Inquire: What is an Ethical Economy?
In one of the more famous passages from his 1776 economic treatise, The Wealth of Nations, Adam Smith 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.” Does this mean that Smith’s market based system of free enterprise is built on the idea that people are fundamentally selfish?
Yes and no. Smith believed that by pursuing self-interest, we satisfy both our own interests and the interests of others. The butcher may be selling meat to meet his own selfish needs (such as making money for himself and his family), but in doing so, others get to purchase meat, eat well, and, for many meat-eaters, have a pleasant dining experience. We can only satisfy our own interests by associating and partnering with other people, making any self-interested act also beneficial for others.
Markets channel self-interest into mutually productive directions. This does not guarantee that we will always find mutually productive ways to work together but it does strongly incentivize us to participate in such mutually beneficial behaviors.
Is a market economy based on self-interest an ethical one?
Watch: Respect in the Marketplace
Read: Is Business Slimy?
Karl Marx objected to Adam Smith’s vision of the function of self-interest in a market economy. Marx said, “Since our exchange in the market economy is selfish on your side as well as on mine and since every self-interest attempts to surpass that of another person we necessarily attempt to defraud each other.” This argument can be broken down into two distinct objections.
The first objection: If the only reason I think or care about you is so you can satisfy my desires, do I have any genuine concern for you? In other words, does the market encourage merely the appearance of concern for others but no genuine affection or altruistic concern?
The second objection: Is it possible that being motivated by self-interest might incline me to defraud others? In other words, if I can get what I want more easily by lying to others, would my self interest in the market economy incline me to do so?
These objections state that a market based on self-interested motivation can only be dishonest, while others argue these objections are not completely representative of market systems.
Buying a Car, Who is Lying?
There are circumstances in which Marx’s views seem plausible. Consider when buying a car, a salesperson says to you, “I simply can’t go below this price.” Well, they are probably lying. When you say, “Well, I simply can’t pay more than this,” you are probably lying too. Part of the car-buying experience is to negotiate back and forth; you might eventually come to an agreement somewhere in the middle of both your and the salesperson’s initial offers. When you do so, it’s based from the beginning until the end on what Marx considered lies.
Marx argued that this kind of lying happens from all parties in a market economy, rather than in just a particular instance such as car negotiations. Marx believed that such lying systemically happens in a market economy, and if we get systemically habituated to lying it will be morally detrimental.
To this first concern, that markets enable merely artificial concern for others, Smith made a psychological prediction. Smith thought that the habit of thinking of others, even if only out of self-interest, eventually would lead to people developing actual concern for one another. As naturally social creatures, Smith thought familiarity would create affection between people. What starts as merely an instrumental concern, i.e. ‘I care about you only insofar as you can give something or provide something to me,’ in time becomes genuine concern for the well-being of others.
Buying a Car or Buying a Lemon?
As for the second concern, that self-interested motivation encourages fraud, the social nature of markets discourages people from cheating others and instead incentivizes honesty. Remember, in markets, people have many iterated opportunities to trade, associate, and partner with people. If I cheat you, you will quickly learn that I’m not to be trusted and you will be less inclined to associate with me in the future. You may even tell your friends and colleagues not to do business with me. Very quickly, my reputation will be damaged, endangering my own ability to achieve self-interest. As a result, fraud is a losing strategy in a market economy.
Thus, Smith thought the desire to satisfy one’s own interests — which in free markets, depends upon the willing, voluntary cooperation of other people — strongly incentivizes us to engage only in fair dealings. There is no guarantee that fraud will not occur, but markets do strongly incentivize against it. Although the market is not a perfect solution to this problem, Adam Smith would argue there are no perfect solutions; we live in a world of second-best alternatives. What the market can do is mitigate this concern. As such, it attempts to reward fair behaviors and punish cheating ones.
An Ethical Market
In markets, other people become opportunities rather than enemies and markets maintain ways of disciplining us for cheating behavior. Smith thought that the institutions that support a market economy also channel self-interest in ways that are beneficial to others, as they encourage cooperation.
Two general ways in which people get what they want are through extraction and cooperation. If you have something I want, one way I can get it is simply by taking it from you, through extraction. Perhaps I steal it from you. Maybe I hurt or kill you and take it. Potentially, I defraud you by promising to pay at a later date, though I don’t intend to do so.
All of these extractions are considered “zero sum,” because they benefit me and disadvantage you. For example, if I steal your television, that’s one fewer television for you (-1) and one more television for me (+1). When adding these together (-1+1), we are left with zero, hence the term “zero sum.”
Alternatively, I could get things I want through cooperation. I can exchange goods or discuss a deal with you, if you willingly assent. However, using this approach, I first have to find ways to satisfy your desires in order for you to want to partner with me. This gives me a strong incentive to focus on you, in addition to myself. Even if I have no other reason to care about you, the fact that I have desires I would like to have satisfied and the only way I can do so is in voluntary cooperation with you, will lead me to finding ways to help you. As long as you have an opt-out option (meaning you can take your business elsewhere), my desire to satisfy my own interests will channel my behavior in ways that are productive and value-producing for us both.
Poll: Is Your Business Slimy
We often view large corporations and businesses as slimy, but what about your own business?
Expand: Justice in the Marketplace
It is impossible to have a completely just or ethical marketplace since the market is based on human actions. People can behave morally or immorally in a free market system, and thus the market system is only as ethical as the actors in it. However, a controlled market is just as susceptible to human failings. Even in a communist market, an individual or group of individuals makes the market decisions, and thus the market becomes susceptible to the morality of that person/group. A free market allows all people to interact with it, both the virtuous and the slimy. Because the nature of people in the market can vary, so too does the virtue of markets themselves. Yet, due to some required traits and expectations of doing business with one another, the market will often lean toward virtue.
What is Justice?
Adam Smith believed that virtues could be divided into two broad categories, which he called “negative” and “positive.” Under negative virtues, he listed “justice,” while under positive virtues, he listed “beneficence,” which includes charity and generosity. The difference between the two categories, he believed, was that the negative virtue of justice required one to only abstain from harming or injuring others, whereas the positive virtues required one to take positive actions to benefit others.
Smith argued that justice is comprised of three main things: respecting others’ persons, property, and voluntary promises. In other words, to act with justice toward another means that one would not kill, molest, or enslave another; would not steal from or destroy the property of another; and would not violate any voluntary contracts or agreements one made with another. As a negative virtue, he thought that while following the rules of justice might not make others better off, it would not make anyone worse off.
How Do You Know What is Just?
No society could survive, Smith thought, if its members violated the rules of justice. By contrast, a society could survive, though not in a particularly inviting state, if people were not positively beneficent toward one another. From this, Smith concluded that justice enjoyed a priority over beneficence: one should first follow the rules of justice, and only then attend to beneficent obligations. Moreover, at the societal level, justice was both necessary and sufficient for the survival of a society, while beneficence was neither necessary nor sufficient.
In the Theory of Moral Sentiments, Smith stated that, “The rules of justice are accurate in the highest degree, and admit of no exceptions or modifications… If I owe a man ten pounds, justice requires that I should precisely pay him ten pounds, either at the time agreed upon, or when he demands it.” Therefore, it is easy to know when you are not following the virtue of justice as it is straightforward. In contrast, positive virtues are much more difficult to judge. Smith compared the way these negative and positive virtues are structured to the rules of grammar:
The rules of justice may be compared to the rules of grammar; the rules of the other virtues, to the rules which critics lay down for the attainment of what is sublime and elegant in composition. The one, are precise, accurate, and indispensable. The other, are loose, vague, and indeterminate, and present us rather with a general idea of the perfection we ought to aim at, than afford us any certain and infallible directions for acquiring it. A man may learn to write grammatically by rule, with the most absolute infallibility; and so, perhaps, he may be taught to act justly. But there are no rules whose observance will infallibly lead us to the attainment of elegance or sublimity in writing; though there are some which may help us, in some measure, to correct and ascertain the vague ideas which we might otherwise have entertained of those perfections. And there are no rules by the knowledge of which we can infallibly be taught to act upon all occasions with prudence, with just magnanimity, or proper beneficence: though there are some which may enable us to correct and ascertain, in several respects, the imperfect ideas which we might otherwise have entertained of those virtues.*
In this sense, governments can only regulate and protect the negative virtue of justice, because it is guided by specific rules and measurements. Positive virtues are left to individual and market discretion, since they are not measurable or required.
Yet positive virtues are prefered in society, which results in our economies not feeling like they are in a perfect state; the market rarely is perfectly just. Because humans are flawed, our markets are not utopian but instead reflect the failings of the people who create them. Smith argued that if we follow the best of our natures, we can create just markets.
Additional Resources and Readings
A quick video summary comparing the ideas of Smith and Marx
An article, by Dr. Vernon Smith on the Foundation for Economic Education, further exploring Smith’s individual definition of “justice”
A video, presented by a University of Oklahoma associate professor breaking down Smith’s works regarding justice
- justice (economic)a negative virtue which includes not harming the person or property of another and keeping your promises, as defined by Adam Smith
- negative virtuesacts which require one to only abstain from harming or injuring another person, as defined by Adam Smith
- opt-out optionmeaning you can take your business elsewhere
- positive virtuesacts which require one to take positive actions to benefit others, as defined by Adam Smith
- zero sumexchanges that benefit one party to the same extent that the other party is disadvantaged
License and Citations
Authored and curated by James R. Otteson, Ph.D. for The TEL Library. CC BY NC SA 4.0
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- Question 1 of 5
Adam Smith thought fraud and selfishness would disappear in a free market.CorrectIncorrect
- Question 2 of 5
Justice, according to Smith, requires that you ________. (select all that apply)CorrectIncorrect
- Question 3 of 5
Smith was primarily concerned with ________ equality.CorrectIncorrect
- Question 4 of 5
Beneficence is a _________ virtue that is __________ and __________ for the survival of society.CorrectIncorrect
- Question 5 of 5
Justice is a ________ virtue that is ________ and ________ for the survival of society.CorrectIncorrect