Smith's Theory of Moral Sentiments

This year is the 250th anniversary of the publication of Adam Smith's "Theory of Moral Sentiments" - the work of moral philosophy that in many ways served as a precursor to his "Wealth of Nations". Econtalk.org is marking the occasion with an audio series on the book, the first installment of which was recently released.

I, like many, am far less familiar with Moral Sentiments than I am with Wealth of Nations. And also, like many, my understanding of Wealth of Nations is largely restricted to the popular cookie-cutter interpretation of that work. To summarize: the pursuit of self-interest is actually beneficial to society, and restrictions on the pursuit of self-interest often have unintended negative consequences. The foundational "human motivation" in Wealth of Nations and most subsequent works of economics is this self-interested pursuit of "utility" or "profit". The few exceptions, including institutionalists like Thorstein Veblen, or heterodox thinkers like John Kenneth Galbraith (I'm thinking of the Galbraith of The Affluent Society primarily, rather than the Galbraith of The New Industrial State) seem to prove the rule.

There are many reasons to believe that any model of society based exclusively or even primarily on the motive of utility maximization is likely to imperfectly represent (and perhaps more substantially, imperfectly predict) reality. It should be self-evident (and I don't appreciate the casual use of that hallowed phrase) that we are motivated in our own lives by other things than self-interest. In many cases, when economists confront this reality, they explain it away by suggesting that alternative motivations aren't directly relevant to the marketplace. Yes, altruism, jealousy, etc. may motivate much of human activity - but greed and self-interest exercise such primacy in market decisions and any model determining production and allocation can safely disregard other motivations.

Adam Smith used his "Theory of Moral Sentiments" to outline the major facets of human motivation beyond self-interest, and for that reason it should serve as a motivator for economists who cling to utility or profit maximization models. This is not to say that self-interest should be marginalized. It will always be central to economics. But I would like to see (I would like to design myself) models that explicitly model the optimization of some combination of relative wealth and absolute wealth. We know people "keep up with the Jones's" - why do we pretend that relative wealth is irrelevant in our models?

Often we look back to Adam Smith, accept the foundational insights into the market that he introduced, and then proceed to qualify the Smithian worldview with various externalities and market failures that economists have come up with since the 18th century. The Wealth of Nations earns it's place of honor on our bookshelves (I have three copies myself, my favorite of which is about 125 years old and looks quite handsome, safely nestled on it's shelf, four feet above the floor), but it is rarely cracked open for actual guidance. I've never read Moral Sentiments, but I think it holds the possibility of exploding the profit-maximizing myth of modern economics. If economics is really going to be a science of human decision making, it should more explicitly encompass the full range of human motivations.