Adam Smith wasn’t the free-market fundamentalist he is thought to have been

It’s time we realised the relevance of his ideas to today’s financial crisis.

Amartya Sen in the New Statesman:

ScreenHunter_06 May. 06 10.38 Smith discussed that to explain the motivation for economic exchange in the market, we do not have to invoke any objective other than the pursuit of self-interest. In the most widely quoted passage from The Wealth of Nations, he 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. We address ourselves, not to their humanity but to their self-love.” In the tradition of interpreting Smith as the guru of selfishness or self-love (as he often called it, not with great admiration), the reading of his writings does not seem to go much beyond those few lines, even though that discussion is addressed only to one very specific issue, namely exchange (rather than distribution or production) and, in particular, the motivation underlying exchange. In the rest of Smith's writings, there are extensive discussions of the role of other motivations that influence human action and behaviour.

Beyond self-love, Smith discussed how the functioning of the economic system in general, and of the market in particular, can be helped enormously by other motives. There are two distinct propositions here. The first is one of epistemology, concerning the fact that human beings are not guided only by self-gain or even prudence. The second is one of practical reason, involving the claim that there are good ethical and practical grounds for encouraging motives other than self-interest, whether in the crude form of self-love or in the refined form of prudence. Indeed, Smith argues that while “prudence” was “of all virtues that which is most helpful to the individual”, “humanity, justice, generosity, and public spirit, are the qualities most useful to others”. These are two distinct points, and, unfortunately, a big part of modern economics gets both of them wrong in interpreting Smith.

More here. [Thanks to Shan Manikkalingam.]