Adam Smith’s Psychology [View all]

His “invisible hand” was only part of the story; so was morality!

The founding father of modern free market economics, Adam Smith, is best known for his famous simile in The Wealth of Nations (1776) about the “invisible hand,” which seemed to endorse a dark view of human nature. He wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

However, that’s perfectly OK. “Man…is led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
Indeed, later on in his masterwork Smith even seemed to provide a rationalization for unvarnished greed and a no-holds-barred predatory economy when he commented: “In spite of their natural selfishness and rapacity…[men] are led by an invisible hand to…advance the interest of the society...”

Modern economists often become lyrical about “the superiority of self-interest” over altruism in economic life and the virtues of competition and the “profit motive,” while overlooking the fact that Smith’s rendering of the invisible hand was quite contingent. As he said, the invisible hand is not “always the worse” and “frequently promotes” the general welfare. But this is not a sure thing.

More important, many of Smith’s modern acolytes seem unaware of his cautionary warnings, especially in his earlier work, The Theory of Moral Sentiments, where (as a Stoic and a Christian) he stressed the fact that everything in a free market depends on a moral foundation of trust, honest dealing and, as he himself put it, “justice”. (He defined justice as not doing “injury” to others.) “There can be no proper motive for hurting our neighbor.” Smith was even a proponent of the Golden Rule and invoked the “invisible hand” simile in his earlier work to characterize our sense of charity toward those in need.

http://www.thefairsociety.net/2012/02/adam-smiths-psychology.html