On Adam Smith

Reuniting Adam Smith’s Moral Philosophy and Political Economy

“The great source of both the misery and disorders of human life seems to arise from overrating the difference between one permanent situation and another. - Adam Smith, The Theory of Moral Sentiments

I am once again asking people to read both The Wealth of Nations and The Theory of Moral Sentiments. Smith’s invisible hand makes no sense without his moral one. Adam Smith wrote two books that belong together.

The Theory of Moral Sentiments (1759) explains how human beings develop conscience, sympathy, and standards of right conduct. The Wealth of Nations (1776) explains how societies, given certain laws and norms, generate prosperity. One book describes the moral ecology of a free people; the other describes the institutional architecture of a free economy. Read in tandem, they outline a workable civilization.

Read apart, especially when the moral half is ignored, the economic half is misread as a permission slip for predation. The modern tendency to quote Smith’s “invisible hand” while forgetting his “impartial spectator” has distorted both policy and culture. We can repair this by restoring Smith’s unity: markets anchored in virtue.

Smith in Context

Adam Smith was born in 1723 in Kirkcaldy, a small Scottish port town. His father died before his birth; his mother, a devout Presbyterian, raised him with high expectations and steady discipline. He studied at the University of Glasgow under Francis Hutcheson, the great moral philosopher who taught that virtue is rooted in an internal moral sense and that liberty flourishes where law, property, and civic manners are secure. Smith then went to Balliol College, Oxford. He respected Oxford’s libraries and disliked its pedagogy; the experience confirmed his belief that institutions decay when shielded from competition and accountability.

By the 1750s Smith was lecturing in Edinburgh, then appointed Professor of Logic and later of Moral Philosophy at Glasgow. There he taught natural jurisprudence, ethics, and political economy as one continuous subject. Justice and character first, commerce and policy second. He formed a deep friendship with David Hume; he admired Hume’s rigor and independence while rejecting crude materialism.

Smith’s own religious posture was circumspect: raised in a Calvinist culture, skeptical of clerical power, respectful of conscience. His defense of religious liberty and competitive churches reflected both his economics and his ethics: monopoly corrupts, including spiritual monopoly; pluralism disciplines.

In 1764 Smith left Glasgow to tutor the young Duke of Buccleuch, traveling in France and meeting the Physiocrats, Quesnay, Turgot, who argued that economic order emerges from regular laws rather than mercantilist engineering. Smith absorbed their insights and corrected their errors. He returned to Kirkcaldy to write The Wealth of Nations, published in 1776, the year of the American Declaration. He spent his last years as a Commissioner of Customs in Edinburgh, an irony only on the surface.

Smith believed in low, broad, predictable taxation and impartial administration; he despised smuggling not because he loved tariffs but because he loved the rule of law. He died in 1790, having ordered many manuscripts burned, an austere coda from a man who prized clarity over reputation.

The Theory of Moral Sentiments

Smith begins not with trade, but with the human heart. We are social creatures who crave approbation, guided by an internalized “impartial spectator” that judges our conduct as if from the outside. Sympathy, the capacity to enter imaginatively into another’s situation is the seed of moral life. From this soil grow the cardinal social virtues:

Prudence, which governs self-command and long-term orientation. Justice, which forbids injury and secures rights, non-negotiable and enforceable. Beneficence, which cannot be compelled but completes the social bond; and self-command, the discipline that keeps passion in harness.

Justice is the strictest: society “cannot subsist” without it. Beneficence adorns life but cannot be mandated. This ranking matters. Smith’s ethics are not sentimental. He defends free speech because truth needs friction; he defends due process because justice needs boundaries. He distrusts grand projects that treat people as clay. The impartial spectator restrains our self-love; reputation disciplines our choices; custom and law stabilize expectations. The outcome is not utopia but decency: a framework within which freedom does not self-destruct.

The Wealth of Nations

The later book opens with a stark claim: the wealth of a country lies not in bullion but in its capacity to produce, its division of labor, capital formation, and institutional reliability. Smith’s analytic moves are still the skeleton of economics:

Division of labor multiplies productivity by specialization and learning-by-doing. Exchange coordinates dispersed knowledge through prices. Capital accumulation saved and reinvested extends the division of labor over time. Secure property, impartial courts, and open competition are preconditions for the rest.

Commerce, in this view, is a discovery process. The “invisible hand” is not a mystic force; it is a shorthand for how lawful self-interest, operating under rules that punish fraud and protect consent, channels private plans into public coordination. Smith is scathing about two enemies of this order: mercantilism, which confuses national power with monopoly privilege, and rent-seeking, by which merchants capture the state to throttle rivals. He warns repeatedly that “people of the same trade” are eager to collude, and that legislators are easily seduced by concentrated interests. Free markets require tough-minded governance: competition policy, simple taxes, no favoritism.

There is no contradiction between the books. Moral Sentiments defines the character and norms that make law workable and exchange tolerable; Wealth of Nations describes the legal-institutional machinery that turns enterprise into prosperity. One guards the soul; the other guards the system.

Why They Must Be Read Together

Motives vs. rules. Moral Sentiments teaches that our motives are mixed and corrigible through habit and social feedback; Wealth assumes precisely such human material and asks what rules convert ordinary self-interest into extraordinary social gains. Without the former, the latter is misread as moral indifference. Without the latter, the former risks political paternalism.

Justice’s priority. Smith assigns justice a lexical priority: it is the hard constraint under which markets operate. Property, contract, and reputation are moral institutions before they are economic instruments. A society that grows rich by corroding trust will not remain rich.

Humility about knowledge. Smith’s ethic of the impartial spectator cultivates self-doubt; his economics of spontaneous order institutionalizes humility: let prices and entry-exit test our theories. Together, they rebut both technocratic hubris and moral cynicism.

The American reception of Smith has been selective for reasons both intellectual and political.

Cold War simplification. In contest with central planning, the elegant logic of markets was the right weapon. Nuance was a casualty. Smith’s moral psychology looked optional when the historical task was to prove that planning fails. Economics’ formal turn. Twentieth-century economics pursued mathematical clarity. Gains were real; losses were human. Smith’s qualitative account of sympathy and conscience did not fit easily into models, so it fell out of the core curriculum.

Shareholder primacy and management theory. From the 1970s onward, corporate law and finance emphasized agency alignment via stock price. Useful corrective, but flattened into a creed: maximize price today, outsource morality to law tomorrow. Smith would have approved of aligning incentives and still insisted that prudence and justice bind managers beyond what statutes specify. Cultural allergy to moral language. In pluralist societies, talk of virtue can sound sectarian. Smith’s vocabulary. Prudence, beneficence, self-command, was wrongly pigeonholed as “Victorian.” In reality it is a civic grammar compatible with modern liberty.

The neglect has consequences: thin corporate cultures managed by metrics alone; regulatory cat and mouse where rule evasion is a core competency; externalities socialized while gains are privatized; consumers treated as targets rather than neighbors; political capture that Smith explicitly warned against. We have wealth, but less confidence that we deserve it.

To recover Smith’s unity, begin where he began: character, then rules, then growth. The order matters.

Re-center the three Smithian virtues: Prudence as long-term orientation. Tie compensation and promotion to multi-year value creation, not quarterly theater. Require executives and directors to hold meaningful stock through the cycle. Celebrate patient capital as a civic service, not a quaint hobby.

Justice as non-negotiable floor. Make fraud prosecution certain and swift. Criminalize willful opacity in critical disclosures. Treat regulatory arbitrage that defeats the statute’s purpose as a breach of justice, not cleverness. Beneficence as voluntary social glue. Encourage corporate philanthropy that aligns with genuine competence (what the firm actually knows how to do). Reward customer-first cultures that resolve disputes generously without being gamed.

Deregulation where rules merely protect incumbents; stricter enforcement where concentrated interests game the commons. Sunset exemptions. Simplify taxes to reduce loopholes that invite rent-seeking. Expand open data, sunlight disciplines both firms and regulators. Protect small-firm formation with default-simple compliance in the early years. Police anticompetitive mergers with Smith’s suspicion of “people of the same trade.” Invest in the civic infrastructure of growth: courts that resolve disputes quickly, registries that prove ownership clearly, bankruptcy that is merciful but not lax.

Smith would not have called pollution “somebody else’s problem.” Price what we can; regulate where we must; avoid industrial policy that re-creates mercantile favoritism. Keep the rule simple, the revenue neutral where feasible, and the playing field open. Undergraduates should meet Smith as a moral philosopher who built an economics from a theory of the person. Business schools should require a serious course on Moral Sentiments with casework: whistleblowing, pricing power, platform governance, political spending. The goal is not sanctimony but professional formation: how to be trustworthy at scale. Boards should view risk appetite as a moral choice, not just a VaR percentile. Firms should publish “sources of temptation” reports, where their models encourage corner-cutting and show the controls. Internal “impartial spectator” committees, with rotation from outside functions, can pressure test high-profit projects for justice risks.

GDP remains critical; it is not sufficient. Track measures of trust, timeliness of courts, start-up survival rates, concentration indices, audit quality, customer complaint resolution speed. Smith watched behavior, not press releases. Civil servants who administer impartial law are market allies, not enemies. Pay them adequately, promote on competence, rotate to reduce capture, publish performance dashboards. Corruption is the most regressive tax.

An entrepreneur prices fairly not because a regulator hovers but because reputation is compounding capital; he treats suppliers as partners under stress, not as costs to be crushed; he refuses revenues that depend on confusing the customer. A board resists buybacks that jeopardize resilience; it approves them when the balance sheet is strong and opportunities are scarce, prudence, not fashion. An investor votes proxies for transparent pay and against staggered boards that entrench mediocrity. A policymaker simplifies rules while sharpening consequences for deceit. A citizen rewards firms that resolve errors quickly and penalizes those that hide behind call trees.

None of this requires angelic people. It requires decent people in sound institutions, trained by habit and watched by spectators, some within, some without. That is Smith’s anthropology: ordinary self-interest coached by conscience, channeled by competition, fenced by justice.

In Sum

Americans often read The Wealth of Nations as if it were a treatise on greed’s efficiency. It is not. It is a treatise on how, under good laws and sturdy norms, fallible people can coordinate for mutual advantage. The Theory of Moral Sentimentsexplains why those laws and norms stick: because we are built to care what a just observer would think of us, and because communities teach standards that outlive transactions.

Smith intended the books to balance one another. Our era has suffered from reading only one. If we want capitalism to deserve its moral license, we must recover the pair: a market order that rewards enterprise, a moral culture that restrains vice, and a legal regime that protects the weak from the strong. The invisible hand rests on a moral wrist. Reattach it.