Adam Smith’s Theory of Moral Sentiments: Ignored by Neoclassical Economists, Implications, and a New Social Science Perspective

While The Wealth of Nations (WN) has achieved iconic status, another of Adam Smith's works, The Theory of Moral Sentiments (TMS), has remained largely overlooked by contemporary neoclassical economists. This article explores why TMS is so often neglected, the implications of this oversight, and argues for a reevaluation of economic theory to embrace a more holistic, ethical approach.

The Contrast Between WN and TMS

The Wealth of Nations is a cornerstone of modern economics, emphasizing the role of markets and commodity data in shaping economic outcomes. In contrast, The Theory of Moral Sentiments is a deeply subjective work that focuses on human emotions and moral judgments. This subjective nature has led many modern economists to dismiss TMS as irrelevant or out of touch.

Challenges to TMS

One of the key reasons for the neglect of TMS is its rejection of the concept of utility as the primary basis for moral sentiments. In Part 4, Chapter 2, Smith argues that nature has designed our feelings of approval for moral virtues, not for the practical utility that these actions provide to individuals and society. This is a bold statement that challenges the very foundations of modern economic thinking.

Rejection of Utility in TMS

Smith's rejection of utility as a basis for moral approbation is rooted in a nuanced worldview. He believes that while physical objects provide pleasure, it is the moral virtues that should guide human behavior. Allowing practical utility to take precedence over moral virtues risks leading to materialism and a disregard for ethical considerations.

Implications of Ignoring TMS

If neoclassical economists were to truly embrace and integrate TMS into their theory, several profound changes would occur:

Destroying the Concept of Marginal Utility

One such change would be the destruction of the concept of ldquo;marginal utilityrdquo;—a foundation of neoclassical economics created by Paul Samuelson. Without marginal utility, the concept of maximizing utility (which underpins profit maximization) would also crumble. This would have far-reaching consequences for economic theory and practice.

Eliminating Profit Maximization

Eliminating profit maximization would mean a shift away from the competitive economic model currently in place. Profits would no longer be the primary goal, and the natural rates of profit would align more closely with wages and taxes. This would lead to a reduction in economic inequality, as profits would be distributed more equitably.

Implications for Investors and Corporations

The consequences of such a shift would impact investors and corporations significantly. Without the expectation of high returns, investors might be content with a 5% return on investment, much like workers might be satisfied with minimum wages. This change would necessitate the breaking up of large corporations into smaller, more competitive entities. This would foster innovation, competition, and employment, further spreading economic prosperity globally.

The Role of Adam Smith's 'Invisible Hand'

Smith's "invisible hand" concept in TMS suggests that free trade and competition would lead to a more equitable distribution of resources. With these mechanisms in place, the world would experience a more balanced distribution of necessities, as if the earth had been divided equally among all its inhabitants. Unfortunately, the current economic system, rooted in mercantilism and utility maximization, has not permitted this to happen.

Conclusion: A New Social Science

Given the history of economic crises, from the 1929 stock market crash to the Asian financial crisis, it is clear that traditional economics has limitations. Revisiting and integrating Adam Smith's moral insights into contemporary economic theory could lead to a more sustainable social science. By creating this new social science, we can steer clear of the recurring economic downturns and focus on creating a more equitable and environmentally sustainable world.

Smith's vision for humanity is one where we pursue virtue and moral sentiments, not just utility. As we face the twin challenges of economic inequality and environmental destruction, it is time to reevaluate our assumptions and embrace a more holistic, ethical approach to economics.