Adam Smith, Social Investor Father of Capitalism Saw Competition, Ethics, and Regulation Working for the Good of All

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In spite of capitalism's worldwide triumph over all competitors, it has become fashionable to think of capitalism as heartless and soulless. Its opponents, of course, have always thought so, but today even some of its friends see "hard" market forces as a desirable counterbalance to "soft" social values.

Neither group, however, is advancing the critical debates that should be taking place on such issues as the workplace, productivity, and global competitiveness. This, then, seems a good time to go back to the roots of capitalist theory. The father of capitalism, Adam Smith (1723-1790), was perhaps history's most misunderstood philosopher. He was a progressive, even radical thinker, a far cry from his image in economic and political debates today.

Not to put too fine a point on it: If Adam Smith were alive, he would be a socially responsive investor. He clearly thought the financial success of an enterprise depended in large measure on the degree to which it contributed to the social good. He would have had no patience with those who think it frivolous or irrelevant to assess a company's social performance or who promote the idea that government never has an interest in regulating markets. The 'spectator' within Smith was not an economist in the modern sense but a moral philosopher, the towering figure of the Scottish Enlightenment. In his major works - "The Theory of Moral Sentiments" (1759) and "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776) - social ethics have their foundation in individual morality. All people have an inner "impartial spectator" - a combination of conscience and need for approval - which, among other things, makes them sympathetic to others. They are driven by passions and self-regulated by the ability to reason. The resulting tensions encourage people to compete but mitigate the worst effects of competition for the common good. This is the great theme of "The Wealth of Nations." Long chapters deal with technical discussions of prices, the advantages of the division of labor, the motives for technological improvement, and the theory of money. But Smith's overriding interest is in increasing the general well-being of society by expanding the middle class. He was the first to define the proper object of society as the greatest good for the greatest number of people: "But what improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy of which the far greater part of the members are poor and miserable." The way to improve society is to grow the economy. Increasing production increases wealth, which increases wages and purchasing power. The question for policymakers is how to facilitate this chain of cause and effect. …