Scotland and Edinburgh in the latter half of the 18th century were uncommonly prolific of genius. This year we celebrate the 300th anniversary of the birth of Adam Smith, and the coming years will see similar milestones for David Hume, James Watt, and many others.
Why, or how, did these scholars give us modern free liberal social and economic communities, constitutions, and nations? I think it was because they created an unsurpassed community of themselves, meeting in "societies" regularly for seminars in Edinburgh and Glasgow, and for dinner every Sunday in Smith's home in Canongate, across High Street from the sidewalk statue of Robert Burns, Scotland's most famed poet.
Scotland was famous for its "clubs and societies," regular seminars that met in pubs for discussion and debate. Unlike the university seminars of today, largely limited to departments and visitors, these were in the community and included the university, independent scholars (Hume's skepticism blocked him from a university appointment, but not invitations to converse), outside visitors (Benjamin Franklin was known to make an appearance), townspeople, merchants, and professionals.
Smith was a member of two of these groups, the Literary Society in Glasgow and the Political Economy Society. He was also a consummate host. "Smith's house was noted for its simple and unpretending hospitality," wrote John Rae in his 1895 Life of Adam Smith. "He liked to have his friends about him without the formality of an invitation."
Smith's Theory of Human Sociability and Self-Command
Smith's natural curiosity as to the sources of order led him to inquire why and how our actions are social, and explored the consequences of those actions. His key methodological principle, separating him from modern thought, was to distinguish the origins of human action from their consequences. He concluded that our maturation as a social being is manifest in three phases.
In the first phase, by observing others—immediate family, then friends and neighbors—we become aware of what another person must feel based on our own feelings experienced in similar situations. We observe another's expression of joy, or of sorrow, in a particular context, and we remember what we felt in a similar circumstance. This ability arises out of, and likely helps to shape, our capacity for sympathy. As Smith puts it, we can never know what another person feels, except through our imagination in changing places with them, and remembering what we felt in their situation.
In the second phase of our social maturation, we realize that sympathy goes both ways: Others are forming sympathetic judgments of what we must feel in situations like they have experienced. When we are observing others, they are observing us. In a situation of joy, we enter into a mutual fellow-feeling that is a source of pleasure. When the situation is one of sorrow, fellow-feeling is a comfort for the person experiencing sorrow. Our feelings associated with sorrow and distress are more pungent and deeply felt than those concerning joy and elation.
Because of this fundamental asymmetry between our feelings of joy and of sorrow, we are more anxious that an associate sympathizes with our sorrow than with our joy. Unless we are vain, we generally can better forgive them for not entering into our joys than for not entering into our sorrows. This fundamental joy-sorrow asymmetry carries over into gains and losses from our actions in society.
These constitute the general principles of Smith's first two phases in the development of our sociability. He strongly objects to any idea that this development is because it is utilitarian, or useful, and efficient. Our sociability may indeed have these consequences, but that does not explain its origin. Out of the relationships created by our capacity for fellow-feelings, we do little services for each other from day to day, but the pattern of relationships we form are not created by those services. The services flow from our relationships and may enhance those relationships, but they do not themselves account for the sense of fellow-feeling arising from our shared experiences. Moreover, Smith argues, our responses are too automatic and immediate to be explained by any utilitarian evaluation, thus providing the first theory of fast- vs. slow-action thinking.
In phase three, knowing what others must feel about our own actions and manner, we take account of their judgments and assessments in the actions we take. We screen and modify our actions, as would a "fair and impartial spectator."
Hence our tendency to follow rules that enable us to get along with others. The collection of all such rules constitute culture, which is disciplined by Smith's critical concept of "self-command." Originally, we begin to follow rules enabling us to get along with others when we first have playmates, usually at about the time we start schooling.
We soon learn that our playmates are not as indulgent as our parents in tolerating our expressions of anger and selfishness. Thereby we enter the great school of self-command, and we continue to be shaped by this school our entire lives.
Human Sociability as a Mirror Phenomenon
Smith demonstrates why we must be social through a "mental experiment" in which he imagines a person growing to adulthood separated from any form of contact or communication with another member of the species. Such a person could not "think of his own character, of the propriety or demerit of his own sentiments and conduct, of the beauty or deformity of his own mind," any more than they could think of "the beauty or deformity of his own face."
Such things he cannot understand because he has no natural means of observing and learning their meaning. For, as Smith wrote in his 1759 book The Theory of Moral Sentiments, "he is provided with no mirror which can present them to his view." But if the person is raised with others, he is part of a group of his peers from the beginning. A mirror is "placed in the countenance and behaviour" of all whom he is associated with, who never fail to "mark when they enter into, and when they disapprove of his sentiments."
It is from the appearance of others, and not from our own, that we draw our personal conceptions of beauty or ugliness. Later we become aware that others go through the same process in examining us. "We are pleased when they approve of our figure, and are disobliged when they seem to be disgusted," Smith wrote in Moral Sentiments. "If…we are satisfied with our own appearance, we can more easily support the most disadvantageous judgments of others. If, on the contrary, we are sensible that we are the natural objects of distaste, every appearance of their disapprobation mortifies us beyond all measure. A man who is tolerably handsome, will allow you to laugh at any little irregularity in his person; but all such jokes are commonly unsupportable to one who is really deformed."
An analogous process shapes our moral judgments concerning the character and conduct of other people. Then we learn that others are making similar moral judgments of us, and we are keen to fully observe their reactions. "We become anxious to know how far we deserve their censure or applause, and whether to them we must necessarily appear those agreeable or disagreeable creatures which they represent us," Smith wrote in Moral Sentiments. "We suppose ourselves the spectators of our own behaviour, and endeavour to imagine what effect it would, in this light, produce upon us….If in this view it pleases us, we are tolerably satisfied. We can be more indifferent about the applause, and, in some measure, despise the censure of the world; secure that, however misunderstood or misrepresented, we are the natural and proper objects of approbation. On the contrary, if we are doubtful about it, we are often…more anxious to gain their approbation."
The Roots and Importance of Beneficence and Justice
Consequent to this vision of sociability are two fundamental propositions about when we are beneficent or hurtful toward others. The first proposition defines the roots of reciprocity in human communities. The second says that property is rooted in security from intentional injury, a concept of negative justice—as the absence of such intentional injury—essential to stable community and economy.
The first we may call the Beneficence Proposition. "Actions of a beneficent tendency," Smith wrote in Moral Sentiments, "which proceed from proper motives [intentional], seem alone to require a reward; because such alone are the approved objects of gratitude, or excite the sympathetic gratitude of the spectator."
People need to know not just what to reward, but what to punish. That leads to Smith's Justice Proposition: "Actions of a hurtful tendency, which proceed from [intentionally] improper motives, seem alone to deserve punishment; because such alone are the approved objects of resentment, or excite the sympathetic resentment of the spectator."
From the Beneficence Proposition is derived the principle of reciprocity: the mutual giving and returning of favors observed everywhere in pleasurable communities of neighbors, friends, workers, and families—and also in communities of adversity, such as prisoner-of-war camps, refugee camps, Japanese-American internment camps, bomb and storm shelters, slave quarters, ad infinitum. "Nature, which formed men for that mutual kindness so necessary for their happiness, renders every man the peculiar object of kindness to the persons to whom he himself has been kind," Smith wrote in Moral Sentiments. "Kindness is the parent of kindness."
From the Justice Proposition we get property in the negative sense of security from injury, a necessary condition for community and for wealth creation. If hurtful conduct deserves punishment, the various ways people can be hurtful to others lead us to various conceptions of property to fence us off from such harm. Security from murder gives us property in our bodies; security from robbery and theft gives us property in the products of our body and mind; security of contract gives us property in each other's promises.
These propositions together powerfully contribute to the spontaneous emergence of order in society. Reciprocity serves positive social betterment while alleviating the pangs of adversity. The punishment of deliberately hurtful acts serves as their deterrent.
Smith, a fine-grained observer, finds in religion ancient inspiration for the rules we follow and the beliefs that support them. Our responses are rooted in feelings: reward in gratitude, punishment in resentment. The latter is so prominent and automatic that we sometimes witlessly strike out at an inanimate object we have carelessly bumped into, as if the object were blameable and deserving of punishment. "Resentment seems to have been given us by nature for defence, and for defence only. It is the safeguard of justice and the security of innocence," Smith wrote in Moral Sentiments.
Of these two pillars of society, beneficence and justice, Smith finds the latter more vital: "Society…cannot subsist among those who are at all times ready to hurt and injure one another," he wrote in Moral Sentiments. "The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broken asunder, and the different members of which it consisted, are…dissipated and scattered abroad….Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it."
Positive reciprocity, the exchange of good deeds, never escalates out of control; negative reciprocity easily does. Beneficence is especially important in Smith's thought, and in his larger contributions to economics, because it also underlies gains from trade—the origins of market price discovery, with unintended consequences captured in his theorems on wealth creation.
Specialization, Wealth, and the Value of Extended Markets
Smith's second book, his famous Wealth of Nations, roots wealth creation in "the division of labor"—the specialization across time, space, skill, and technique made possible by market trade. Economic action in a free civil order, he argues, is governed by three fundamental theorems. Together, these theorems illustrate Smith's vision of the pricing system as a decentralized information system for unifying cooperation across widely dispersed peoples.
The first theorem is that wealth is created by the division of labor. "The universal opulence of a well-governed society…is the great multiplication of the productions of all the different arts, in consequence of the division of labour," Smith wrote. This opulence "extends itself to the lowest ranks of the people," and it rests on "the assistance and co-operation of many thousands."
The second theorem is that wealth creation is the unintended consequence of the human propensity for exchange. "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," Smith wrote. "It is the necessary, though very slow and gradual, [evolutionary] consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another."
The third theorem is that the division of labor is determined by the extent of the market. "When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for," he explained.
So wealth is created by the division of labor, which is determined by the extent of markets. But positive wealth, or accumulation, can exist only if output value exceeds consumption value, and there are overall surpluses, with one person exchanging his surplus of one product for the surplus product of another.
Suppose you and I each subsist by growing both corn and hogs. If there is a market in corn or one in hogs, but not both, we cannot trade, sharply illustrating how the extent of markets limits specialization. If there is a market for both corn and hogs, and if, by growing more corn and fewer hogs, I can trade my corn for more of your hogs than I gave up, the gain constitutes a surplus above subsistence, which is potential wealth. Trade may benefit even those unable to subsist.
Symmetrically, suppose you can get more corn from me than you gave up in order to raise more hogs to exchange for my corn. Then by specializing more in hogs, you can enjoy a profit, which is potential wealth. Together, we can trade and create new wealth. The 19th century economist David Ricardo called this "comparative advantage" in his explanation of the benefits of free international trade. We do not have to be equal except in having the opportunity to trade and specialize. You are big and consume lots of hogs and corn. I am a little guy and consume little of each. We can still gain from specialization and trade.
The magic is in the fact that the resources of each of us are more productive if we specialize. In the limit we each fully specialize—I grow corn only; you grow hogs only. Practice makes perfect, and we both may gain wealth greater than our previous baselines. We profit. For net profit, each produces greater value than the cost incurred. Every increment to wealth is profit. If no one profits, society descends deeper and deeper into poverty.
What do we do with our profit? We might work less and enjoy more leisure, or we might invest in more land to grow hogs or corn for more others. We might start exporting to China, whose citizens might increase rice output to pay for the corn and hogs bought from us.
Death Among Friends
Smith's Sunday suppers continued until the final evening of his life. On that evening, "he was able to receive them with something of his usual cheerfulness," wrote Smith's biographer Rae.
"He would even have stayed up and sat with them had they allowed him, but they pressed him not to do so, and he retired to bed about half-past nine," Rae continued. "As he left the room he turned and said, 'I love your company, gentlemen, but I believe I must leave you to go to another world.'" Or perhaps he said, as another account claimed: "I believe we must adjourn this meeting to some other place."