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Moral Foundations of Classical Economics

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Moral Foundations of Classical Economics

    The Role of Moral Reflection in the Economics of Adam Smith and

    Other Classical Economists

    By James Halteman

    Hendrickson Professor of Business/Economics

    Wheaton College, Wheaton, IL 60187

    Prepared for the Free Market Forum, “The Role of Markets and Governments in Pursuing the Common Good,” Panel Topic: The Moral Foundations of Classical Economics, at Hillsdale College, September 29, 2007

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    The Role of Moral Reflection in the Economics of Adam Smith and other Classical Economists

    It is hard to draw boundaries around a topic of this magnitude and the modern mind is not inclined to see and analyze the lengthy process along which values and beliefs evolve. It is clear that the economies of ancient and medieval times integrated values and beliefs into practice in ways that are foreign to a modern scientific understanding.

    The mindset of the ancient and medieval world did not envision life in this world as becoming less onerous over time. What could be hoped for was favorable weather, peace with one’s neighbors and a harvest sufficient to survive without misery from one year to the next. For the Greeks, the good life here depended on an ordered society with open discussion and the cultivation of virtue as understood by the philosophers. For the Christians, this life was a staging ground for the next life which promised everything good that could be imagined. In such a steady state world where human passions often led to strife and misery, equality and the practice of virtue became the social glue and therefore the moral teaching. The search for a better life was viewed as socially destructive. Jerry Muller observes that “There was no room – or little room- for

    commerce and the pursuit of gain in the portrait of the good society conveyed by the traditions of classical Greece and of Christianity, traditions that continued to influence 1intellectual life through the eighteenth century and beyond.”

    However, from the twelfth century onward the Greek and Christian traditions had an increasingly difficult time maintaining the social glue in the face of some new inventions and practices that led to output above the customary levels. Primitive market activity spread to larger transport of goods and exchanges that raised new questions of distribution norms and the dangers of wealth creation. Dogmatism and religious wars could not effectively settle the search for a common social vision though both were extensively tried. The church, now a political, social, and religious power struggled to interpret older teachings in light of the new pressures. Thomas Aquinas’ teaching attempted to integrate the ideas of the ancient philosophers with the teachings of the church and the increased commercial activity and in the process prohibitions against property ownership, usury and trade began to be softened, but no new social vision emerged from the church over the centuries.

    When the authority of the Catholic Church was undermined by the Reformation and the individual believer gained in stature relative to the institutional church, another fault line appeared in the social order. One unintended consequence of the Reformation was a shift in how the individual was viewed with respect to the collective group. The notion that the primary building block of a social order is the individual rather than the group was not the intention of the early reformers, but the groundwork was laid for such a possibility.

    Finally, into the void created by the deteriorating social glue of the late middle ages, came the nation state. Security issues always lead to a stronger state and because security

     1 Jerry Muller, The Mind and the Market (New York: Alfred A. Knopf, 2002), 4.

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    and economic concerns are always intertwined a strong nation state eventually led to a more centralized economic system that was called mercantilism. Lacking a coherent economic theory, Mercantilism was a loose collection of policies that were designed to strengthen the nation by accumulating bullion which could be used for security enhancing ventures. An economy highly managed and extensively taxed became the legacy of a philosophy that lasted for nearly 300 years. The colonial expansion efforts during this time helped to disguise the flaws in the economics of the system, but the longevity of Mercantilism can be explained in part by the lack of an alternative vision of social organization that people could trust as new social glue.

    An alternative vision can not appear overnight. It requires a coherent explanation of how the world works and how people fit into the picture. There must be a standard of verification so claims can be deemed credible and there must be a source from which moral judgments can be made so there can be meaning to what is good and evil and trustworthy. In the ancient world there was a God or gods who ordered things and God gave people directives through the prophets, the church or the philosophers. The virtuous life stemmed from obedience to God and the telos of human existence was centered in a God. When that worldview faded there was no immediate replacement. What follows is the story of how classical liberalism filled in the void and how that worldview dealt with the moral component of the new social glue.

    The seventeenth century was a critical time in the development of an alternative vision for social organization. Political and religious wars occurred in much of the Western world. Significant developments took place in medicine, mathematics, astronomy, philosophy, physics and the arts. “All in all it was an era that greatly distanced itself from

    the Middle Ages and the Renaissance by its institutional changes, its challenges to authority, its preparation for the Enlightenment, and its cultivation of markets. Old ideas 2broke down at an accelerated pace and new ideas quickly filled the void.” In this

    environment the increased market activity soon led toward a theory of markets that became Classical economics. Significant shifts in thinking about social relationships in retrospect may appear rapid, but centuries are usually required for ideas to percolate and institutions to evolve and so the ideas of classical economics progressed for many years against the mercantilist practices before they became the accepted economic thinking of the Enlightenment era. The concern here is to explore the moral base upon which this new thinking was built.

    It is important at this juncture to define the categories that are relevant in the exploration of moral content. As various classical writers are examined three elements of moral behavior will be evaluated. The first issue concerns the nature of the person and the human passions that drive behavior. Second, the mechanism that provides a check on unsocial passions will be explored. Finally, the source of moral resources is important. Do moral precepts originate from a purpose (telos) outside of the individual or are moral principles derived from within the individual. All three of these join to give a picture of

     2 Robert B. Ekeland Jr. and Robert E. Hebert, A History of Economic Theory and Method (Long Grove, IL: Waveland Press Inc., 2007), 68.

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    the moral content of any given worldview, but people will differ on what they believe is required to provide sufficient moral direction for social survival.

    For example, Alasdair MacIntyre sees the Enlightenment project as stripping telos from moral discernment. In After Virtue, MacIntyre argues that the scientific quest has 3minimized the subjective side of life that deals with meaning and values. When the

    search for what kind of people we ought to be is lost as we try to structure a system that deals with the kind of people we are, then moral reflection becomes meaningless. If there is no purpose outside of ourselves, no telos toward which we can point, then there is no objective standard for moral precepts and ethical norms. MacIntyre claims the enlightenment has left us with an emotive approach to moral reflection with the economic caricature of homoeconomicus as the accepted social building block. In MacIntyre’s view,

    those disciplines that take their cues from the enlightenment on these issues are in need of significant reform. In other words, modern economics from Adam Smith's time foreword is doomed unless it rediscovers some meaningful moral framework that retains teleological moorings.

    If MacIntyre is right about the importance of telos in moral life, then our task is to see if the classical economists consider telos important in their theorizing. However, it is possible that Macintyre sets too high a standard for moral discernment and that classical economists have a moral foundation without an external reference point that is sufficient to provide social cohesion. It is clear that organized religion is not the place to look for the moral moorings of the seventeenth and eighteenth century thinkers. The perpetual wars fostered by states aligned with a particular religious group and the intolerance and persecution endured by dissenters convinced those exposed to enlightenment ideas of science and reason that religion was a detriment to progress. Telos, if it is to be found at all, will focus on a Creator who has built into creation certain principles that, if followed, will provide a better life for everyone.

What follows is an argument that Adam Smith in both his Theory of Moral Sentiments

    and The Wealth of Nations (1759) is operating from a moral framework that meets the

    standard MacIntyre sets for a successful social vision. The first component of the argument is that Smith’s view of human nature sees the selfish passions of grief, joy, self preservation and pleasure/pain choices as more common than the social passions of generosity and compassion. Therefore, people are bent toward behavior that is not socially constructive. The second point in the argument is that the creator has endowed humanity with some screens or filters which will check unsocial behavior if given the proper social setting. Finally, the telos of human existence is the cultivation of virtue. This will fulfill the wishes of the creator and lead to social harmony. This moral foundation is a prerequisite for the enlightenment vision that a free society can prosper and endure. Smith was careful to avoid ecclesiastical language and he was hesitant to speak of a life beyond this one because of his view that theology had become corrupted and had lost its relevance to the present world.

    But when moral, as well as natural philosophy, came to be taught only as

    subservient to theology, the duties of human life were treated of as chiefly

     3 Alasdair MacIntyre, After Virtue (Notre Dame: University of Notre Dame Press, 1984) p.---

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    subservient to the happiness of a life to come. In the antient philosophy the

    perfection of virtue was represented as necessarily productive to the person

    who possessed it, of the most perfect happiness in this life. In the modern

    philosophy it was frequently represented as generally, or rather as almost

    always inconsistent with any degree of happiness in this life; and heaven was

    to be earned only by penance and mortification, by the austerities and

    abasement of a monk; not by the liberal, generous, and spirited conduct of a 4man.

    Clearly for Smith, any theology, philosophy, or moral system that was not relevant to this world or that had become corrupted by power or political entanglements was to be avoided.

    Before proceeding it will be helpful to do a brief summary of the building blocks of Smith’s moral philosophy. First, human passions are divided into three categories and then the passions are filtered through the screens of sympathy and the impartial spectator. When filtered effectively the result leads to the development of the virtues which brings happiness and tranquility to people in this life and harmony to the social order. The chart 5below illustrates this process of the moral life

    Human Passions and Adam Smith's View of Virtue

    From the social The second All of the Social Passions

    screen is the passions come the passions are Generosity

    virtues of benevolence impartial subject to Compassion

    spectator in and self-control. The filters or Esteem

    which one highest virtues screens that

    Unsocial Passions enters into condition be- possible.

    Hate their own havior. The

    Envy situation first screen is The unsocial passions Revenge from behind sympathy, are unacceptable and a veil of which allows are kept hidden if one Selfish passions ignorance in a person to seeks social approval. Grief order to identify with Joy make another or to Pain/pleasure choice impartial develop a Selfish passions, when Self preservation moral fellow feeling filtered, lead to the Desire for Approval toward them. judgments. virtues of prudence

     and justice. These lead

     to the “rules of the The All Seeing Judge of the Universe game.”

    In this chart the dominant passions of humanity are in the lower left box. They are the ones that form the glue for a social order because the passions in the top box are too rare

     4 Smith, WN p.771 V.i.f, 30 5 For a more complete discussion of the chart of Smith’s moral theory refer to James Halteman, “The Market System, The Poor, And Economic Theory” in Toward a Just and Caring Society edited by David P.

    Gushee, Baker Books, 1999. pp. 77-80. Also see James Halteman, “Is Adam Smith’s Moral Philosophy an

    Adequate Foundation for the Market Economy” in Markets and Morality, Vol 6, Number 2, Fall 2003.

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    and the passions in the middle box are rejected as unacceptable and so they can not be a positive force in society. The significant part of this process is that it is a natural process given to humanity by the creator. Sympathy puts us into another’s shoes and helps us feel what they feel so we can make judgments about their behavior and conversely about what we would do in their place. The impartial spectator helps us step away from our biases and review our own behavior and the behavior of others thereby gaining a perspective that is removed from self interest. However, there are times when these interpersonal and social screens fail to promote the right behavior. In those cases the all seeing judge of the universe compels us to override the social screens that usually lead to appropriate moral behavior. When viewed together these three checks given to us by the creator keep the passions from going awry and provide the necessary social glue for a successful society. What is good and just and right can be achieved, but the reference point for this system is the creator. There is a telos or purpose of human activity that exists outside of human preference. .

    After repeatedly working on versions of this moral theory and struggling to see how it might be related to the economic, political, legal and religious spheres of life, Smith published the political economy component of the entire social package 17 years later. The legal or jurisprudence component of the entire system is known only from lecture notes of Smith’s students and he never did finish his views on natural religion. What

    manuscript drafts were burned at his request after his death is unknown. When one has absorbed Smith’s moral theory recognizing the moral restraint that exists

    upon the passions of humanity, the treatise on political economy takes on a different tone than if the moral theory is missing. Self interest is now coupled with the desire for social approval and the approval of the IS as well as the all seeing judge of the universe. In Smith’s words: . “If he would act so as that the impartial spectator may enter into the

    principles of his conduct, which is what of all things he has the greatest desire to do, he must, upon this, as upon all other occasions, humble the arrogance of his self-love, and 6bring it down to something which other men can go along with.” (TMS p. 83)

    This qualification of self interest raises may questions about how personal interests help to form a social glue that is effective over time. It is interesting at this point to observe that Smith relates one’s interest to moral behavior which he then calls a person’s “real interest”. “Wherever dealings are frequent, a man does not expect to gain so much by any one contract as by probity and punctuality in the whole and a prudent dealer, who is sensible of his real interest, would rather choose to lose what he has a right to than give 7any ground for suspicion.” In other words, a merchant will not insist on even his own

    rights if by doing so some credibility will be lost. Self interest is clearly closely tied to judgments about how one’s actions are viewed by others and the real interest of the

    merchant is closely tied to the cultivation of commendable qualities like probity and punctuality. In Smith’s work self interest is heavily conditioned by social feedback loops, a long run perspective, and meaningful moral screens. Prudence is the virtue that best fits Smith’s concept of social glue and it is a richer concept than a narrow autonomous self

     6 Smith, TMS p. 83 7 Adam Smith, Lectures on Jurisprudence, Edited by R.I. Meek, D.D. Raphael, and P.G. Stein. (Indianapolis, IN: Liberty Fund Press, 1982), p. 539.

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    interest that does not contain social costs and benefits as well as moral conditioning. Thus the morally conditioned prudent person is not just playing by the rules of the game and maximizing one’s narrow interests. Rather it is doing what is right as we would imagine what is in the “real interest” of economic players. Self interest divorced from this morally

    conditioned prudence is not a Smithian concept.

    Smith’s description of the complementarities of the selfish and social passions illustrates the manner in which these two sets of passions combine to form a morally conditioned social order.

    The man of the most perfect virtue, the man whom we naturally love and

    revere the most, is he who joins, to the most perfect command of his own

    original and selfish feelings, the most exquisite sensibility both to the original

    and sympathetic feelings of others. The man who, to all the soft, the amiable,

    and the gentle virtues, joins all the great, the awful and the respectable, must

    surely be the natural and proper object of our highest love and admiration. The

    person best fitted by nature for acquiring the former of those two sets of 8virtues, is likewise best fitted for acquiring the latter.

    Nevertheless, there is always the pull away from the moral behavior and human nature constantly needs self control to pull back from behavior that is not in our real interest. “The propriety of our moral sentiments is never so apt to be corrupted, as when the indulgent and partial spectator is at hand, while the indifferent and impartial one is at a 9great distance.” The distance of the impartial spectator occurs when we rely on the unconditioned selfish passions. Only when we imagine the wishes of the impartial spectator can we escape the pull of narrow self interest. D. D. Raphael summarizes Smith’s moral theory as follows. “But if the agent is liable to be swayed by self-interest,

    how can he reach an impartial judgment? He can do so because the imagination can free 10itself from the ties of practical desires.”

From this description of morally conditioned self interest presented in the TMS we now thmove to the economic thinking of the period beginning in the mid 18 century until

    approximately 1870. This Classical period, as it is called, begins with Smith and includes significant works by David Ricardo, Thomas Malthus, J. B. Say, John Stuart Mill, Jeremy Bentham and others who built on the principles of Smith and Ricardo. D. P. OBrien lists four propositions that are foundational to classical economic thinking. These propositions are the basis from which economic theorizing could proceed.

    The four basic propositions are as follows: that there is an underlying

    order in material phenomena; that this underlying order is discoverable

    either by reasoning from observed phenomena or from innate moral sense;

    that discovery of the underlying order leads to the formulation of natural

     8 Smith, TMS, 152. 9 Ibid, 154. 10 D.D. Raphael, The Impartial Spectator: Adam Smith’s Moral Philosophy, (London: Oxford University Press, 2007) 128.

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    laws which, if followed, lead to the best possible situation; and that 11positive legislation should reflect these natural laws.

The remainder of the paper will deal with three key questions. 1. If one reads Smith’s

    Wealth of Nations with his moral theory clearly in mind will markets appear to have a moral foundation? 2. What impact did Ricardo, John Stuart Mill, Thomas Malthus and other Classical writers after Smith have on moral reflection in economic thinking? 3. What does Deirdre McCloskey’s claim about markets and virtue add to the discussion of

    morality in Classical economics?

Did markets as envisioned by Adam Smith have a moral foundation?

    The WN is a monumental work combining casual observations, theory, principles of creation and suggestions for economic practice. It wanders across all of Smith’s

    experience and most of history in search of a coherent system that can improve the lot of human existence by the creation of wealth beyond the meager subsistence level thought to be the norm in the past. Underlying the entire structure are three primary principles upon which economic life is built. The first is the natural tendency of humans to truck and barter. This tendency comes from a desire for self improvement and it leads to a second closely related principle which is the division of labor or specialization in production. The third principle required for the system to work is the freedom of actors in the system to make choices based on their interests.

    Throughout the WN the appeal is to natural tendencies and these tendencies are operative completely apart from the practice of self interest as it is often understood in modern times. “This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive 12utility” In this passage it is not a plan to get rich or lessons in diligence that lead to the increase in production. Rather it is the evolutionary process of people following their natural inclination. It is not the end that drives the means, but the means which simply happen to result in the increase in production. In fact the notion of self interest is lower on Smith’s motivation list than is commonly thought.

    If we should enquire into the principle in the human mind on which this

    disposition of trucking is founded, it is clearly the naturall (sic) inclination

    everyone has to persuade. The offering of a shilling, which to us appear to

    have so plain and simple a meaning, is in reality offering an argument to

    persuade one to do so and so as it is for his interest. Men always endeavour to

    persuade others to be of their opinion even when the matter is of no 13consequence to them.

     11 D. P. O’Brien, The Classical Economists Revisited (Princeton, NJ. Princeton University Press, 2004), p.

    27. 12 Smith, WN, 25. 13 Smith, LJ, 352.

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    The last line of this passage from LJ is illuminating in that it is not rational self interest which drives the system but the natural tendencies put in humans by their creator. When WN is read from the perspective of the natural inclinations of people and with the interdependent moral theory described earlier it is not hard to imagine the market activity Smith describes as being fully approved by the moral screens of sympathy and the impartial spectator. The all seeing eye of the universe will approve as well because that deity designed humans with the moral and economic tendencies that can make the system work. Freely exercising those tendencies constrained only by moral and natural boundaries was the vision Smith was trying to convey. However, Smith was keenly aware of the deviousness of human nature and the high level of interdependence that was needed for human existence. He spoke often of the problems of materialism, the abuse of economic power and the need for collective action. However, when he spoke of self love he frequently put it in the framework of an interdependent social interaction where one appeals to the self love of the other, not as a game to outwit the other, but as information to clarify the mutual benefits of trade.

    In almost every other race of animals each individual, when it is grown up to

    maturity, is entirely independent, and in its natural state has occasion for the

    assistance of no other living creature. But man has almost constant occasion

    for the help of his brethren, and it is in vain for him to expect it from their

    benevolence only. He will be more likely to prevail if he can interest their

    self-love in his favour, and show them that it is for their own advantage to do 14for him what he requires of them.

    This mix of interdependence and self-love leads to mutually beneficial market exchanges and this same mix of interdependence and selfish passions are at work in the moral 15process of virtue development. The popular notion of independent narrowly defined self

    interest as a driver of the market system is not a Smithian concept. Free markets were not value free for Smith. There was a moral foundation underlying the market system. Athol Fitzgibbons makes this point appropriately.

    Smith conceived that a new and superior society could be formed if its culture

    and laws were based on moral impartiality and the virtues to which it led.

    Rather than an authoritarian society based on military heroism and fatalistic

    virtue, and rather than a commercial society based on self-love without any

    values at all, Smith wanted society to derive its culture and laws from the 16impartiality that was cultivated by the pursuit of virtue in active life.

    There are other themes that could be drawn from WN to show some of the moral implications of Smith’s work. His labor theory of value, though an inadequate view of exchange value, illustrates an approach that saw intrinsic value in things created by human effort. The Smithian system was long run in nature

    emphasizing the permanence of creation and his frequent references to the creation and the creator and the order of the system give glimpses of his attraction

     14 Smith, WN, 26. 15 James R. Otteson develops this theme that there are parallels between Smith’s moral theory and his

    economic theory in that interdependence and community are part of the context of both theories. Read chapter 3 in the Marketplace of Life (Cambridge: Cambridge University Press, 2002), pp. 101-133. 16 Athol Fitsgibbons, Adam Smith’s System of Liberty, Wealth, and Virtue: The Moral and Political

    Foundations of the Wealth of Nations. (New York: Oxford University Press, 1995), 94.

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    to the Stoics and their view of the order of creation and our need to be subject to it. Smith, like the Stoics, realized that the order of things pointed to a presence outside of human existence and therefore there was a purpose or telos toward which our moral life should point. It is possible to see in Smith’s work traces of

    Aristotle’s metaphysical biology with its focus on what is natural. Also the natural law tradition of Thomas Aquinas and other scholastics pointed toward principles in creation which could direct humans toward a fulfilling and purposeful life. There is much more than mechanism in Smith’s markets. Moral reflection 17originated, not in cognitive reasoning, but in the senses and the imagination.

    What we can not know is how Smith would respond to the global market environment today. The markets of Smith’s world were far more personal and socially interactive that most modern transactions tend to be. Trucking and bartering involved considerable thpersonal interaction in 18 century Scotland compared with the impersonal advertising and internet exchanges of today. In a world of perfect competition where many buyers and sellers are price takers and where an equilibrium price is determined outside of individual transactions it is not as easy to see how we might address our interest by appealing to the self love of another. Consequently we are inclined to separate moral judgments from the market. However, when the abstract competitive market model is qualified by other market forms, and interaction in the economy is seen to occur in the actions of real people we are inclined to resort to a Smithian concept of appropriate behavior. Moral screens and social norms come into play and market actors are held accountable. In this sense the Hayekian appeal to market processes rather than equilibriums opens the door to a renewed discussion of values and moral reflection in economic life, but that topic goes beyond the scope of this paper.

    What impact did David Ricardo, J. S. Mill, Thomas Malthus and other Classical writers after Smith have on moral reflection in economic thinking?

    After Smith, David Ricardo (1772-1823), Thomas Malthus, (1766-1834), John Stuart Mill (1806-1873), Jeremy Bentham (1748-1832) and others, took up the search for a more fruitful natural economic system. For them the political economy agenda focused on a deductive methodology and the rational discovery of the underlying principles of society so that human law would fit more closely to those principles. Thus increasingly influenced by the methods of natural science in general and classical physics in particular, economics eventually adopted a methodology with value free scientific tools and a primary goal of prediction. But the secularization of political economy took the best part of 100 years and it is instructive to examine some of the steps taken by the classical economists along the way.

     17 This view is counter to Charles L. Griswold’s claim that Smith’s moral system was not telos based and that both the moral and economic systems Smith articulated were more aesthetic in nature designed to assuage human longing for unity and beauty rather than a picture of how the moral or economic life is formed in everyday life. This argument can be found in “Imagination, Morals, Science, and Arts” by Charles Griswold, The Cambridge Companion to Adam Smith edited by Knud Haakonssen. (Cambridge,

    Cambridge University Press, 2006). In a previous work, Griswold does leave open the question of telos in Smith’s work. Adam Smith and the Virtues of Enlightement (Cambridge: Cambridge University Press, 1999), p. 314.

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