Thursday, September 4, 2014

Adam Smith And The Good Society

Adam Smith understood that there were many poor countries and some prosperous countries.  There was no point in learning about poverty; it was more important to understand what made a country prosperous.  He believed that self interest is a powerful motivation.  We often benefit others in unknown ways by pursuing our self interest.  Commerce can be construed as system of fair exchange.  The business person offers a product or service that provides value to the customer and both parties benefit from the exchange.  Competition is an external force that governs the fairness of the exchange.  This is the message that many people have taken from The Wealth Of Nations.  It is certainly an important part of any market system.  Unfortunately, there was another important factor in the determination of a wealthy and just society that is often ignored.

Smith believed that we are also driven by moral sentiments.  In fact, he wrote a book about moral sentiments prior to The Wealth Of Nations.  Moral sentiments provide an internal compass that guides our behavior which complements the the external forces of self interest and competition.  We are helpless at birth and society could not exist without the attachment and sacrifices that parents make for their children.  We intuitively understand the difference between things that are good, and things that are harmful to others.  We feel good about ourselves when behave in ways that are consistent with our moral compass.  The desire to be praiseworthy is a powerful force that complements our self interest.  Together, the external force of self interest, under conditions of fair competition, and our desire to satisfy the demands of our internal compass,  are the forces that determine "good conduct".  Smith believed that good conduct is essential for commerce, and that it is the end towards which a just society and prosperous should aspire.

There are times when the forces described by Smith lead to good conduct, and there are times when they do not.  Our problem is to better understand the conditions that lead to the perversion of the system described by Smith.  There are often forces at work that limit the external guidance from competition, and we can also be deceived when believe that we have become praiseworthy by accumulating symbols of achievement through devious means.  We will go to great lengths to justify our success under those conditions but we are seldom able to fool ourselves.  The problem becomes more severe when the financial rewards for bad conduct have risen to the levels that we observe today. 

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