Indeed, Smith argues that while “prudence” was “of all the virtues that which is most helpful to the individual,” “humanity, justice, generosity, and public spirit, are the qualities most useful to others.”6 These are two distinct points, and unfortunately a big part of modern economics gets both of them wrong in interpreting Smith.

The nature of the present economic crisis illustrates very clearly the need for departures from unmitigated and unrestrained self-seeking in order to have a decent society. Even John McCain, the 2008 U.S. Republican presidential candidate, complained constantly in his campaign speeches of “the greed of Wall Street.” Smith had a diagnosis for this: he called promoters of excessive risk in search of profits “prodigals and projectors”—which, by the way, is quite a good description of many of the entrepreneurs of credit swaps insurances and subprime mortgages over the recent past. The term “projector” is used by Smith not in the neutral sense of “one who forms a project,” but in the pejorative sense, apparently common from 1616 (so I gather from The Shorter Oxford English Dictionary), meaning, among other things, “a promoter of bubble companies; a speculator; a cheat.” Indeed Jonathan Swift’s unflattering portrait of “projectors” in Gulliver’s Travels, published in 1726 (fifty years before The Wealth of Nations), corresponds closely to what Smith seems to have had in mind. Relying entirely on an unregulated market economy can result in a dire predicament in which, as Smith writes, “a great part of the capital of the country” is “kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.”7

Smith’s criticism of an unregulated market economy did not go unchallenged. It is a matter of some historical interest that Jeremy Bentham took Smith to task in a long letter he wrote to him in March 1787, arguing that Smith should leave the market alone.8 He argued, for those whom Smith saw as “projectors”—with various projects of making quick money—were also the innovators and pioneers of change and progress. Smith was good-humored about the critique.9 But he knew the distinction between projectors and innovators well enough, and there is little evidence, despite Bentham’s expectations, that Smith wanted to revise what he had said on the need for regulation.

To understand the nature of a country’s financial stability in a way that is, as it happens, immediately relevant to the current economic crisis, it is extremely important to pay attention to Smith’s argument that “When the people of any particular country have such confidence in the fortune, probity, and prudence of a particular banker, as to believe that he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.”10 Such confidence need not always pre-exist or survive, Smith argued; a climate of mutual trust has to be cultivated and fostered. Even though the champions of the baker-brewer-butcher reading of Smith, enshrined in many economics books, may be at a complete loss about how to understand the present economic crisis (since people still have excellent reason to seek more trade even now, in the middle of the crisis—only far less opportunity), the devastating consequences of mistrust and the collapse of mutual confidence would not have puzzled Smith.

MARKETS AND THE NEED FOR OTHER INSTITUTIONS

The spirited attempt to see Smith as an advocate of pure capitalism, with complete reliance on the market mechanism guided by pure profit motive, is altogether misconceived. Smith never used the term “capitalism” (I have certainly not found an instance). More importantly, he was not aiming to be the great champion of the profit-based market mechanism, nor was he arguing against the importance of economic institutions other than the markets. Smith was convinced of the necessity of a well-functioning market economy, but not of its sufficiency. He argued powerfully against many false diagnoses of terrible “commissions” of the market economy, and yet nowhere did he deny that the market economy yields important “omissions.” He rejected market-excluding interventions but not market-including interventions aimed at doing those important things that the market may leave undone.

Smith saw the task of political economy as the pursuit of “two distinct objects”: “first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.”11 He defended such public services as free education and poverty relief while demanding greater freedom for the indigent who receives support than the rather punitive Poor Laws of his day permitted. Beyond his attention to the components and responsibilities of a well-functioning market system (such as the role of accountability and trust), he was deeply concerned about the inequality and poverty that might remain in an otherwise successful market economy. Even in dealing with regulations that restrain the markets, Smith additionally acknowledged the importance of interventions on behalf of the poor and the underdogs of society. At one stage he gives a formula of disarming simplicity: “When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.”12 Smith was both a proponent of a plural institutional structure and a champion of social values that transcend the profit motive in principle as well as in actual reach.

ETHICS, VIRTUE, AND CONSEQUENCES

I turn now from the relevance of Moral Sentiments to Smith’s economic analysis to its salience to ethics and political philosophy. Smith had an abiding interest in how things actually work out, and in recommending actions and rules to be chosen he paid particular attention to the kind of world they would yield.13 But he also noted the importance of the character of the actions themselves and the motivation behind undertaking them—not just what happens at the very end—in identifying what can be seen as virtuous.14

In fact, a broad ethical evaluation of the kind Smith outlined can take note of the virtues both of what actually happened and of the actions taken to produce such outcomes, going well beyond the simple-minded “consequentialist” framework made popular by theories of practical reason such as utilitarian ethics (which insists on attaching direct significance only to utilities that ultimately result). We can take note of the actions undertaken and of the ethical quality of the decision-making that led to those actions, since they are indeed part of what “really happened,” without confining our scrutiny only to what occurred at the “culmination.”15 Smith’s simultaneous interest in virtues and obligations and in what actually happens in the world are comprehensively integrated.

Smith makes an important distinction, in his conception of virtue, between praise and “praiseworthiness,” and focuses on the latter as the legitimate basis for action.16 It is of course the case that a praiseworthy action would also tend to generate actual praise, and this may well be pleasing to the person praised. What Smith argues for, however, is to concentrate not on what would bring praise—despite the happiness it may bring to the person involved—but on whether the action is praiseworthy.

In discussing “the different accounts which have been given of the nature of virtue,” Smith distinguishes among the ways of seeing virtue: first, in terms of “propriety”; second, as fulfilling one’s “private interest and happiness”; and third, as aiming “at the happiness of others.”17 These distinct views, he argues, can be integrated, and he discusses how reasoning can link them together, allowing a kind of balance that virtue and praiseworthiness would demand:

As our most solid judgments, therefore, with regard to right and wrong, are regulated by maxims and ideas derived from an induction of reason, virtue may very properly be said to consist in a conformity to reason, and so far this faculty may be considered as the source and principle of approbation and disapprobation.18

POLITICAL PHILOSOPHY AND JUSTICE

I turn now from moral to political philosophy, though the two are closely related, particularly so in Smith’s analysis. I will concentrate first on the kind of theory of justice that we can find in the Moral Sentiments, and examine it in light of mainstream theories of justice as they have emerged in recent centuries.19

There are two basic, and divergent, lines of reasoning about justice among leading philosophers associated with the radical thought of the Enlightenment. There is, first, the “contractarian” approach, led by the work of Thomas Hobbes in the seventeenth century, and followed in different ways by such outstanding thinkers as John Locke, Jean-Jacques Rousseau, and Immanuel Kant. In its rudimentary version, this approach concentrates on identifying “just” institutional arrangements for a society, which would yield a corresponding—hypothetical—contract. The demands of justice are, then, seen in terms of those institutional requirements, with the expectation that people would behave appropriately to make those institutions entirely effective.

The approach has two distinct features. First, it concentrates its attention on what it identifies as perfect justice, rather than on relative comparisons of justice and injustice; it tries to identify social characteristics that cannot be transcended in terms of justice, and is aimed at identifying the nature of “the just”—rather than at finding some criteria that would allow us to decide whether an alternative is “less unjust” than another. Second, in searching for perfection, transcendental institutionalism concentrates primarily on getting the institutions right, and it is only indirectly concerned with the societies that would ultimately emerge. The nature of the society that would emerge from any given set of institutions must, of course, depend on many non-institutional factors, such as actual behaviors of people and their social interactions. The traverse from institutions to social outcomes is handled by this approach with the assumption that people’s behavior would be exactly what would be needed for the proper functioning of the chosen institutions.

In contrast to the social contract approach, a number of other Enlightenment theorists took a variety of comparative approaches that were concerned primarily with removing identifiable injustices in the world—such as slavery, or bureaucracy-induced poverty, or cruel and counterproductive penal codes, or rampant exploitation of labor, or the subjugation of women. The focus is on what actually happens to the lives of people, and the judgments are comparative—for example, how the world would improve if slavery were abolished. The approach of comparative realizations, as we may call it, was pursued, in different ways, not only by Smith—who was its most powerful proponent—but also by the Marquis de Condorcet (the founder of the mathematical discipline of social choice theory who was greatly influenced by Smith), Jeremy Bentham, Mary Wollstonecraft, Karl Marx, and John Stuart Mill, among others, all of whom were admirers of Smith and were clearly influenced by him, to varying extents.

As it happens, it is the first tradition—that of transcendental institutionalism—on which today’s mainstream political philosophy largely draws in its exploration of the theory of justice. The most powerful and momentous exposition of this approach to justice can be found in the work of the leading political philosopher of our time, John Rawls.20 Indeed, Rawls’s “principles of justice” in A Theory of Justice are defined entirely for selecting perfectly just institutions. This entire tradition is very non-Smithian.