Adam Smith is commonly referred to as the father of modern economics and capitalism--the man who coined the phrase 'invisible hand' and whose coattails most captains of industry and finance grab for support when confronting criticisms of capitalism, or more directly when defending an unpopular outcome of the 'invisible hand.' But if the great man were alive today, he would not recognize what is attributed to him and he might even be horrified by what he sees.
First, let's set the record straight. Adam Smith wrote a book, The Theory of Moral Sentiments, some seven years before his famous book, An Inquiry into the Nature and Causes of the Wealth of Nations. He intended the two books to be read together. Unfortunately, most references to Smith, especially those by economists, miss this simple point and focus on The Wealth of Nations and even more narrowly on a phrase, 'the invisible hand' that is stated only once. Some observers even thought of these two books as unrelated and separate works. If indeed that was what Smith intended, then he must have been an exceptional schizophrenic!
This is important because The Theory of Moral Sentiments was intended to provide the foundation and the moral grounding for The Wealth of Nations, which essentially explains the workings and benefits of a market system, a system that needs market participants who have sympathy for others, with government supervision and enforcement to keep the world from running amuck. In other words, Smith's doctrine of the 'invisible hand' demonstrated the idea of the unintended consequences of everyone acting in his or her own self-interest, and in so doing resulting in the general well being of everyone. His book, The Theory of Moral Sentiments, outlines the ethical rules of behavior prescribed by God, where human behavior is in accordance with moral faculties and promotes the happiness of mankind, thus advancing the plan of Providence.
In the Smithian universe, The Theory of Moral Sentiments provides the institutional (rules of behavior) framework consisting of rules prescribed by God (which Smith references as "Deity", the "Designer", the "Author of Nature" and "God" interchangeably), compliance with which assures that passions are controlled and that the working of the invisible hand would bring about social harmony. Lectures on Jurisprudence, a third book, is a general argument about how legal institutions could be so structured that Divine Laws, reflected in Natural Laws, are accommodated by human laws. It is within this moral, ethical, political and social framework that the propositions of The Wealth of Nations would find their validity and operational significance. This is Smith's conceptualization of capitalism. But the capitalism that has emerged, especially over the last fifty years or so, disregards the moral institutional framework of The Theory of Moral Sentiments, which is indispensable to understanding the working of the socioeconomic system envisioned by Smith, who recognized and stated the possibility that without moral constraints, self-interest can easily turn into greed with frightfully destructive consequences.
Now getting back to our own times. Many observers consider that while a number of technical reasons could be advanced as causes of the recent financial and economic crisis, at its heart, it was driven by massive moral failure and greed. In a commercial society, Smith saw justice, or correct behavior of individuals toward each other, as the main task of government along with education and national security. In a commercial society, Smith suggested, the pursuit of self-interest arises from a teleological view of the universe in which the guiding hand of Providence can be observed. Moreover, Smith argued, humans have the ability to comprehend others' point of view through their innate sympathy, which forms "natural justice" toward others. This justice provides the framework within which the self-interests of one person benefit others. For Smith, the idea of justice permeates self-interest.
The Smith of economics is the author whose writings are abused to elevate the self-interest motive that is the basis of utility and profit maximization at any cost to society, including the impoverishment and exploitation of fellow human beings. Modern-day capitalists conveniently forget that Smith makes clear in his Theory of Moral Sentiments that compliance with the rules prescribed by the Creator and with the rules of the market are essential to his vision. Moreover, Smith was consciously aware of the ever-presence of the Creator and believed that acting accordingly is crucial to all human conduct, including economics.
Modern capitalism has developed institutions that are prohibited in any Deity-centered religion, such as the unlimited accumulation of private property and wealth, extravagant and opulent consumption, highly unequal distribution of income, massive poverty, increasing financial and economic exclusion, and the adverse impact of environmental degradation. It is difficult to see how this form of "modern" capitalism could be compatible with any theocentric or even humanistic system of thought or with what Smith proposed. Its modus operandi is unjust wars, oppression, the curtailment of democratic values and limited access to healthcare and retirement benefits with little provision for those who cannot provide for themselves.
What would morality and humanity, namely the Smithian universe, dictate in the wake of the financial crisis and its fallout with untold human suffering that continues nearly 10 years later? What might Adam Smith have demanded that the captains of finance and the government do in the aftermath of the recent financial crisis? The list would be long, but let's give some examples of what moral bankers and financiers and a just government that was not in the pocket of special interests might have done.
Given the loss of jobs and health insurance, the bankruptcies, the pressures on families and the lifesaving bailout of the banks by US taxpayers, the titans of Wall Street could have started by apologizing to the residents of the United States, and maybe even to hundreds of millions outside the United States, for the hardship that they caused. They might have uttered a commitment that they would do whatever it took to ensure that this never occurred again. And to be credible, they could have backed this commitment by (i) putting an end to their selfish lobbying no matter the fallout for the nation and the world, (ii) encouraging a strong Frank-Dodd Bill, as opposed to lobbying for a toothless bill that we now have, (iii) giving a significant share of their corporate profits and all their bonuses for a number of years for the benefit of those who had suffered, and (iv) taking a page from Bill Gates and shaming their fellow billionaires in Wall Street and beyond to do the same.
What we suggest here will go nowhere unless we as individuals take a few pages from Adam Smith and become more concerned for others. Everything goes back to the Golden Rule--do unto others as you would have done unto you. If our business leaders took this to heart, what would they be doing now? Here are a number of things that they could contemplate.
We all know the simple economic arguments against the minimum wage, but there is more than these arguments at stake here. For the sake of social cohesion, families who work hard deserve a minimum standard of living, especially when there are billionaires on Wall Street who produce nothing yet pay little tax and enjoy unimaginable wealth and opulence. If a minimum wage is undesirable for the standard reason given (it may increase unemployment and hurt those it is intended to help), then there could be government income transfers to bring the wage rate to some livable minimum.
Surely the captains of industry and finance are sufficiently smart enough to recognize that a dollar transferred to a poor person means much more to that person than a dollar does to them? If so, they could openly admit that there is something horribly wrong with our wealth and income distribution. Surely they realize that we all die and all the money in the world can do us no good when we die; and too much money could even harm our children. They should take another page from Bill Gates and try giving away a large chunk of their wealth and income. They might even get more happiness from seeing some deserving person happy than from buying another vacation home for themselves. They could also lobby for a change in the tax code that would restore more balance to the distribution of wealth and income.
The government should be more vigilant, and should monitor and enforce the rules and the law uniformly. Just imagine if a person steals $1,000. They are prosecuted, punished and invariably jailed. The folks on Wall Street caused damages that have already amounted to trillions of dollars. What has happened to them? Not much. They went to work the next day and soon they were doing even better than before. There is something wrong here. Given their kid-glove treatment afforded to the bankers, isn't it likely they have learned nothing and are thus likely to do it all over again?
In the end, we need a sea change in our thinking if we are to restore balance to modern-day capitalism as a system that Adam Smith could even recognize as his offspring. The system has to be fair and just if we are to enjoy social cohesion and mutual trust. During the recent election, candidate Trump opined that the election was rigged but provided little evidence. However, if he had said that our economic and financial systems were rigged he would have had a great deal of evidence. We need to change our values, lest understandable anger destroys us as a society.
The captains of finance and industry could make a good start by reading The Theory of Moral Sentiments. Our government officials should do so too.