The Theory of Moral Sentiments and the Morality of Markets

In Five myths about capitalism, Steven Pearlstein describes the primary myth as a misunderstanding about motivations of those choosing freely in the marketplace (broadly understood, these choices are about not only capital, but also labor or goods):

Myth No. 1: Greed, a natural human instinct, makes markets work.

Adam Smith, the father of economics, first pointed out in his most famous work, “The Wealth of Nations,” that in vigorously pursuing our own selfish interests in a market system, we are led “as if by an invisible hand” to promote the prosperity of others. Years later, Smith’s theme that capitalism runs on selfishness would find its most famous articulation in a speech by a fictional corporate raider, Gordon Gekko, in the movie “Wall Street”: “Greed . . . is good, greed is right, greed works.” (Defenders of free markets have been desperate to disown the “greedy” label ever since.)

Smith, however, was never the prophet of greed that free-market cheerleaders have made him out to be. In other passages from “The Wealth of Nations,” and in his earlier work, “The Theory of Moral Sentiments,” Smith makes clear that for capitalism to succeed, selfishness must be tempered by an equally powerful inclination toward cooperation, empathy and trust — traits that are hard-wired into our nature and reinforced by our moral instincts. These insights have now been confirmed by brain researchers, behavioral economists, evolutionary biologists and social psychologists. An economy organized around the cynical presumption that everyone is greedy is likely to be no more successful than one organized around the utopian assumption that everyone will act out of altruism.

Smith understood that free exchanges in the marketplace require a natural cooperative impulse.  He’s been proved right that the overwhelming number of people are oriented toward voluntary social cooperation, and it’s for this reason that a society organized around free exchange (rather than state or private coercion) works so productively.

It’s encouraging to see Pearlstein lead with this point. Smith’s Theory of Moral Sentiments (online and available at Amazon) reminds one that, despite imperfections in any human arrangement, from natural and worthy inclinations men and women cooperate voluntarily in the marketplace.

Consider, after all, how Smith begins this great work (Part First, Section I, Chapter I, Of Sympathy).  He begins not with an exaggerated notion of human greed, but with a realistic understanding of  human concern for others:

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.

Upon some occasions sympathy may seem to arise merely from the view of a certain emotion in another person. The passions, upon some occasions, may seem to be transfused from one man to another, instantaneously, and antecedent to any knowledge of what excited them in the person principally concerned. Grief and joy, for example, strongly expressed in the look and gestures of any person, at once affect the spectator with some degree of a like painful or agreeable emotion. A smiling face is, to everybody that sees it, a cheerful object; as a sorrowful countenance, on the other hand, is a melancholy one.

Markets work so well because they rest, truly, on virtues.  A well-ordered society (although not all societies are such), free from government or factional manipulation, allows worthy traits to express themselves to the benefit of all.

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