Adam Smith, Self-Interest, and How Not to Sell Capitalism

Happy belated 290th Birthday Adam Smith!

It’s hard to imagine any one person exerting more of an influence on modern day discourse on  political economy than Smith.  He is the go-to guy.  For basketball?  Jordan.  Physics?  Newton.  Economics?  Smith.

There is one significant difference though between Smith and the others.  For Jordan, we all know the bounds of his greatness.  He wasn’t a great baseball player.  For Newton, his equations did not apply to objects traveling near the speed of light.  Not a big deal.  Those observations in no way diminish their greatness.  Smith, on the other hand, has the very grave misfortune of not having been bounded.  We haven’t identified and corrected some of his minor oversights and have amplified some of his weaker arguments until they’ve grown into society wide antagonisms — major unnecessary rifts between the political right and left.

Allow me to explain.

Smith was phenomenal at perceiving how capitalism results in prosperity; introducing comparative advantage, division of labor, pricing mechanisms, etc.  The Wealth of Nations was so remarkable in this respect, that we often want accept everything it says as economic gospel.  Unfortunately, he was not the best at describing how capitalism came to be or what exactly capitalism was.  A couple of examples:


“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society… He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention”  ~ Adam Smith, The Wealth of Nations

These two quotes have been directly incorporated into most conventional definitions of capitalism:

Capitalism is an economic system based on the private ownership of the means of production, with the goal of making a profit. ~ Wikipedia

We could very well replace “the goal of making a profit” with Smith’s pursuit of self-interest, and not materially change the meaning.  Therefore, capitalism is a system based on self-interest or a profit motive.  Got it.  The major problem here is that self-interest is not in any way a distinguishing feature of capitalism.  Every system known to man is based on self-interest: imperialism, mercantilism, fascism, communism, tribalism, you name it.  And by “communism”, I’m not referring to the one written on paper, but the system as practiced in the real world by Lenin, Stalin and Zedong.  If any system stood a day, it was riding on the shoulders of self-interest.  Even the vile slave labor camps of the Nazis used self-interest to motivate prisoners and enforce compliance.

The distinguishing feature of capitalism, then, is that the butcher and baker have to please you in exchange for your value because they have no other choice.  In Smith’s scenario, if the butcher and baker desire your value, what’s to stop them from taking it?  That’s what one African tribe does to another?  What the armed samurai did to the unarmed peasants?  What Turkish Prime Minister Recep Tayyip Erdoğan does to dissidents that post on Twitter?  It’s so much easier to just take stuff away, so why are the butcher and baker busting their tails?  Hint: It’s not because of self-interest.

It would be far more accurate to describe capitalism as a system that — unlike most all others — strongly protects you from the greed and illicit self-interest of others.  It is a system of voluntary exchange simply because all the forms of involuntary exchange have been outlawed.  The moment the butcher can coerce you out of your value, is the moment you can no longer rely on him to work  for your good.  So to conclude, a discussion of self-interest is necessary and critical to describing “how capitalism results in prosperity”, but it is deceptive when applied to the question of “what capitalism is.”

What does it matter?  A great deal.  We have an entire generation of liberal leaning folk that look at capitalism and see a system based on greed.  “How”, they rightfully ask, “can a system founded on greed and profit motive ultimately result in more overall well being?”  They don’t believe it can.  They are right.  No such system has ever worked.  By not modifying Smith we have inadvertently fostered anti-capitalism.

The Public Good

Setting up a system where everyone’s value is strongly and equally protected is extremely difficult and rare.  It requires tremendous sacrifices and self-denial.  Did Lincoln follow his self-interest when he set about to end slavery?  The man was absolutely miserable as a consequence of the Civil War and died an early death on account of his convictions.  Such a system requires many contributors that are more devoted to the public good than themselves.  Which is what makes a statement like this from Smith problematic:

“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

In context, Smith is largely correct.  He’s saying we’ll all be better off if we buy the best products (for ourselves) regardless of their country of origin.  That is true.  But these comments, and the misplaced emphasis on self-interest, have led subsequent writers like Ayn Rand to decry morally motivated behavior, and exalt self-interested motives.  Poor Adam Smith.

We can not create or maintain a society where everyone is strongly and equally protected solely by encouraging self interest.  We all need Washingtons, Lincolns, Rosa Parkses and Martin Luther King Juniors, to put their moral convictions above their personal well being.  We need a culture that encourages and fosters the principles they stood for — principles which protect us still today.