roberts, 2014.