American Economic Association

Adam Smith's Theory of Justice, Prudence, and Beneficence Author(s): William F. Campbell Source: The American Economic Review, Vol. 57, No. 2, Papers and Proceedings of the Seventy -ninth Annual Meeting of the American Economic Association (May, 1967), pp. 571-577 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/1821657 Accessed: 18/09/2008 00:04
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ADAM SMITH'S THEORY OF JUSTICE, PRUDENCE, AND BENEFICENCE*

By
WILLIAM

F.

CAMPBELL

Louisiana State University

Do we not owe the Growth of Wine To the dry shabby crooked Vine? Which, while its Shoots neglected stood, Chok'd other Plants, and ran to Wood; But blest us with its noble Fruit, As soon as it was ty'd and cut: So Vice is beneficial found, When it's by Justice lopt and bound ;1

Adam Smith in many ways is Mandeville without paradox. The core problem for both Smith and Mandeville is how to channel self-interest into socially beneficial manifestations. The two major restraints, prudence and justice, that Smith explains in the Theory of Moral Sentiments are also important in the Wealth of Nations. The third characteristic of the perfection of human nature, namely, proper beneficence, figures only marginally in the Wealth of Nations. The reason for this is that beneficence for Smith is the result rather than the cause of economic growth and development. As Smith says in the Theory of Moral Sentiments, "Before we can feel much for others, we must in some measure be at ease ourselves."2 Although there has been much discussion on the relationship between the Theory of Moral Sentiments and the HWealth Nations, it of has usually been carried on by partisans who uphold one book at the expense of the other. Unfortunately, little attempt has been made to carefully analyze the two books as complementary. When one does this, one notices certain relationships and ideas which have been obscured. First, Smith's formulation of justice is similar to certain problems of modern day wvelfare economics; second, the meaning of justice functions on two different levels: interpersonal relationships which are stressed in the Theory of Moral Sentiments, and intergroup relationships which are stressed in the TVealthof Nations. The impartial spectator becomes less of a spectator and more impartial when it is applied to economic policy as a rule of law norm. We shall see that much of Smith's distrust of governmental policy stems from his dedication to justice and impartiality rather than to an abstract devotion to free* This paper is extracted from an unpublished dissertation, "Prudence, Justice, and Beneficence as the Foundation of Adam Smith's Normative Economics," submitted to the Univ. of Virginia, June, 1966. The writer would like to express his thanks to Professors William Breit, Harold Hochman, and Roger Ransom for their advice and criticisms. 1 Bernard Mandeville, The Fable of the Bees, F. B. Kaye, ed. (Oxford: Clarendon Press, 1924), Vol. I, pp. 36-37. 'Adam Smith, The Theory of Moral Sentiments (London: Cadell and Davies, 1812), p. 357. 571

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dom. The natural law influences on Smith are more powerful and relevant than they have often been thought to be. Before we can understand Smith's ideas on justice, we must examine the broader framework of his moral philosophy. George Stigler once observed that "the desire for better men, rather than for larger national incomes, was a main theme of the classical economics."3If this is true, what, then, constitutes better men for Smith? The following passage should illustrate what type of man Smith wished to develop: "And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety."4This passage along with many others which could be cited should be sufficient evidence to indicate that Smith was aware of the possible abuses of self-interest. Smith never glorifies selfishness, greed, and an unbridled pursuit of personal gain, either in the Moral Sentiments or in the Wealth of Nations. It is the purpose of Smith's moral, legal, and economic thought to devise the appropriate institutional framework within which self-interest can be expressed without inflicting harm on other individuals. We should recognize that Smith theorizes on two different moral levels. The first level is the one of propriety or the proper government and direction of all our affections. It is on this level that the truly moral individual lives. Propriety is not unrelated to the "golden Mean" in Aristotelian thought or even to justice in Plato's thought. All actions and affections of the heart can be judged in terms of whether it is proportionate to the cause which excites it. If we may use an analogy which Smith did not use, we may say that propriety is similar to a moral radar which is constantly indicating marginal adjustments in actions and sentiments. Although we do not intend to fully explicate this level of Smith's moral philosophy, it is important to recognize that the psychological process of sympathy and the construction of the impartial spectator are essential to the functioning of propriety. Furthermore, the method appropriate to this aspect of moral philosophy is the most concrete and empirical. To live on a fully moral level requires knowledge and appreciation of all those little circumstances which determinemen's concrete actions in specific situations. The second level on which Smith theorizes is more relevant to our purposes and will therefore be discussed in detail. On this second level, general rules can be formulated which is the highest level to which or' GeorgeJ. Stigler,Five Lectureson EcononticProblems(London: Longmans,Greenand Co., 1949), p. 4. 'Smith, MoralSentiments,p. 32.

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dinary men can aspire. General rules are a second-best substitute for true moral behavior. They are devices by which insensitive and fallible human beings can have a rough measure of their actions, and by which men either through the force of public opinion or through the enforcement of the courts can control their antisocial tendencies and behavior. More specifically, Smith says, "The man who acts according to the rules of perfect prudence, of strict justice, and of proper benevolence, may be said to be perfectly virtuous."5Let us consider these three virtues in turn. Prudence, for Smith, is the kind of cool, calculating behavior that we associate with enlightened self-interest. Prudence dictates the necessary conditions for preserving and increasing one's external fortune. In his description of the prudent man, Smith gives an example which illustrates his knowledge of human nature, and also illustrates that the academic world has not changed much since his time. He says with respect to the prudent man of letters: "For reputation in his profession he is naturally disposed to rely a good deal upon the solidity of his knowledge and abilities; and he does not always think of cultivating the favor of those little clubs and cabals, who, in the superior arts and sciences, so often erect themselves into the supreme judges of merit; and who make it their business to celebrate the talents and virtues of another, and to decry whatever can come into competition with them."' Prudence is, of course, also important in the Wealthi of Nations as the source of the "desire to better our condition," and it is prudence which recognizes the advantages of the division of labor. Prudence is therefore the basis of saving and capital formation which is the engine of economic development for Smith. Even with all these advantages Smith has to say that prudence, though respectable and agreeable, is not one of the "most endearing, or of the most ennobling of the virtues. It commands a certain cold esteem, but seems not entitled to any very ardent love or admiration."7 Concern for the happiness of others recommendsto us the virtues of justice and beneficence. Justice "restrains us from hurting" the happiness of others, and beneficence "prompt us to promote that happiness."8 Smith prefers to use the term "justice" in its narrow meaning of abstaining from doing our neighbor any positive harm. In more familiar terms, it is the right to "life, liberty, and property." Justice is the limitation implied in the quip: my freedom extends as far as your nose. In fact, Smith's concept of justice is the necessary complement to freedom defined as the absence of coercion. Justice is the limit
'Ibid., p. 418. "Ibid., p. 372. ' Ibid., p. 377. Ibid., p. 464.

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or boundary beyond which no individual's pursuit of self-interest can extend. Furthermore, the observation of this limit is not to be left up to individual discretion as in the case of prudence (or as we also shall see of beneficence): it can be extorted by force. In another passage Smith says that "beneficence is always free, it
cannot be extorted by force.
. . ."I

Why does Smith make such a dis-

tinction between justice and beneficence? In modern terms it can perhaps be described as one way of distinguishing a free society from a good society. Justice is a necessary requisite for the existence of any civil society, and particularly a free society. Beneficence, although it is not a necessary condition for the free society, may be a necessary condition for a good society. Beneficence is an "ornament which embellishes, not the foundation which supports the building."'10 For an appraisal of justice and natural law influences in Smith it is important to note that the rules of justice are compared to the rules of grammar, and the rules of the other virtues such as prudence and beneficence are compared to the rules which critics lay down for the attainment of what is sublime and elegant in composition. This is an important departure from the rationalist theorists of natural law by whom Smith was nurtured as a student-Grotius, Pufendorf, and the "never-to-be-forgottenHutcheson." No longer is the analogy to mathematics or arithmetic. Without going into the philosophical difficulties, the rules of mathematics have an absoluteness and an a priori fixity, an independence from human will, that the rules of grammar do not have. Presumably grammar differs from society to society as the rules of mathematics do not. However, for any person living in a concrete society, the rules of grammar are fixed, and one can live with a longrun certainty that they will not be changed tomorrow.The rules of justice are established by a similar process; like grammar they are established by a slow process of social consensus, they are fixed for long periods of time without alteration, thus permitting individuals to make long-range plans without worrying about their being switched overnight. The fact that the purpose of justice is to prevent one person from harming another is similar to problems of externalities where the actions of one producer or consumer affect adversely the utility or production function of another. Although Smith undoubtedly had in mind such obvious examples as murder, rape, and theft, it is instructive to interpret Smith's characterization of justice as a negative formulation of Pareto optimality. When one interprets Smith's formulation in this
10 Ibid.,p.

'Ibid., p. 131.
146.

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manner, his discussion of the development of social institutions is useful to shed light on the difficultiesof resolving externalities. The Pareto rule which follows from Pareto optimality has been
stated in the following manner:
". . .

any social change is desirable

which results in (1) everyone being better off or (2) someone being better off and no one being worse off than before the change."" For Smith, a change (an action) cannot be called socially beneficial if it involves injury or harm to other individuals. Such actions should be discouraged by means of the formulation of legal and moral rules. If one accepts this Pareto-rule interpretation of justice, then the problem becomes one of practical implementation. Little thought has been applied to how, in fact, one would go about making the Pareto rule (voluntary agreement) relevant to a wider range of social phenomena than purely private market choices. Perhaps realistic thought on the possibility of other kinds of social institutions has been hindered because of the polarization around the dichotomy of purely voluntary market choices and collective-coercive group decisions. It has been assumed that the only alternative to market processes is collective group decisions.

The unanimity in group decisions which is necessary in a strict interpretation of the Pareto rule implies a fully rational process with a determinate voting procedure by which individual choices are consciously expressed. If the solution of all externalities was to be achieved by voluntary agreement (unanimity), then the frequency of intimidation and blackmail would increase considerably. Consensus, on the other hand, is a much looser criterion of general agreement. Smith would have pointed out that consensus (but not unanimity) is a common fact of social life. Language, morals and laws (civil and criminal law, but not legislation) are important examples of consensus. In the resolution of externalities the role of the judge as an impartial spectator is to discover the consensus which e:ists among rational men and to formulate it into rules of law. The role of the judge is not necessarily to read person's utility functions (although the role of judge as an impartial spectator using the psyclhologicalprocess of sympathy is in a better position to attempt this than the legislator), but he does have to decide what constitutes harm or injury. To do this he has to appeal to what is reasonable; i.e., to what the social consensus is among rational men. The problem of resolving interpersonal utility comparisons becomes one of constructing representative or impersonal utility functions by which conflict can be adjudicated.
1"James Buchanan, "Positive Economics, Welfare Economics, and Political Economy," J. of Law and Econ., Oct., 1959, p. 125.

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The formulation of justice in the Theory of Moral Sentiments that we have been examining is a restraint on self-interest imposed to protect one person from harming another. Before proceeding to the extension which Smith makes of the concept in the Wealth of Nations, let us make clear that it is only an extension. Smith does not abandon the old concept of justice (i.e., refraining from harming another), but only applies it to new phenomena. In the Wealth of Nations justice takes on new dimensions imposed by the necessity of articulating a sound set of principles as the basis for social policy. Justice functions on an intergroup or interclass level as well as the interpersonal level. The concept of the spectator (involving the psychological process of sympathy) is appropriate to individual moral development, but not to social policy. The meaning appropriate to social policy is impartial treatment which implies equality before the law; no individual or group is to be awarded special privileges or forced to endure special restraints: "To hurt in any degree the interest of any one order of citizens for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects."12 The elimination of preferences and restraints which is the "simple and obvious system of natural liberty and natural justice" is the main policy theme of the Wealth of Nations. If one had to choose a single passage from the Wealth of Nations which expresses its policy intent most adequately, it would not be the invisible hand passage, which is so persistently misunderstood,but the following passage: "All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men."13 The system of natural liberty and natural justice can only be understood as the contradiction of the systems either of preference or of restraint. The whole point of Books III and IV of the Wealth of Nations is to understand the demands of impartiality in the social order. Smith was very explicit about this organization in the Introduction to the Wealth of Nations. He points out that "the policy of some nations has given extraordinary encouragementto the industry of the country; that of others to the industry of towns. Scarce any nation has dealt equally and impartially with every sort of industry.""
"Adam Smith, The Wealth of Nations (New York: The ModernLibrary,1937), p. 618. 3 Ibid., p. 651. '4
Ibid., p. lix.

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The natural course of economic development (corresponding to the system of natural liberty) was one where neither preferences were granted nor restraints imposed. The whole point of Book III is to compare the actual course of development dictated by the "policy of Europe" with the natural course of development. The point of Book IV is to examine the systems of political economy which arose to justify the policies of Europe. Mercantilism did not act impartially to the development of industry carried on in towns; it gave it special privilege. Physiocracy did not act impartially to the development of agriculture; it wished to give agriculturespecial privileges. Smith's running attack on monopoly can also be approached from the point of view of the impartial spectator. He contrasts the natural price, or the price of free competition, with the monopoly price. The monopoly price (usually but not always) results from the grant of special privileges to firms, or special restraints on potential entrants. Smith says, "Stuchenhancements of the market price may last as long as the regulations of police which give occasion to them."15The main problem of monopoly for Smith was the elimination of legal barriers to entry. This was true in both the commodity markets and factor markets. In the Wealth of Nations, Smith evidences a sympathy for the plight of the laborer. This approbation of the claims of the workingman is, however, the approbation of the impartial spectator; labor has been placed under special restraints, and owners have been granted special privileges. The answer to this problem is not to grant special privileges to labor, but to take away the special privileges of owners and manufacturers, and eliminate the legal restraints on labor. Let us conclude by noting that we have been able to consider only one side of the interplay between moral development and economic development in Smith's thought. We have not been able to examine Smith's philosophy of history in which justice and beneficence are the fruits of an expanding commercial civilization rather than their cause. One aspect only must be noted. Smith was not guilty of the rather naYve Enlightenment views of the inevitability of progress. It is a tribute to Smith's realism and to his concern for the development of better men that he observed an important flaw in the very pillar of his economic scheme: the division of labor. Progress was not unilinear. The evils that were the inevitable accompaniment of economic progress should be ameliorated by prudent government action,
iS

Ibid., p. 62.