Adam Smith on selfishness v. self-interest

UPDATE (06.08.2013): Originally, I posted this article without any commentary although I found it extremely interesting, and, I won't kid you, very heartening for my progressive beliefs. For some reason it's one of my most popular posts.  I'm not sure why.  Maybe it's because people of all stripes, even today, see Adam Smith as the final authority on capitalism.  

Personally, I'm not willing to go that far. Experience and scholarship have contributed much to our understanding of capitalism/free enterprise, call it what you will, since Smith's time.  To give one giant example: Keynes. Say what you want, but the guy invented macroeconomics. Until him, there was only microecon, Smith's provenance. So we gotta give prop's where they're due.

Nevertheless, it's certainly worth discovering in the article that follows what Adam Smith himself actually thought about "capitalism," a word that wasn't even invented in Smith's lifetime; it was coined by 19th-century socialists to disparage what they saw as an economic system that exploited the working class.

I'm no economic scholar, I'm not even an entrepreneur. However, during extensive international experience as a consultant I've seen in developing countries what confirms Smith's belief that a certain moral underpinning (trust, fair dealing, a man's word is his bond, deal on a handshake, etc.), not to mention robust courts that enforce verbal as well as written contracts, are necessary for "economic individualism" to flourish without harming the common good. As Americans and Westerners, we overlook their powerful role too often. And it undermines our credibility when we preach the virtues of the "free market" to developing nations: like criticizing the composition of their roof while ignoring the crumbling foundation.  

Speaking of the common good, or general welfare, that's a concept under constant threat in the U.S., although it's specifically mentioned in the U.S. Constitution. Constitutional "purists" tell us there are no superfluous words in that revered old parchment, so it's worth contemplating what exactly was meant by the general welfare, and how it can be protected. Alright, enough of my two cents.



A Tale of Two Smiths: What Capitalism's Founder Would Think of Goldman's Greed

By John Paul Rollert

April 20, 2012 | Next New Deal

Adam Smith made a distinction between self-interest and selfishness -- and he knew that too much of the latter would lead a nation to ruin.

It has been over a month since Greg Smith's letter of resignation sent Goldman Sachs into full PR panic mode. Since then, the firm has completed its great "muppet" sweep, Mr. Smith has secured a blockbuster book deal, and Lloyd Blankfein has found himself fighting off stories of a growing power struggle at the top of Goldman high command.

All of this makes for good copy, but it risks obscuring the enduring moral dilemma at the heart of the original letter. Namely, when it comes to doing business, can we make a meaningful distinction between self-interest and selfishness? Or, apropos of Mr. Smith, should a place like Goldman ever hold itself to a higher standard than "How much money did we make off the client?"

Another Smith certainly thought so: Adam Smith, the founding father of modern economics. He first made his name as a moral philosopher with The Theory of Moral Sentiments, a careful diagnosis of the concern we have for others, the attention we show ourselves, and how the tension between the two underwrites a common code of ethics.

One of the principal villains of Smith's work was Bernard Mandeville, an occasional philosopher who impishly elided fine-grained distinctions. His scandalous work, The Fable of the Bees, was an allegorical poem involving a thriving beehive that bore more than passing resemblance to 18th-century England. Accounting for the affluence and ease the bees enjoyed, Mandeville made two contentions sufficient to give any high-minded economist heartburn. 

First, he claimed there was no essential difference, morally speaking, between the con man and the merchant. Both were driven by selfish instincts to get the better of their fellow man (or bee), and to that end, both trucked in deceit. Yes, the con man broke the law, but the merchant hid behind it.

Mandeville's second claim was even more scabrous: So be it. Vice, not virtue, kept the wheels of commerce turning, with the benefits shared by all:

Thus Vice nurs'd Ingenuity,
Which join'd with Time and Industry,
Had carry'd Life's Conveniences,
It's real Pleasures, Comforts, Ease,
To such a Height, the very Poor
Liv'd better than the Rich before,
And nothing could be added more.

If these lines sound a little bit like "greed is good," then you get Mandeville's point. Human beings are selfish, and thank goodness for it. Otherwise, we might end up like the bees, who are nearly wiped out after a spell of virtue saps their ambition, spoils their economy, and exposes them to outside attack.

When he stepped forward to challenge these views, Smith knew that he had to provide a compelling distinction between pursuits that are self-interested and those that are merely selfish. He granted Mandeville that there was "a certain remote affinity" between them insofar as both are motivated by a concern for personal well-being, but he appealed to common sense in saying that that we don't view all human desires equally. My interest in having a clean shirt is not only legitimate, it's laudable, whereas my longing for a panda skin sportcoat is not only illegitimate, it's an outrage.

Fair enough. But how exactly do we make these distinctions? Smith says we come by them naturally, by engaging others and discovering where our desires echo, overlap, and, finally, are at odds with one another. This process, iterative and ongoing, defines our moral sentiments, the felt necessities of right and wrong that shape and restrain our actions.  It also defines for us what Smith called "a fair and deliberate exchange," the very type of interaction at the heart of a commercial enterprise. 

When he turned his attention to economics, Smith did not think of himself as devising a system that was antagonistic or even alien to the one he had already developed. A free market provided individuals a space to engage each other in the pursuit of their own private interests, but that realm was not free from moral sentiments, nor should it be. Engaging in business was no less a part of human interaction than raising children or making friends, and the idea that a commercial sphere dominated by the grossest behavior would not contaminate the rest of society was not only silly, it was dangerously naive.  

This was Smith's greatest difference with Mandeville: He did not believe that a nation in which people pursued their interests irrespective of one another would be affluent. It wouldn't even be stable.  Riven by "hostile factions," society would seethe with conflict, for people with different interests would view each other with "contempt and derision."  In such an environment, Smith observed, "[t]ruth and fair dealing are almost totally disregarded," for the interests of others have no moral claim on us.

Is Goldman Sachs such an environment? Greg Smith says so, but only the people who work there know whether the culture is as "toxic and destructive" as his letter claims. Yet to the degree that clients are viewed with contempt and derision, especially by leadership, Adam Smith would say that we should hardly be surprised, as the other Mr. Smith seems to be, by "how callously people talk about ripping their clients off." This is to be expected. The line between selfishness and self-interest, in business as in all human pursuits, appears only when we feel that the interests of others occasionally require us to restrain our own. When we stop caring, that line disappears, and with it some very worthy things — personal integrity, self-respect, professional pride — that money can't buy.

John Paul Rollert is an Adjunct Assistant Professor of Behavioral Science at the University of Chicago Booth School of Business.

Study confirms: Nice guys finish last

To sum up: being a selfish jerk is good for individuals, but bad for the collective.

These findings contradict the idea that "rational self-interest" (read: being a selfish jerk) is the best way to improve the general welfare, as Randroids, libertards, and teabaggers argue.

Indeed, we can see this dissonance writ large at the firm level, where there isn't much evidence that being a "good corporate citizen" is good for the firm's bottom line. There is much more evidence that firms which disregard regulations and moral behavior benefit from such behavior financially.

Hey, You! Mean People Earn More, Study Finds

By Rachel Emma Silverman

August 15, 2011 | Wall Street Journal

It may not pay to be nice in the workplace.

A new study finds that agreeable workers earn significantly lower incomes than less agreeable ones. The gap is especially wide for men.

The researchers examined "agreeableness" using self-reported survey data and found that men who measured below average on agreeableness earned about 18% more—or $9,772 more annually in their sample—than nicer guys. Ruder women, meanwhile, earned about 5% or $1,828 more than their agreeable counterparts.

"Nice guys are getting the shaft," says study co-author Beth A. Livingston, an assistant professor of human resource studies at Cornell University's School of Industrial and Labor Relations.

The study "Do Nice Guys—and Gals—Really Finish Last?" by Dr. Livingston, Timothy A. Judge of the University of Notre Dame and Charlice Hurst of the University of Western Ontario, is to be presented on Monday in San Antonio, Texas, at the annual meeting of the Academy of Management, a professional organization for management scholars. The study is also forthcoming in the Journal of Personality and Social Psychology.

The researchers analyzed data collected over nearly 20 years from three different surveys, which sampled roughly 10,000 workers comprising a wide range of professions, salaries and ages. (The three surveys measured the notion of "agreeableness" in different ways.) They also conducted a separate study of 460 business students who were asked to act as human-resource managers for a fictional company and presented with short descriptions for candidates for a consultant position. Men who were described as highly agreeable were less likely to get the job.

For men being agreeable may not conform "to expectations of 'masculine behavior,'" the researchers write in the study. People who are more agreeable may also be less willing to assert themselves in salary negotiations, Dr. Livingston adds.

Other research shows that rudeness may not always benefit employees or their firms. A paper presented earlier this month at the annual meeting of the American Psychological Association found that 86% of 289 workers at three Midwestern firms in the manufacturing and health-care industries reported incivility at work, including public reprimands and making demeaning comments. Incivility was bad for the organizations as a whole, though, increasing employee turnover, found the researchers, Jeannie Trudel, a business professor at Indiana Wesleyan University-Marion, and Thomas Reio, a professor at Florida International University.

"The problem is, many managers often don't realize they reward disagreeableness," says Dr. Livingston. "You can say this is what you value as a company, but your compensation system may not really reflect that, especially if you leave compensation decisions to individual managers."

Lockerz, a 65-person Seattle, Wash., social-commerce company, has what it calls a "no jerks and divas" policy that is stressed in its employee handbook and orientation, says Chief Executive and founder Kathy Savitt. She notes, though, that there is a difference between being respectful and being agreeable. "We are not about being 'nice' or 'agreeable' or 'civil,'" she says. "We have a lot of robust debates about all kinds of things. But we do stress the notion of being respectful."

Paul Purcell, chairman, president and chief executive of Robert W. Baird & Co., a Milwaukee financial-services firm, says that his 2,700-employee company "doesn't hire or tolerate jerks. That's frankly a large percentage of people in our business. They don't get through the interview process." The firm has fired at least 25 offenders of its "no-jerk" policy, he says.

Human-resources consulting firm Development Dimensions International, of Pittsburgh, offers courses in "Interaction Management," covering interpersonal skills such as teamwork, managing conflict and giving and receiving feedback. "They are very trainable skills," says Jim Davis, DDI's vice president of work force and service development, who says that its interaction-training business is up 20% so far this year.

[Is the flip side also trainable? Because if you are out to do well, at least as a man, then you should enroll in training how to be disagreeable. That'd be the rational self-interested thing to do anyway. - J]