Adam Smith, Social Investor

Father of capitalism saw competition, ethics, and regulation working for the good of all

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.

And it is this question that leads Smith to develop his famous theory of "the invisible hand." We do not gain our supper through the benevolence of the butcher. The butcher labors to promote his own interest, which includes a need to be seen as benevolent. This need and the pressures of a competitive environment produce the positive social effects: the growth of production, wealth, wages, and purchasing power.

Society must promote competition. But unbridled competition is virtually the opposite of what Smith had in mind. He felt it was naturally checked by the individual's tendency toward benevolence and need for approval. He also believed that the role of government was to make certain that no one gained undue advantages that would promote monopoly.

Good wages the key

The first modern corporation was not formed until after Smith's death. During his lifetime there were, however, joint stock organizations such as the Hudson Bay Company. Like the modern socially responsive investor, Smith warned against the short-term and often selfish perspective of absentee proprietors and professional managers. It seems reasonable to speculate, therefore, that he would have readily approved of initiatives to assure the compatibility of society's interests with those of the modern corporation.

But Smith's most important contribution was to establish a moral foundation for economic enterprise: the well-being of the poor and the purchasing power of the majority. Providing good wages for workers was at the heart of Smith's economic and moral philosophy, and, as far as we can determine, he was the first to promote the idea of a "family living wage."

Like today's social investors who want to see corporations contribute to and be proactive forces in the solutions to our social problems, Smith saw commercial society as the force that would shape a better society, the ultimate purpose of his market system. He expected personal ownership of commercial entities, and the "impartial spectator" would lead such owners to act with morality and benevolence and thus promote the common good, for the good of their reputations if for no other reason.

Smith was not a social Darwinist; he did not think that survival of the fittest was the law of the marketplace. In fact, in "The Wealth of Nations" he describes how to improve the conditions of the poor and the vulnerable. This preoccupation with the common good as the goal of economic enterprise suggests that, like today's social investors, he would have wanted to make sure that any enterprise he invested in contributed to the common good and did not hurt our society.

Janet Prindle, a partner at Neuberger & Berman in New York, and Farha-Joyce Haboucha manage more than $300 million of socially responsive investments.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.