Adam Smiths Other Book

09/12/14 6:52 PM

s+b Blogs Posted: November 6, 2014

Theodore Kinni

Theodore Kinni is senior editor for books

at strategy+business. He also blogs at
Reading, Writing re: Management.

Business Literature

Adam Smiths Other Book

Adam Smiths use of the metaphor an invisible hand to suggest that the individual pursuit of self-interest could also benefit
society as a whole has been embraced as a rationale for unfettered capitalism. But the theory has come under fire in recent years.
For one thing, its hard to find the societal silver lining in cases like the abuse of subprime mortgagebacked derivatives, which
led to the Great Recession.
Before we ride the father of modern economics out of town on a rail, however, we
should acknowledge that our current interpretation of his metaphor is an exaggerated
one. Smith briefly mentioned an invisible hand only three times in his published
works and only once in his 1776 economics classic An Inquiry into the Nature and
Causes of the Wealth of Nationsand never did he imbue it with the economic heft it
has taken on in the past century or so. Weve also separated the invisible hand from
another essential Smithian metaphor: the impartial spectator.
If, like me, you havent heard of the impartial spectator, you might find Russ Robertss
How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature
and Happiness (Portfolio, 2014) enlightening. In it, Roberts, an economist at Stanford
Universitys Hoover Institution, explores Adam Smiths other big book, The Theory of
Moral Sentiments, which Smith published in 1759 (17 years before The Wealth of
Nations) and then substantially revised in 1790, the year he died.
The Theory of Moral Sentiments isnt about economics. It is, Roberts says, a road map to happiness, goodness, and selfknowledge. He explains that while Smith acknowledges that we humans are essentially self-interested, he also says theres more
to us than that. Consider the first sentence in Smiths book:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of
others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

While we humans are essentially self-interested, theres

more to us than that.
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Adam Smiths Other Book

09/12/14 6:52 PM

Further, Roberts explains, Smith argued that there are internal governors of our natural self-interest that stop us from doing
harm to others: Smiths answer is that our behavior is driven by an imaginary interaction with what he calls the impartial
spectatora figure we imagine whom we converse with in some virtual sense, an impartial, objective figure who sees the morality
of our actions clearly. It is this figure we answer to when we consider what is moral or right.
Roberts goes on to tell us that Smith saw the impartial spectator as neither god nor government. In the fashion of the
Enlightenment, Smith believed the impartial spectator to be an internalized representative of our collective humanityreason,
principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. Smith continues:
It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of
our own, for the yet greater interests of others, and the deformity of doing the slightest injury to another, in order to the obtain
the greatest benefit to ourselves.
Good stuff, but perhaps its a bit too easy to dismiss as classical claptrap. Maybe thats why so many of us know about Smiths
invisible hand and so few of us know about his impartial spectator. But I know about both now, and I wonder if the former can
operate properly without the latter. In other words, is it possible that the benefits of the invisible hand can be realized only in
conjunction with the guiding hand of the impartial spectator?
Perhaps the abuse of mortgage-backed collateralized debt obligations (CDOs), as just one of many examples of market failures,
was a direct result of the mechanism of the invisible hand operating without regard for the impartial spectator. If mortgage
officers had been listening to their impartial spectators, would they have encouraged home buyers to sign for loans they clearly
could not service? Would market makers have flogged CDOs that they knew were fatally flawed? Thanks to Russ Roberts, Im
pretty sure how Adam Smith would have answered these questions.
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