Adam Smith was an economist with some interesting ideas about morality and ethics. Explore his theories, and test your understanding about moral economic systems with a brief quiz.
‘The Invisible Hand’ – how’s that for a great superhero name? Here comes the Invisible Hand! Well, before we meet this great new hero, we need to meet his mild-mannered alter ego.
This is Adam Smith, 18th-century Scottish economist and philosopher. Smith is most often remembered for his book entitled The Wealth of Nations, which outlined several aspects of modern economic theory and included a philosophical lesson on humanity. Adam Smith is responsible for many of our modern philosophical economic theories including, yes, the invisible hand. So that’s Adam Smith, economist and philosopher by day, and by night- also an economist and philosopher. But one with some pretty important ideas. How’s that for a superhero?
Philosophy ; Economics
In our modern world, we often separate business and ethics. It’s just business, we say, as if economic decisions have no moral implications.
Well, that wasn’t the case with Adam Smith. Smith studied economic systems and very often tied them back to morality, which was a very 18th century thing to do. You see, England and Scotland in the 18th century were in the middle of the Enlightenment, an intellectual movement of individual reason and logic that generated things like the scientific method, the social contract, and ideas about freedom and liberty so powerful they led to the American and French Revolutions. In this world, scientists and philosophers often searched for universal truths, and Smith was no exception.
So how did Smith manage to tie all of these Enlightenment ideas into philosophy and economics? Simply put, he sought to promote economic systems that fit within the natural laws, or universal moral truths determined by nature. Some things are right, some things are wrong, and Smith believed that in order for economic systems to be moral, they should complement natural laws. He also believed that moral economic systems were naturally stronger, and therefore, produced more revenue. So which system was most moral and fit best with the universal laws of nature? The free market, in which there is as little government intervention as possible. Consumers and vendors direct the economy, and the government stays out. Smith had a term for this: laissez-faire, which pretty much just means hands off. So a laissez-faire system is free from government intervention, and Smith believed that this market of competition and individual choice best reflected the universal natural laws.
So therefore, it was the most moral economic system.
The Invisible Hand
So that was Adam Smith’s philosophy on economic systems, but he didn’t stop there. Smith was also interested in personal ethics, mostly because at the end of the day, an economic system is composed of individual people. Plus, like I said, the Enlightenment was really focused on the power of the individual.
So Smith looked to the individual person as the basis for morality. According to him, humans are generally motivated by their own self-interest. Since self-interest fosters a competitive free market economy, self-interest is therefore moral. So any action that is motivated by self-interest is a moral action.
This sounds somewhat shallow, but actually there’s more to it. You see, self-interest does not mean being selfish. Adam Smith noted that being interested in other people is most often in your own best interest since it increases your social value, which in turn can increase your economic opportunities.And with that, we finally get to the invisible hand. According to Smith, when the people in a society all act on their own self-interests, the total outcome is positive.
People may do something out of self-interest, but at the end of the day, that action will benefit all of society, so he described them as being guided by an invisible hand. So the invisible hand is a metaphor to describe the unintentional social benefits that come from individual actions.Here’s an example. Say that a person decides it is in his best interest to buy a sandwich. He buys the sandwich, and his money goes to the deli. Now that deli has increased its profits and can, in turn, buy more products from its meat, cheese and pickle suppliers. Now those businesses are increasing, and you have a healthy economy.
Soon, the deli realizes that if it wants the economy to stay healthy, the consumer needs to stay healthy and keep buying sandwiches. So the deli decides it’s in its own best interest to give some of its profits to charities that promote healthy living. People see this and choose to support that deli over its competitors. So now other delis have to donate money to charities to stay competitive. See how that works? You bought a sandwich, the deli owner tried to maintain its clientele, everybody was acting in their own self-interest, but the entire society benefited as a result. That’s the invisible hand at work.
Adam Smith was an 18th-century economist and philosopher who believed in promoting moral economic systems, as explained in his book The Wealth of Nations.
To him, a moral economic system was one that aligned with universal, natural, moral laws, and the best fit was the free market because it encouraged individualism and competition. To Smith, this meant the need for laissez-faire economics, in which the government does not regulate the economy but instead stays hands off. Adam Smith also believed that human actions should be motivated by self-interest and supported this with the idea of the invisible hand, a metaphor that demonstrates how individual self-interested actions unintentionally benefit society. According to this theory, when people act in self-interest, they are naturally and unconsciously doing what will be best for their society in the long run. So maybe it can’t jump over tall buildings or fly, but it always guides the economy towards good.
It’s not a bird or a plane; it’s the invisible hand.
Vocabulary & Definitions
Adam Smith: Adam Smith was an economist and philosopher from the 18th century.The Wealth of Nations: The Wealth of Nations was a book written by Adam Smith about economic theory.Enlightenment: The Enlightenment was a movement in the 18th century that focused on finding universal truths by using the scientific method.Natural laws: Natural laws are are universal moral truths determined by nature.Free market: A free market is one by which there is little government intervention.Laissez-faire: Laissez-faire from an economic standpoint means hands off, whereby there is no government intervention in economics.Invisible hand: Invisible hand is the term used by Adam Smith to describe how a free market benefits from people acting in their own self-interests.
You might set out to accomplish the following after reviewing the lesson on human morality and ethics:
- Provide background information on Adam Smith
- Discuss the ways in which Smith united Enlightenment ideas with economics and philosophy
- Characterize the invisible hand and cite an example