The Enduring Relevance of Adam Smith, Reconciling Morality and Markets in the 21st Century
Adam Smith’s magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, considered the foundation stone of modern economics, marked its 250th anniversary on March 9. While celebrating this epic work, it is also worth pondering the long-standing conflict between two of Smith’s books – The Wealth of Nations (1776) and The Theory of Moral Sentiments (1759). The “problem,” known as “Das Adam Smith Problem,” was first formulated by German economists of the Historical School in the late 19th century. They perceived a huge contrast between the sympathetic moral philosophy of Smith’s first book and the selfishness depicted in the latter. Did Smith’s perspective really evolve over those 17 years? The majority of contemporary scholars now see this as a misunderstanding, arguing that Smith’s philosophy forms a coherent whole that unites ethics and economics. Yet, as the world grapples with rising inequality, climate change, and the ethical implications of artificial intelligence, the Das Adam Smith Problem has taken on a broader scope for the 21st century: how do we integrate the fact that much economic analysis is based on self-regard with renewed evidence of the importance of pro-social motivations?
The “Problem”: A Pseudo-Problem Born of Misreading
The Das Adam Smith Problem was based on a perceived dichotomy. The Theory of Moral Sentiments (1759) emphasised “sympathy”—the capacity to imagine ourselves in another’s situation—as the foundation of moral judgment. The Wealth of Nations (1776) famously argued that individuals pursuing their own self-interest, guided by an “invisible hand,” inadvertently promote the public good. To casual readers, Smith seemed to be of two minds: a moral philosopher in one book, a cheerleader for avarice in the other.
In the 1920s, however, Jacob Viner, a mentor of the early Chicago school of economics, showed that Smith’s two books share an identical philosophical base. Furthermore, David D. Raphael and Alec A. Macfie, editors of the 1976 Glasgow Edition of The Theory of Moral Sentiments, categorically rejected the Das Adam Smith Problem, calling it “a pseudo-problem based on ignorance and misunderstanding.” Smith extended his earlier moral philosophy into economics rather than discarding it. The “invisible hand” was a metaphor for how individual motivations, when properly directed, could benefit society. It was never intended to be a celebration of avarice.
Drawing on Rousseau’s Second Discourse, as discussed in Charles L. Griswold’s 2010 paper, Smith suggested that human beings are not naturally sociable, and that markets are extensions of morality rather than moral voids. Smith was not a crude egoist. He understood that markets require trust, honesty, and the rule of law—all of which depend on moral sentiments.
A Unified System: Applied Empathy vs. Empathy Per Se
On closer inspection, Smith’s two perspectives are not only compatible but also complement each other, as they are, in fact, part of a unified system. While The Wealth of Nations is more outward-focused, The Theory of Moral Sentiments is inward-focused; both, however, view the world and the self through the lens of empathy. The Wealth of Nations deals with applied empathy, whereas The Theory of Moral Sentiments is about empathy per se.
What is the root cause of the Das Adam Smith Problem? As Leonidas Montes argued in a 2003 paper, the dilemma arises because, by nature, human beings are binary thinkers. The real world, however, exists along a spectrum of grey areas. There is a constant interplay, advancement, regression, etc., of self-interest and empathy. Smith’s two books engage with different points along this same spectrum. A merchant in a market transaction acts out of self-interest. That same merchant, as a parent, a citizen, or a philanthropist, acts out of sympathy. There is no contradiction; there is context.
In his 2010 work, Amartya Sen argued that “Adam Smith has had much smallness thrust upon him.” Smith became the welfare theorist of today because of the innovative interpretations of welfare economists, not because he was a narrow advocate of self-interest. Smith was a moral philosopher first, an economist second. He would have been horrified by the caricature of his work as a justification for greed.
The 21st Century Problem: Integrating Self-Regard and Pro-Social Motivations
Today, the Das Adam Smith Problem has taken on a broader scope. As Natalie Gold, of the University of Oxford, writes in a 2020 paper, the renewed problem for the 21st century is: “How do we integrate the fact that much economic analysis is based on self-regard (via the price mechanism) with renewed interest in and evidence of the importance of pro-social motivations?” Experimental economics has shown, repeatedly, that people are not purely self-interested. They care about fairness. They punish cheaters even at a cost to themselves. They cooperate in public goods games. They donate to charity. They volunteer. These behaviours cannot be explained by a narrow reading of The Wealth of Nations.
Behavioural economics, pioneered by Daniel Kahneman, Amos Tversky, and Richard Thaler, has demonstrated systematic deviations from rational self-interest. Neuroeconomics has identified neural correlates of empathy and altruism. Evolutionary biology has shown that cooperation and reciprocity can evolve through natural selection. The evidence is clear: humans are both self-interested and pro-social. The question is how to design institutions that harness both motivations.
Smith’s Relevance for Contemporary Policy
Smith’s unified system offers a framework for thinking about this question. He understood that markets work when they are embedded in a moral and legal order. He was not a laissez-faire ideologue. He supported regulations to prevent fraud, to ensure product safety, and to provide public goods like education and infrastructure. He was suspicious of monopolies and corporate collusion. He believed that the state had a role in mitigating inequality, because extreme inequality undermines the moral sentiments necessary for social cohesion.
In the 21st century, this means addressing the excesses of financial capitalism. The 2008 global financial crisis was caused not by too much morality, but by too little. Bankers pursued self-interest without sympathy, gambling with other people’s money. Regulators looked away. Rating agencies gave AAA ratings to toxic assets. The invisible hand became a hidden fist. Smith would have been appalled.
Similarly, climate change is a collective action problem that cannot be solved by self-interest alone. The benefits of reducing emissions are shared by all; the costs are borne by individual actors. Without pro-social motivations (a sense of responsibility to future generations, a sense of fairness to those already suffering from climate impacts), cooperation is impossible. Smith’s concept of the “impartial spectator”—an imagined observer who judges our actions from a moral standpoint—is relevant here. The impartial spectator would condemn the free-riding of high-emitting nations and corporations.
The Unresolved Mystery: No Single Thread
There is no denying that the “Das Adam Smith Problem” has long puzzled academics, and it shows not just the dualities in Smith’s work but also our own uneasy relationship with morality and markets. But it is also necessary to mention the fact that though the two different Smiths are now well connected, there is no single thread that fully links the two works. As David Wilson and William Dixon noted in a 2006 paper, “There is still no widely agreed version of what it is that links these two texts, aside from their common author.” That is the beauty and mystery of it. The absence of a master key is not a failure; it is an invitation. Each generation of readers must find its own connections, its own interpretations, its own resolutions.
The cornerstone of the Scottish Enlightenment in the 18th century continues to shed light on the world in a renewed spectrum. Smith’s insights are not static doctrines; they are starting points for inquiry. His two books are not contradictory; they are complementary. They remind us that economics cannot be separated from ethics, that markets cannot be divorced from morals, and that the pursuit of self-interest, without sympathy, leads not to prosperity but to ruin.
As we celebrate 250 years of The Wealth of Nations, we should also return to The Theory of Moral Sentiments. Smith’s legacy is not a choice between the two; it is the synthesis of both. The Das Adam Smith Problem is not a problem to be solved; it is a dialectic to be lived. And that is perhaps the most Smithian insight of all.
Q&A: The Das Adam Smith Problem
Q1: What is the “Das Adam Smith Problem,” and who first formulated it?
A1: The “Das Adam Smith Problem” is the perceived dichotomy between Adam Smith’s two major works: The Theory of Moral Sentiments (1759), which emphasises “sympathy” (the capacity to imagine ourselves in another’s situation) as the foundation of moral judgment, and The Wealth of Nations (1776), which famously argues that individuals pursuing their own self-interest, guided by an “invisible hand,” inadvertently promote the public good. The problem was first formulated by German economists of the Historical School (Wilhelm Hasbach, August Oncken) in the late 19th century, who saw a “huge contrast between the sympathetic morality philosophy of Smith’s first book and the selfishness depicted in the latter.”
Q2: How do contemporary scholars view the Das Adam Smith Problem?
A2: The majority of contemporary scholars see it as “a misunderstanding or a partial grasp of Smith’s philosophy” and view his work as “forming a coherent whole that unites ethics and economics.” Jacob Viner showed that Smith’s two books share an identical philosophical base. David D. Raphael and Alec A. Macfie (editors of the 1976 Glasgow Edition) categorically rejected it, calling it “a pseudo-problem based on ignorance and misunderstanding.” Smith extended his earlier moral philosophy into economics rather than discarding it. As Amartya Sen wrote, Smith was concerned not only with self-interest at the moment of exchange but also with “the wider moral motivations and institutions required to support economic activity in general.”
Q3: How does the article reconcile Smith’s emphasis on sympathy with his emphasis on self-interest?
A3: The article argues that the two perspectives “are not only compatible but also complement each other, as they are, in fact, part of a unified system.” While The Wealth of Nations is “outward-focused” (applied empathy), The Theory of Moral Sentiments is “inward-focused” (empathy per se). The apparent contradiction arises because humans are “binary thinkers,” but the real world exists along a “spectrum of grey areas.” A merchant acts out of self-interest in a market transaction but, as a parent or citizen, acts out of sympathy. Smith was not a “crude egoist”; he understood that markets require trust, honesty, and the rule of law—all of which depend on moral sentiments.
Q4: What is the “renewed Das Adam Smith Problem for the 21st century” according to the article?
A4: According to Natalie Gold of Oxford University, the renewed problem is: “How do we integrate the fact that much economic analysis is based on self-regard (via the price mechanism) with renewed interest in and evidence of the importance of pro-social motivations?” Experimental economics, behavioural economics (Kahneman, Tversky, Thaler), neuroeconomics, and evolutionary biology have all shown that humans are “both self-interested and pro-social.” The question is how to design institutions that harness both motivations. The article applies this to the 2008 financial crisis (bankers pursuing self-interest without sympathy) and climate change (a collective action problem requiring pro-social motivations to overcome free-riding).
Q5: Despite the reconciliation, what mystery remains about Smith’s two works?
A5: As David Wilson and William Dixon noted (2006), “There is still no widely agreed version of what it is that links these two texts, aside from their common author.” The article calls this “the beauty and mystery of it”—”the absence of a master key is not a failure; it is an invitation. Each generation of readers must find its own connections, its own interpretations, its own resolutions.” The article concludes that “Smith’s insights are not static doctrines; they are starting points for inquiry.” As we celebrate 250 years of The Wealth of Nations, we should also return to The Theory of Moral Sentiments: “Smith’s legacy is not a choice between the two; it is the synthesis of both. The Das Adam Smith Problem is not a problem to be solved; it is a dialectic to be lived.” That, the article argues, is “the most Smithian insight of all.”
