Straight No Chaser
Another invisible hand starts to show
January 24, 2006
By Jabulani Sikhakhane
Adam Smith's other invisible hand is slowly showing up. Smith is known as the father of economics because of the fascination with his book, The Wealth of Nations, in which he laid the basis of the functioning of markets.
Smith's theory, explained in the book he published in 1776, was that economic behaviour was driven by self-interest, which acted as an "invisible hand" guiding the actions of individuals to combine for the common good.
Smith became the darling of free-marketeers, who continue to view him as the father of unfettered capitalism. But his views were much more complex than some present ideologues would have us believe
"The attack may apply to some - but not to Adam Smith" |
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Seventeen years before he published The Wealth of Nations, he proposed a theory of human behaviour that is anything but based only on self-interest.
Todd Buchholz, the author of New Ideas from Dead Economists, argued in his book that the gist of Smith's Theory of Moral Sentiments (published in 1759) was that people made decisions on the basis of sympathy, not selfishness.
"Many critics vilify modern economists for assuming only selfish motives, for caring only about costs and benefits, and for ignoring man's more noble side. The economist is, they declare, a moral dwarf. The attack may apply to some - but not to Adam Smith," wrote Buchholz.
Princeton economist Alan Krueger has also quoted Smith arguing that: "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.
It is but equity, besides, that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably fed, clothed and lodged."
The Theory of Moral Sentiments described the psychological factors that Smith believed underlay human decision making, motivation, and interaction. These factors "have strong implications for what drives consumption and savings decisions, worker productivity and effort, and market exchange", according to Nava Ashraf, an assistant professor at the Harvard Business School.
Ashraf, Colin Camerer and George Loewenstein wrote a paper last year, Adam Smith, Behavioural Economist, in which they argued that the Theory of Moral Sentiments presaged what is today known as behavioural economics - that branch of economics that seeks to explain the economic decisions people make.
Camerer is professor of business economics at the California Institute of Technology and Loewenstein is professor of economics and psychology at Carnegie-Mellon University.
Ashraf said in an interview with Working Knowledge, Harvard Business School's electronic newsletter, that Smith believed that human behaviour was under the influence of the "passions" such as fear and anger, and drives such as hunger and sex.
These passions were, however, moderated by an internal "voice of reason", which Smith called an "impartial spectator".
"In the area of self-control and self-governance, the impartial spectator takes the form of a long-term interest (that is, I won't have that cookie today because I can see that I will regret it down the road). In the area of social interaction, the impartial spectator allows us to see things from another's perspective rather than to be blinded by our own needs," said Ashraf.
In the Theory of Moral Sentiments, Smith dealt with matters that economic theory was now beginning to address.
"Only recently has the field of economics advanced enough to have the tools to reincorporate the factors that Smith and others have always felt were important in human interaction: our caring about each other and about our fairness, our difficulties with aligning our long-term interests and short-terms pulls, etc," said Ashraf.
Smith also argued that there was a weak connection between income or wealth and happiness, something that economists have recently began to study more closely.
He believed that the anticipation of a status gained was much better than its realisation. The wealthy eventually recognised, albeit long after they could remedy the situation, how little utility the goods they struggled so hard to procure had provided, he thought.
While Smith believed that the consumption of goods, wealth and greatness provided only "frivolous utility", he also believed that the misguided belief that wealth brought happiness kept the wheels of a market economy turning.
"It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invest and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe," wrote Smith.
There you have it. Smith was, true to his profession, an economist with two hands.
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