The Father of Capitalism About the "Spirit" of Capitalism

This post is the third in a five-part series on the real purpose and spirit of capitalism. You can begin the series here.

In his critically acclaimed book, The Protestant Ethic and the “Spirit” of Capitalism, the 20^th century sociologist and economist Max Weber asserted that the theologies of certain religious groups influenced the development of capitalism in Northern Europe.

Image Credit: Paul Knowlton 

Weber’s use of the word “spirit" does not mean Spirit in the religious or metaphysical sense. Rather, it means the sets of values – the ethics and behaviors – that sprang from the theologies of those certain religious groups. Among the most prevalent is what we call the Protestant work ethic – hard work equating to economic progress - that continues to this very day in many circles, at least in name even if not in practice.

Likewise, Adam Smith -- often known as "The Father of Capitalism" -- had a theology and from his theological perspective he too wrote about the "spirit" of capitalism. He didn’t use the word “ethic/s” so much as he used the word “sentiment/s.”

 Image Credit: Paul Knowlton

In The Theory of Moral Sentiments (“Moral Sentiments”), first published in 1759, Smith introduced his social science breakthroughs that explained human behavior – including our responsibilities to each other and behavior in the context of free market economics – as springing from our nature as social creatures. Moral Sentiments is a book about behavioral economics that reveals Smith’s theology. It is also the strong foundation on which Smith places and erects the economic breakthroughs he discusses in his next book, Wealth of Nations.

Let’s review just a couple of the ethics from Moral Sentiments that Adam Smith observed as being elemental to the spirit of capitalism done well.

Self-interest

Smith advocates for self-interest, but his view of self-interest inherently and inextricably includes concern for others and the common good. His own words declare that both individuals and governments can and should seek mutual benefit. Smith’s work centers on and repeatedly emphasizes the mutuality of self-interest with other-interests and social good.

The Invisible Hand

Here’s the phrase 'invisible hand' as found in Moral Sentiments, together with the two sentences before and after to provide context:

 The rich only select from the heap what is most precious and agreeable. They consume little more than the poor: and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants; and thus, without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last, too, enjoy their share of all that it produces. (Emphasis ours.)(Part IV, Chapter I, Paragraph 9.)

Here we see that an invisible hand leads the rich to distribute, and not withhold, the necessities of life.

Empathy is the point of the spear in today’s emotional intelligence and leadership circles. Smith was centuries ahead of us in his including empathy in our business dealings.

The Role of Government

What does Smith actually say about the role of government? In relatively few words given his style, Smith writes in Moral Sentiments: 

The perfection of police, the extension of trade and manufacturers, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions. All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end. (Emphasis ours.) (Part IV, Chapter I, Paragraph 11.)

Smith did not advocate for laissez-faire government. In fact, he never used that phrase in Moral Sentiments or Wealth of Nations. Just the opposite.

In his own words, Smith sees the need and benefit of well-formed, functioning, and active governments. Notice that Smith refers to government functions as “noble” and “magnificent” and government as a “great system” that supports harmony and ease in politics. Politics refers to the administration of internal and external affairs on behalf of a body of people, not merely allegiance to a particular ideology or partisanship as it’s typically (mis)understood today.

Mutuality

The core principle of mutuality, of partnering for self-interest and other/neighbor-interest, weaves throughout the wide-ranging thinking of the Father of Capitalism, from his impartial spectator’s invisible hand to all combinations of exchange among individuals and nations. He provides the following examples of mutuality, primarily in Wealth of Nations.

Mutuality among individuals:

“As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of, so it is this same trucking disposition which originally gives occasion to the division of labour.”(Wealth of Nations, book I, chapter II, paragraph 3.) We note that division of labor does not by itself create gains—it is division of labor and partnership exchanges among the specialized laborers that creates mutual benefit and net gain.

Mutuality between urban and rural areas:

“The gains of both are mutual and reciprocal, and the division of labour is in this, as in all other cases, advantageous to all the different persons employed in the various occupations into which it is subdivided.” (Wealth of Nations, book III, chapter I, para. 1.)

“The inhabitants of the town and those of the country are mutually the servants of one another.” (Wealth of Nations, book III, chapter I, para. 5.)

Mutuality between nations:

“Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity . . . [due to] the impertinent jealousy of merchants and manufacturers.” (Wealth of Nations, book IV, chapter III, part II, paragraph 9.) This speaks to the intended mutuality of union and friendship, and the failure of mutuality leading to discord and animosity.

Mutuality between governments and citizens:

“The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expence [expense] to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.” (Wealth of Nations, book V, chapter I, part III, para. 1.)

“When the institutions or public works which are beneficial to the whole society, either cannot be maintained altogether, or are not maintained altogether by the contribution of such particular members of the society as are most immediately benefited by them, the deficiency must in most cases be made up by the general contribution of the whole society.” (Wealth of Nations, book V, chapter I, conclusion, para. 6.)

 Image Credit: AZ Quotes

Self-interest that includes the interests of others and the common good, the economically advantaged having empathy for the economically disadvantaged, governments designed to function well and gauged by the happiness of the people, and mutuality are all ethics that form and inform the spirit of capitalism according to the Father of Capitalism.

Take a moment to think about the current spirit of American capitalism.

How would you describe that spirit? Do you like it or would you like to see a different spirit? Would you like to see a spirit of capitalism as Adam Smith envisioned? Anything stopping you or your organization from helping create that spirit of capitalism?

Right. We don't think so either. So, would you please join us in helping breathe life into that spirit of capitalism, the spirit of capitalism as Adam Smith envisioned?

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Our vision is to benefit society by transforming capitalism's current core ethic of 'maximize shareholder value' to the better core ethic of 'optimize mutual value.' We achieve our vision by impacting learning, opinion, beliefs, and policy. Institute for Better Capitalism, Inc.

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