Adam Smith | Self-Interest, Division of Labor, and the Invisible Hand
“The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.
― Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
In lieu of the story from history this week, I want to give you some context for today’s episode. This season we have been covering individuals who have had a direct effect on history, in a positive or negative way. Adam Smith is one of those. He is called the “father of modern economics” and “the creator of capitalism”. Rather than walk you through a summary of his life, I instead wanted to treat you to three of his most popular ideas, the influences that helped him form them, and provide possible context for each. I will attempt in vain to summarize the possible influences that formed three major concepts which exist in his later and final work, the Wealth of Nations, namely the appropriation of Self-Interest, Division of Labor, and the “The Invisible Hand”, thereby showing the linear deduction of each, and how that logic reflects in Adam Smith’s moral philosophy.
With the presentation of these three ideas, its my hope that you, our audience, will make your own deductions regarding what kind of man he was and whether his effect on history was a positive one.
Influences
Adam Smith was a student and teacher during the Era of Enlightenment, which lasted from 1685 to 1815. Born and coming of age in the middle of the period, he had many influences during his academic career. His adherence to natural law, the belief that humans possess intrinsic values ascribed by nature rather than by society or governments, was as much a part of his economic philosophy as his moral ideology. He illustrates these views in two of his most famous works. In The Theory of Moral Sentiments, he postulates his moral position. In The Wealth of Nations, he espouses an economic system as a result of his previously stated moral conviction. These works have been contested among contemporary historians since their publication, the main objection being that the views expressed in both contradict one another other. Charles M. Clark states that “we see no discrepancy between the Adam Smith in TMS and the Adam Smith in The Wealth of Nations.” On the other hand, Edward W. Cooker states that “the economic man of The Wealth of Nations, is constrained by the prudent man in Theory of Moral Sentiments”, and Emma Rothschild’s statement, in writing about the invisible hand, “but the subjects of…are blind, and cannot see the hand by which they are led.” While this later reference is an example of the type of man portrayed in both of Smith’s major works, there are other examples arguing both sides of how Smith depicted himself as a very different man with different ideas. Some historians have stated that the differences exhibited in both works are, in fact, not differences at all and that there is an inherent congruity between the two works which gives the reader insight into Adam Smith’s view of man, morals, and economics.
Self-Interest
Adam Smith defined self-interest as the motivation behind our desires, “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.”
It is impossible to investigate the influence of self-interest on The Wealth of Nations without first learning of its origins in The Theory of Moral Sentiments. In TMS, Smith constructs a closed system, where “sympathy” and an “Impartial spectator” act as surrogates for an individual’s social conscience. This system of thought seemed to have originated from many different sources. Early in his life, during his education in Glasgow, Smith studied under renowned teacher and philosopher, Francis Hutcheson, who was one of the leaders of the Scottish Enlightenment. Hutcheson promoted the theory of moral sense, which he believed to be, “implanted by God, to be an innate sense of pleasure for objects that are not necessarily to our advantage -and for noble pleasures like caring for others or appreciation of harmony”. This perception by the inner-self gives reference when interpreting the actions of individuals within a society.
While the influence of his teacher is obvious within the theory of “the impartial spectator”, Smith’s theoretical dichotomy came when he perceived self-interest as an ethically positive, driving force. David Hume, another leader in the Scottish Enlightenment, promoted the ideals of empiricism, which sees moral thought as the “expression of sentiments that evolve as a result of experience, that all concepts are about or applicable to things that can be experienced, or that all rationally acceptable beliefs or propositions are justifiable or knowable only through experience.” As Smith’s close friend, it is easy to decipher the influence of this teacher within the realm of self-interest. The drive to emulate that which is respected or admired within one’s sphere of existence is paramount to the experiences perceived within that sphere. Another way to say it is we are influenced by our surroundings, and the concept of “self-interest” does not exist in a silo. We are, naturally, part of societal systems and standards. Those standards are the result of innate moral convictions, that is communicated through sympathy, love, charity, and sacrifice. Other influences, namely Lockean Natural Law, are also reflective within Smith’s philosophical reasoning, as they were important principles taught during his time in Glasgow.
With these influences, Adam Smith connected the idea of self-interest with that of sympathy. He knew that societies consisted of family, friends, and acquaintances, and as a result of experiences with all three (and more), our innate self-interest will be closely aligned with the happiness of those we care about, and our pursuit of what we desire will include such considerations as we seek to better our own condition. “The purpose of self-interest is not only to drive the larger economic engine of society. It also ensures that individuals direct their moral energy in a way that is consistent with their limited abilities and knowledge.” We see the latter part of this statement illustrated in his belief in the division of labor.
Division of Labor
Smith defines the division of labor as, “the greatest improvement in the productive powers of labor, and the greater part of skill, dexterity, and judgment with which it is anywhere directed or applied.” This means that labor specialization not only contributes to the quality of the work but inherently adds to the quantity.
Theories into Division of Labor, similar to those of self-interest, did not originate with Adam Smith. Plato’s Republic defines this theory as economically significant. In addition, countless medieval records describe this division as contributory to the community as a whole. Thomas Aquinas stated that “one man is not able to do all things which are needed within a society, and accordingly, different people work at different tasks.” Among these possible literary influences, there were societal impacts that caused Smith to give literal application. Mercantilism, which could be described as the exact opposite of Smithian economics, was one such influence. The system of mercantilism defined a nation's supply of capital, coupled with a positive balance of trade, as the determinant of a nation’s economic welfare. To put it simply, it is a system in which a country attempts to gain wealth through trade, exporting more than it imports while increasing in goal and other metals.
This influence was prevalent throughout the 18th century and was considered the modal means of economic interpretation before The Wealth of Nations. Another view to which Smith was exposed, was that of the French Physiocrats, and their founder, Francois Quesnay. It stated a belief in private property, minimal government, and bureaucratic noninterference. It was one of their predecessors, Vincent De Gournay, who created the term, laissez-fair. Obviously, Smith did not agree with the mercantilists, nor did he completely agree with the Physiocrats, who determined that agriculture and farming were the center of economic productivity, and had continuing disagreements about whether labor was productive or unproductive. Agree or not, these two influences, coupled with his already determined theories of self-interest, allowed for his own interpretation of the importance of division of labor, where the individual is productive within his or her specialization.
No one can be everything at once. Specialization is key to pursuing excellence and mastery, allowing all members of a society to exercise their talents in the way they see fit. In production, this looks like the breaking down and separation of the working process into a number of tasks that go into creating a whole product. In business, it can be specialized teams and departments responsible for daily operations, marketing, and finance. Conversely, too much specialization can lead to mundane tasks cited in the quote at the beginning of the podcast, where the drive of the individual is lost within the needs of the industry. However, when the division of labor is combined with the concept of self-interest, there exists a check-and-balance, governed by desire, which may push the individual within a new specialization. Smith summarized this idea with the concept of the invisible hand.
The Invisible Hand
The notion of the “invisible hand” has become synonymous with Smithian economics. Stated simply, it means that “the result of everyone pursuing his own self-interests will be the maximization of interests within a society.” That somehow the “hand” will move the entire society in a positive direction through the individuals which comprise that society. The possible influences of this theory can only be assumed. The phrase is first used in Smith’s, History of Astronomy, where the reference is made sardonically in relation to polytheistic societies that ascribed natural events such as storms to fairy tale beings. The second use was recorded in the Theory of Moral Sentiments, where unconcerned rich farmers advanced the interests of society through the exploitation of their peasant workers. This passage was influenced by Bernard Mandeville, in his Fable of Bees, where it was argued that personal vices such as greed, avarice, and envy were public virtues in that they led people to economic activity. The third and final reference appears in Wealth of Nations, where the individual worker progresses the interests of society by pursuing his own. Possible influences on this theory can be found in the literature of the time. From Macbeth to Ovid, where the hero is stabbed in the back, “twisted and piled his invisible hand, causing a wound within a wound.”
Specific speculation has been raised about Smith’s real definition of “the invisible hand”, saying that all references to it were done sardonically or sarcastically. Most of these interpretations are done through the lens of “contemporary” history, where modern historians look through the eyes of current circumstances in order to surmise the intentions of historical figures. Throughout his writings, it seems that the notion of the “invisible hand” evolved from its sardonic uses to the more useful analogy which describes the modal movement of goods and services provided by those acting within the realm of their own self-interest, as related to personal sympathy, within the division of labor. It’s not my purpose to argue either point, but to provide a viable argument for both.
Outcome
The influences of Adam Smith on these three themes created a line of thought which transcends the economic principles and gravitates toward a moral outcome. According to Smith, self-interest is more likely to lead people to help others rather than hurt them. It leads the butcher and baker to feed others, not turn them away hungry. This basic principle lends itself to the importance of the division of labor, in which the specialized individual is capable of feeding multitudes quality food because he or she specializes in that specific area. The “invisible hand”, as defined by the Wealth of Nations, is said to automatically move in accordance with these principles, moving the society of specialized individuals towards a more productive, and thereby, happier end. These three themes are only pieces of the grand picture Adam Smith presented in both The Theory of Moral Sentiments and The Wealth of Nations. The influences of Adam Smith provided him with the tools needed to construct both the moral philosophies and the economic principles which are still in use today.
via Biography