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Myths Debunked:
Adam Smith Proved that Greed Is Good



Adam Smith’s Mistake

[A private clinical psychologist is the only person I know of who has written about what Adam Smith, who was trained as a “moral philosopher,” could possibly have meant when he apparently extolled selfishness.  In fact, Smith’s first book, Theory of Moral Sentiments, is about sympathy, or altruism, as a primary human motivator.  Dr. Kenneth Lux wrote a book showing that Smith may not have meant that greed is unquestionably good, at least not to the extent later readers have assumed.  Here are some excerpts from Lux’s very important book.]

Kenneth Lux, Adam Smith's Mistake:  How a Moral Philosopher Invented Economics and Ended Morality (Boston:  Shambhala Publications, Inc., 1990)

"If the butcher or baker can cheat us (say by using short weights on his scale), and he can get away with it, isn't it in his self-interest to do so?  The answer must be yes.  There is nothing in self-interest that rules out cheating, especially if one is good at it.  It is not self-interest that prevents someone from cheating.  Self-interest only dictates that they not get caught." (P. 83)

". . . economists came to conclude that from the standpoint of self-interest it would be irrational for someone not to cheat if they could be reasonably sure of getting away with it.  'Honesty is the best policy' is not an economic doctrine." (P. 83)

"Smith's forthright talk of businessmen cheating and oppressing the public seems to stand in direct contradiction to his advocacy of self-interest as the sole principle necessary for the achievement of the public good.  The saving grace was supposed to be the 'invisible hand' of competition.  It was competition that would keep these instincts and 'expensive vanities' of the merchants, dealers, and landlords in line. . . .  Smith had essentially (P. 83) overlooked the possibility that self-interest would work to undermine and eliminate competition and thus to tie up the invisible hand.  It is this outcome of unrestrained self-interest that is the fundamental flaw in any absolute policy of laissez-faire." (P. 84)

". . . the principle of self-interest dictates that the individual seek self-benefit by imposing costs on the natural environment.  From the Industrial Revolution and continuing down into the present, self-interest has produced pollution, depletion, and the progressive destruction of the natural world." (P. 84)

"Our review of several periods of history has shown that the good of all is not attained by pure self-interest or egoism.  There must be another principle operating in people, a principle that moderates self-interest in favor of the general good.  We indicated above that a sense of honesty could be one such moderating tendency.  Honesty follows a standard that is outside of self-interest, and this is precisely the definition of morality.  Other such principles are fairness, integrity, reasonableness, and a sense of justice." (P. 87)

"As a matter of fact, it is according to Smith himself that justice is necessary for the good to be attained." (P. 87)  Later on in the book he says, "'Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interests in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.'" (P. 87)

"What Adam Smith ought to have said was, "'It is not only from the benevolence . . . [of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.]'" (P. 87)

". . . Smith's sanctioning of self-interest without any qualifying or restraining force completely eliminated the moral problem in human action.  Morality is always a matter of choosing, and situations of moral relevance always involve conflict of interest.  One has to choose between the interests of 'rightness' (which can be taken to mean honesty, justice, fairness, the concerns of the other, the public, society) and the interests of the self in disregard of rightness." (P. 89)

[And don’t forget what the evolutionary biologists are finding.  Social skills, including altruism, honor, and even a sense of fairness and justice appear to be instinctual to our closest relatives, the apes and monkeys.  (Read Matt Ridley, Robert Wright, and Frans de Waal.)  Perhaps we can assume, then, that these are also traits we have inherited.  We have an acknowledged instinct for self-interest, so if these scientists are right, we’re born with a built-in conflict.  And what we must do, both as individuals and as societies, is to find a balance between the two poles of the continuum.  It is simplistic, even childish, to insist on black-or-white, either-or, thinking and believing.

Pure altruism (communism) doesn’t work because it ignores self-interest and encourages freeloading.  Pure self-interest (laissez-faire capitalism) doesn’t work because it goes against the self-interest of the many by encouraging a dog-eat-dog world where only the unscrupulous get to the top.  Finding the balance, finding the right mix, doing what works and what’s best for the greatest number of people is what politics is all about.  Maybe Adam Smith meant to write a book about balance between the two prime motivators he wrote about, but never had a chance.

I talked to Dr. Lux in February of 2002 to suggest that he reissue the book in light of the Enron collapse, and he said a professor in Texas is using it in his ethics classes.  The book is available in spiral bound form in the college bookstore.  It's the Palo Alto College in San Antonio, Texas.  I've spoken with the manager.  He said to just call the bookstore at 210-921-5230 and ask for Adam Smith's Mistake.]

Even Business Week admits that unfettered greed leads to theft.
Business Week

NOVEMBER 27, 2002

By Christopher Farrell

Biting the Invisible Hand

Ongoing corporate scandals prove that top execs didn't quite get what Adam Smith meant by "enlightened self-interest"

In an October talk before the Financial Management Association International, Martin Fridson, chief high-yield strategist at Merrill Lynch and a market historian, drew a critical distinction by calling on Adam Smith's famous image of the Invisible Hand. Fridson noted that the Invisible Hand, a metaphor for harnessing individual self-interest to serve the general well-being, is a powerful principle.

And in my view, it's worked well, perhaps better than ever, in the 1990s. Barriers to trade fell with the collapse of communism and the embrace of freer markets around the world. Deregulation unleashed competitive forces in previously cosseted and inefficient industries. The traditional command-and-control corporate hierarchy broke down as management embraced a more flexible, entrepreneurial culture. The Internet, a remarkable technology for financial democratization, created direct pipelines to consumers. Wall Street was no longer a private club for the wealthy, and equity ownership spread to the mass of employees.

Excesses emerged toward the end of the era, however. And here's where Fridson's second observation about the Invisible Hand comes into play: It's a "very convenient cover story for people who are actually trying to stack the deck in their favor," he says. America's business and finance elite preached the virtues of competitive capitalism while practicing the crony variety. The elites took no risks, and pocketed outsized rewards, by gaming the system with deceptive accounting practices and backroom compensation deals…

The market has brought about some needed correction. But the rules of the market are still far too open to manipulation, in my view. A broad-based equity culture requires a reform agenda deeply committed to more disclosure and ensuring dependable financial numbers. If you look at it in capitalist terms, there's a return on reform: Strong economic growth and a widespread social stake in the capitalist system. Wise up, all you captains of industry. The right course is clear. And take Washington with you.

Scientific studies are proving that cooperation is a built-in human trait.

Brain scans show why we love cooperating (now archived at – no longer available on the Yahoo website)

Last Updated: 2002-07-17 13:09:43 -0400 (Reuters Health)

By Alison McCook

NEW YORK (Reuters Health) - New research reveals why people often cooperate with each other, even when it is not necessarily to their advantage to do so.

A group of researchers based at Emory University in Atlanta, Georgia, found that when a woman is involved in a situation where she is cooperating with someone else, she experiences activation in brain areas that are also activated by "rewards" such as food, money and drugs.

This indicates that our bodies may have been somehow programmed to "tag cooperation as rewarding," study author Dr. Gregory S. Berns told Reuters Health.

"Which is good, because it probably keeps the social fabric of society together," he added…

[The truth is, when you get past all the hate rhetoric, that millions of years of evolution have made us social beings.  We lived in tribes for millions of years, and I assure you that members of a tribe didn’t have a greed-is-good mentality.  I’m no expert, but what I’ve read suggests that in a tribal environment generosity was admired and rewarded.  And one didn’t become a chief simply by being the strongest.  An aspirant for chiefdom had to build coalitions of supporters, had to be willing to listen to the wisdom of the elders, and was most likely to become and remain chief if he was known as a brave hunter and warrior, but also as a generous person.]

Financial Times


A trust fund that gives a fillip to the feel-good factor (archived at – not available on the FT website)

Alison Beard

The good news is that a hormone secreted by the brain during sex can be a powerful economic growth engine

Oxytocin is a hormone that the brain secretes when the body feels good.  Mothers show higher levels of oxytocin when they breast feed; it increases in men when they hug their children.  Oxytocin rises during sexual orgasm.

So why does Paul Zak, an associated professor of economics at Claremont Graduate University, spend his days in a laboratory, drawing blood samples from student volunteers and looking for the hormone?

Because oxytocin also appears to be linked to trust.  And trust, according to Zak, is a powerful economic growth engine…

Per capita income is one of the top four predictors of a country’s trust levels.  (The others are social and economic homogeneity, strong legal institutions, and social rules that promote good behaviour.)

But when trust is high, the economy grows, further boosting income, they argue.  A country that increases its trust levels by 15 percentage points will raise per capita output growth by 1 per cent a year, they estimate…

Zak’s macroeconomic research suggests that governments can increase trust levels by changing the environment in which their people live and transact – improving education, reducing income inequality. Enhancing freedoms and strengthening legal institutions…

Other ways to boost oxytocin include massages, warm baths and phytoestrogens, which are found in soyabeans, cabbage and broccoli.  Interaction with children helps, too.  But “the best way to raise oxytocin, short of giving birth, is having sex,” Zak says.

“If you want a flippant way of saying it:  Sex is good for the economy.”

[That ought to scare the socks off the sexophobic right wingers.  You can be sure that neo-conservative ideologues like those in the Bush administration will never follow this advice, because it's in their best interest to DECREASE the level of trust.  They don't want a growing economy where everybody benefits, they just want to get and keep more money and more power for themselves.  And people tend to vote Republican when they're afraid and don't have trust, as we saw in the 2002 election.]

And John Nash, subject of the book and movie, A Beautiful Mind, proved mathematically that complete self-interest is not in the best interest of the group.

“Adam Smith's theory is incomplete. Self-interest alone can lead to disaster for all, [mathematician John] Nash demonstrated mathematically. Self-interest coupled with concern for the good of the group is most likely to benefit everyone.” – Marjorie Kelly, San Francisco Chronicle, February 24, 2002

I'd write a book on this subject, if I could ever find a publisher.

Carolyn Kay

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Last changed: December 13, 2009