Is the assumption of self-interested behavior assumed in economics at odds with altruism and compassion? I believe that this question—which has been formulated in various ways in the literature for the past two centuries—is the thorn that often turns us away from reconciling the Adam Smith of the Wealth of Nations (hereinafter WN) with the Adam Smith of The Theory of Moral Sentiments (hereinafter TMS). Economics has certainly made WN the most known contribution by Smith since it is generally assumed that publication of WN marks the beginning of economics as a discipline independent from philosophy. Indeed, it is a widely held belief that the concept of self-interest is not only central to the WN, it also established self-interest as the founding principle of economic theory. For example, in his “Mathematical Psychics: an Essay on the Application of Mathematics to the Moral Sciences,” F. Y. Edgeworth wrote, “the first principle of economics is that every agent is actuated by self interest” (1881, p. 16). This was a received view at the time and the sentiment has not changed much since then, although the self-interest paradigm has graduated into the more sophisticated abstraction of utility maximizing behavior. Under this more palatable name, self interested behavior has been attributed more broadly to all human behavior, not just economic phenomena. Gary Becker, for example, claims that “the economic approach is a comprehensive one that is applicable to all human behavior” (1976, p. 8). In “The Successes and Failures of Professor Smith,” George Stigler claims that Smith “put in the center of economics the systematic analysis of the behavior of individuals pursuing their self-interest under conditions of competition. This theory was the crown jewel of The Wealth of Nations and it became, and remains to this day, the foundation of the theory of allocation of resources” (1976, p. 1201).
Part of the problem not only with the claim that self-interest is central to WN, but also with the claim that it is also the founding principle of economics, is that our understanding of self-interest seems to fall within a wide range and we often fail to see the variation in connotations from one end of this range to the other until we see the variety of interpretations of WN. On its leanest interpretation, Smith’s notion of self-interest is assumed to be a type of ethical egoism. And on its grandest interpretation, “the Wealth of Nations is a stupendous palace erected upon the granite of self-interest” (Stigler, 1971, p. 265). The curious thing is that these widely-different interpretations seem to draw from the WN the same conclusion: that Smith’s chief point is that our actions are principally motivated by self-interest. The problem is not only that both interpretations misunderstand Smith, but they also present dangerous implications since the least favorable interpretation can be used as a pretext for uncritical charges of greed and cut-throat individualism, and the grand interpretation can be used as justification for the uncritical view that we are best regulated by self-interest.
Where did we go wrong in the understanding of Smith? Nowhere in WN does Smith state that self-interest is the only or the best motivation for human action, not even of the economic sort. This has been recognized in the most sober commentaries. For example, R. H. Coase argues that “Self-interest is certainly, in Adam Smith’s view, a powerful motive in human behavior, but it is by no means the only motive” (1976, p. 529). Jon Elster observes that “the assumption that all behavior is selfish is the most parsimonious that we can make…[and] we cannot conclude that selfishness is the more widespread motivation…[because] the world is messy, and the most parsimonious explanation is wrong” (1989, p. 54). Vernon Smith recognizes that, “There is a vulgar representation of Adam Smith as championing the unconstrained pursuit of self-love to the exclusion of other values by humans…” (2013, p. 285).
But the strongest evidence is given to us by (Adam) Smith himself. We have to start with TMS, however, since it lays the foundation that makes WN intelligible as a systematic treatise on economic behavior.