Business and Ethical Thinking: Adam Smith

an Ethical Framework

Smith in the Wealth of Nations (1776), argued that societal wealth results from each citizen, pursuing his or her self interest with diligence. This serves the public interest as the citizen is guided by an invisible hand. Such self-interest today is usually equated with enlightened self-interest. Wealth is also enhanced by specialisation - efficient division of labour -

as a line of business
from work specialisation or specialisation within an industrial process
countries could specialise in products or lines of trade

The Pin Factory

Specialisation brings improvement in productive power. Skill and judgment are focused and applied. Whilst travelling in France, Smith pondered the ideas of the Physiocrats (e.g. Quesnay) and had observed the manufacture of pins (his one case study from which the ideas flowed).

One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put then into the paper......

Smith calculated that ten people specialising and technically organised could produce 48,000 pins a day. One working alone could not hope to get anyway near the average of 4,800. Businesses such as the Springfield Rifle Company in the American civil war, Marc Brunel in making pulley blocks for the world's navies and Ford with the model T all demonstrated the scope for further division of labour and automation to secure high volume, quality controlled, mass production.

Frederick Taylor's methods of scientific management conceptualised and operationalised the ideas further. Taylor's recommended methods of work design and measurement were founded on specialisation and simplification of labour processes.

State Intervention and the Cartel

Smith saw two threats to market freedom and the scope that creative individuals had to produce, buy and sell (the invisible hand).

interventionist, mercantilist government which imposed tariffs, granted monopolies, operated with high taxation. Such interventions he argued restricted the "invisible hand" of individuals pursuing self-interest in the market place (mediated by socially responsible sentiments).
business people themselves who had a tendency to meet in huddles and develop schemes to control the market place to their own advantage.
"People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices."

On Corporations and their Directors

Smith also spoke against corporations (joint stock companies) of which he wrote, they

"seldom pretend to understand anything of the business of the company; and when the spirit of faction happens not to prevail amongst them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make them."

He said of corporate directors

"..being the managers of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they ..... consider attention to small matters as not for their master's honour and very easily give themselves a dispensation from having it. Negligence and profusion therefore must prevail more or less in the management of such a company....Without an exclusive privilege.... (corporations) have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it."

Adam Smith Vol 2

Theory of Moral Sentiments

Smith's "TTOMS" supports the social responsibility aspects of the Wealth of Nations. He criticises those for whom self-interest is seen as the source of all "affections and sentiments" . This he sees as misapprehension about the nature of sympathy.

Macfie, argues that the sympathy or empathy of an impartial, rational spectator was, for Smith, a form of social cement. Socialisation processes instil "self-command" and "sense of duty" enabling us to demonstrate rational sympathy for others. "Proper" self regard is a mediated outcome. It is on this basis that social codes and behavior conventions arise to benefit the community.

Self-interested behavior "may" result in socially desirable outcomes "if" moderated by self-control and socially responsible adherence to socially beneficial rules and codes of behavior.

Thus, TTOMS outlines the social and institutional backdrop for a "society of perfect liberty" within which (Wealth of Nations) the "self-interested" person makes economic decisions. Within this social framework, excessive greed is seen as socially undesirable.

Adam Smith and Enlightened Self-Interest

Smith saw neither selfishness or greed as virtues. The former may be associated with deceptive advertising, fraud, theft and taking advantage of another. He argued for enlightened self-interest and industriousness. The free market represented a "system of natural liberty" whose processes, checks and balances would constrain greed, selfishness and fraud - open commercial society encourages people to be well informed and industrious. Patience, industry, fortitude and thought are key abilities needed by those who are able to jostle in the marketplace. The fear of losing reputation and customers restrains fraud and negligent indulgence.

The open, orderly, free market model contrasted with merchantilist, political societies which feature flattery, favouritism and deceit. Instead, the mechanisms and institions of the market place foster self-control, cooperation, timeliness, benevolence and moderated pleasures.

Web References et al

This resource was written by Chris Jarvis as part of the BOLA project