Business Ethics and the Origins of Contemporary Capitalism: Economics and Ethics in the

Work of Adam Smith and Herbert Spencer

Author(s): Patricia H. Werhane
Source: Journal of Business Ethics, Vol. 24, No. 3 (Apr., 2000), pp. 185-198
Published by: Springer
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Business Ethics and the Origins
of Contemporary Capitalism:
Economics and Ethics in theWork
of Adam Smith and Herbert Spencer1 PatriciaH. Werhane

ABSTRACT. Both Adam Smith and Herbert Adam and the later nineteenth-century
Smith,
Spencer, albeit in quite different ways, have been English thinker, Herbert Spencer. I have chosen
enormously influential in what we today take to be these two for focus, because, as I shall demon
philosophies of modern capitalism. Surprisingly it is influenced much
strate, their thinking has
Spencer, not Smith, who is the individualist, perhaps
an egoist, and supports a "night watchman"
of what today we take to be the relationship
theory between economics to ethics. What I shall call
of the state. Smith's concept of political economy is
the "popular views" of their writings do not
a notion that needs to be revisited, and Spencer's
represent the full body of their texts; yet these
theory of democratic workplace management offers
a refreshing twist on contemporary libertarianism. popular views have had profound implications
in economics and in applied ethics. At the same
time, of one carefully reads their work, each has

something new to contribute to

The origins of capitalism in the form of importantly
commerce and free enterprise started can be contemporary analyses in applied ethics.

traced to a prehistoric era when Adam Smith has been called the father of the
people began
each other. Ethical issues in business Industrial Revolution, the first neo-classical
trading with
arose simultaneously or soon after. As early as political economist, and one of the earliest

1800 BC, for example, we find worries about defenders of private freeenterprise. Yet, inter

the ethics of traders and merchants in the Code estingly, almost since his death there has devel
not a caricature of his best-known treatise on
of Hammurabi. But I shall begin there. oped
in this paper I shall dwell on the work political economy, the Wealth of Nations (WN).
Rather,
of two more recent the Beginning in the early nineteenth-century Smith
thinkers, eighteenth
Scottish economist and has been read as having promulgated Thomas
century philosopher,
Hobbes' allegedly egoistic picture human of
motivation in the WN, and as having solved the
Patricia H. Werhane is the Ruffin Professor of Business of the dichotomy between the so-called
problem
Ethics in the Darden School at the University of natural selfish passions and public interests. When
Virginia and Senior Fellow of the Olsson Center for individual human beings are granted what Smith
Applied Ethics. Her works include Ethical Issues
calls the "natural to pursue their own
liberty"
in Business, edited with Tom Donaldson (5 editions), ...
interests, where "all systems of restraint,
Persons, Rights, and Corporations, Adam Smith
therefore, being thus completely taken away"
and His Legacy for Modern Capitalism,
(Smith, WN, iv.ix.51) the harmony of these indi
Skepticism, Rules, and Private Languages. She is
on the Executive Committee of the Society of Business vidual pursuits will, unintended by the actors,
Business Ethics Quarterly, often produce social and economic good. This
Ethics, Editor-in-Chief,
and on the editorial boards of Journal of Business is because, according to this reading of Smith,
Ethics, Journal of Value Based Management, and self-interested, economic actors in free compe
Public Affairs Quarterly. tition with each other unintentionally create a

fournal of Business Ethics 24: 185-198, 2000.

?*
r" ? 2000 Kluwer Academic Publishers. Printed in theNetherlands.

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 186 Patricia H. Werhane

system. This system, the "invis about commerce and free enterprise. Surpris
self-constraining
ible hand" which governs market transactions, ingly, too, we can look to Spencer's libertarianism
functions both to regulate these self-interests and and evolutionary Social Darwinism for a model
to produce economic growth and well-being of workplace democracy in mature capitalist
such that no one actor or group of actors can economies.

take advantage of other actors or take advantage Herbert Spencer, the great British nineteenth
for very long (Hildebrand, 1948; Knies, 1853; century radical liberal, sociologist, and political
von 1878. See also Buckle, 1861). is referred to as the father
Skarzynski, philosopher, usually
a number of late twentieth and founder of Social Darwinism. In nineteenth
Interestingly,
century scholars including Amatai Etzioni, century Europe evolutionary theory was not the
Robert Frank, Milton
Friedman, Albert monopoly of Charles Darwin, but was part of
Hirschman, and George Stigler have adapted this speculative thinking of the time. It was Darwin
as well a theory of bio
reading of Smith (Etzioni, 1988; Frank, who gave biological proof for
1988; Friedman, 1962 and 1976, Hirschman, logical evolution, but the theory, albeit unproved,
1977; Stigler, 1971). A. O. Hirschman declared predates the voyage of the Beagle and the 1859
that "the main impact of The Wealth of Nations publication of the Origin of the Species. Spencer
was to establish a economic justification was one of its most articulate proponents, and it
powerful
for the untrammeled of individual self was Spencer, not Charles Darwin, who
coined
pursuit
interest" (Hirschman, 1977, p. 100). This view of the term, "survival of the fittest." Spencer
is nicely summarized the late depends on Lamark rather than Darwin for the
by George Stigler,
Nobel Prize Chicago economist who writes, basis of his system, and a number of his books
"The Wealth of Nations is a
stupendous palace and essays were published before Darwin's work
erected upon the granite of self-interest" (Stigler,
came out. According to one sympathetic inter
1971, p. 265). preter, it is not that Spencer was a social
How did what I take to be amisreading of the Darwinist; rather one should more properly say
WN occur? It may have been, in part, a confu that Darwin was a
"biological Spencerian"
sion of Smith with his predecessor, Bernard (Turner, 1983, p. 107f).
Mandeville, who was famous
for arguing that Spencer is a systemic thinker who conceives
vices could be into public virtues
turned the universe, in all its diversity, as constructed
private
(Mandeville, 1732, 1988, pp. 23-24). But such from one set of principles, in his case, the prin
an interpretation may also have arisen from ciples of evolution. He calls this set of principles

reading Smith through a certain understanding and his depiction of this system as the "System
of the writings of Herbert Spencer. Spencer's of Synthetic Philosophy" (e.g., Spencer, 1862).
social Darwinism has influenced some of the Spencer outlines the basic principles of natural
more libertarian twentieth-century thinking selection: the evolution of natural phenomena
about free enterprise in this century and may from the very simple to the increasingly complex.
have tainted the reading of the WN as well. According to Spencer, evolution is "a continuous
In what follows I shall spend some time delin change from indefinite incoherent homogeneity
eating Spencers thinking. I shall then present a to definite coherent
heterogeneity of structure

nonSpencerian, interpretation of Smith's work and function, through successive differentiation

that more closely resembles the original text. I and integration" (Hudson, 1985, p. 88). For
shall conclude with some
speculations
con example,
we find the universe evolving from a
how and Smith have influenced mass to a highly complex
cerning Spencer simple homogenous
modern economic theory and applied ethics. solar and galactic system. Similarly, biological
Neo-Classical economists to Smith for evolution begins with simple single-cell amoebae
appealed
a for laissez-faire and and evolves to a collection
increasinglyof
justification capitalism,
to Spencer for grounding a "night watchman" complex organisms where those species that can

theory of the state. However,

we can appeal to best adapt to changing environmental and global
another of Smith to tell different story conditions survive. The weak, less fit, and least
reading

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 Business Ethics and the Origins of Contemporary Capitalism 187

flexible die In this process

off. of complexifi natural phenomena. Spencer analogizes society
cation, evolve from simple, fairly to an
organism, and traces the history of
organisms
undifferentiated to differen humankind as an evolutionary process from
phenomena highly
tiated, specialized, heterogeneous organisms. simple informal arrangements between hunters
"The of society, as well as the and gatherers to hierarchical military or military
development
of man and of life generally, may like political systems, then thence to more
development
as a tendency to individuation - to
be described complex political and economic systems. Private
become a thing" (Spencer, 1851, p. 408). Because enterprise introduces the notion of economic
of differentiation and specialization, individual liberty as wellas industrialization, and eventually,
become on other the idea of democratic As
species dependent species, and political development.
later, individual human become societies become more complex there is evidence
beings depen
dent on other human beings. of increased differentiation parallel to species
This process is neither nor linear. differentiation, and at the same time greater
simple
Despite the indestructibility of matter and the mutual dependence exhibited by increasingly
fact that it is continually in motion, at various complex interrelationships between highly dif
stages there are periods of devolution and regres ferentiated and specialized individuals, institu
sion in the development of organisms. As new tions, and society, and, sometimes, between

species evolve, others devolve, and with each societies. Like natural evolution, these social
iteration the most and the are spontaneous unless
adaptable species, processes tampered with,
fittest individuals in each survive the and like natural evolution these processes are not
species,
increasingly complexification of their surround linear; there are periods of devolution as well,

ings and the increasing interdependence. In this when particular societies revert to simpler social,
spontaneous process of evolution and devolution political, and economic arrangements (Spencer,
is exhibited the law of the survival of the fittest. 1857, pp. 8-62).
Spencer applies the term "survival of the
The law is the survival of the fittest. . . .
[T]he law fittest," to
alternately particular political
is not the survival of the "better" or the "stronger,"
economies or societies or to individuals
if we give to those words like their (Spencer,
anything is most
It is the survival of those which
1886, pp. 389-466). A society likely to
ordinary meanings. survive if it is constantly more
are constitutionally fittest to thrive under condi developing
tions under which are . . . complex economic
systems, and adapting itself to
they placed (Spencer,
whatever changes it encounters. The society that
1872, I, pp. 379-380) -
is independent that is allowed to evolve in its
The ideal is a state of equilibrium where each own way - is most likely to develop its own

organism, each species, each planet, each star and survival and adaptability mechanisms so that,
each galaxy is in stasis with its surroundings and Spencer thought, that it is immoral to interfere
other phenomena. For example, in the evolu with this process. Spencer writes,
tion of the universe, the revolution of the planets
around the sun has reached a state of fairly stable [t]o interfere with this process [of spontaneous evo
lution] by producing premature development in
equilibrium and, for the time being at least, is no direction is to disturb the
any particular inevitably
longer subject to drastic change. true balance of organization by causing somewhere
This process is not merely a
evolutionary else a corresponding atrophy (Spencer, 1851, pp.
natural or biological one. Rather, in accordance
290-291).
with System
Spencer's of Synthetic Philosophy,
the principles of evolution apply to all phe A particular society should look after itself, but
nomena including human beings and their social not come to the aid of its neighbor for two
interactions. The evolution of individuals in their reasons. First, such aid reduces the strength,
social and political relationships, and of cultures, capital, or resources of the aiding thus
society,
societies, and social systems is as much a part of its own chances for
diminishing evolutionary
the evolutionary process as are biological and Second, each should be left
development. society

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 188 Patricia H. Werhane

alone to make its way. Interfering with that according to Spencer, we seek our own pleasure

process of evolution may be harmful to that or happiness and try to avoid pain. However,

society or make it less independent, or it may the evolution of the human being entails the
a
assist weak, devolving society to continue, again development of complex mental abilities. Along
with the of evolution. War with this mental we have devel
interfering principles development
is an for Our a notion of free will, thus we are able to
interesting anomaly Spencer. oped
our own
aggressive nature is obviously evolutionary, inher direct individual destinies. If particular
ited from other animal and, he writes, societies should be left alone to evolve or
species,
"in the earlier states of civilization, war has the devolve as they are fit, so too, the individual, who
effect of exterminating the weaker societies, and makes up the basic unit of any society, should
of weeding out the weaker members of the be left alone to develop her resources and
stronger societies"(Spencer, 1873, p. 346). Still, strengths. This conclusion is based upon what
as civilizations evolve, industrialize, and democ Spencer calls the "Law of Equal Freedom,"
ratize, there develops a strong sense of individual stated as,

morality including the principle that it is wrong

to interfere with others. War depletes "[e]very man may claim the
liberty to
fullest
capital and
exercise his faculties compatible with the posses
cultivates anti-social immoral behavior. Thus as
sion of like liberty by every other man (Spencer,
societies evolve, "wars" will be industrial com
1851, p. 35), [or,] [e]very man is free to do that
petitions rather
than physical battles. The result
which he wills, provided he infringes not the equal
will be similar without the accompanying freedom of any other man" (Spencer, 1892b, II,
negative financial and moral side-effects.
p. 46).
Spencer's synthetic philosophy appears holistic,
and he often uses the term "social organism" to The ideal just grants and protects
society equally
refer to society or societies. Nevertheless, these negative rights, and indeed, the Law of

Spencer is a methodological individualist. The Equal Freedom forms the basis for Spencer's
unit out of which social organisms are commutative theory of justice. Every individual
primary
made up is the individual human being. Societies has the equal natural right to be left alone, the
evolve, not to be harmed or interfered with by
they develop complex interrelationships, right
and they affect and are affected by individual rela others society. As a result, individuals
or by have

tionships. But societies are merely aggregates, the equal liberty to pursue their own ends as they
albeit complicated aggregates, often constructed are able and desirous of doing, so long as they do
out of impossibly complicated interrelationships. not interfere with others' pursuits. Importantly,
It is the individual, in this case, the individual freedom is the absence of restraints, not self
human that is the basic unit and at the determination. Thus the natural right not to be
being,
core of Spencer's synthetic system. It
is, of interfered with allows, but does not require, the
course, difficult to envision how the principles to pursue one's own ends (Doherty and
right
of evolution drive social evolution of societies Gray, 1993,p. 484). If left alone some of us will
that are merely aggregates of individuals, and develop, mature, and contribute; others will
does not answer that criticism. or wither away. Thus the strongest and
Spencer fully atrophy
this problem, never relinquishes most adaptable, both physically and mentally, will
Despite Spencer
his individualism to the general of and should survive and flourish. As a result of
principles
social (Simon, 1960, pp. noninterference, a collection of the fittest indi
evolutionary theory
294-299). viduals will create the fittest society. This is not
In the Social Statics and in his political writings quite radical individualism, because Spencer
Spencer applies his synthetic system with its evo recognizes that as complex highly differentiated
to individual human devel individuals, we live in and must work within
lutionary principles
opment. Spencer parallels individual development social structures. This is always a struggle because
to natural development and social development, we have not yet reached a stage in evolution
one more factor. Like every organism, where private and social interests coincide. It is
adding

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 Business Ethics and the Origins of Contemporary Capitalism 189

or pro
hard not to interfere with others while at the laws that restrict days or hours of work
same time in a community. scribe women or children from laboring. He
interrelating
One of the issues raised by Spencer's preoc fights against compulsory education, orphanages,
cupation with the natural right to be left poor houses, libraries, or any sort of public insti
alone is whether or how the Law of Equal tution that requires government funds, govern
Freedom makes sense within Spencer's natural ment intervention, and helped people who
istic hedonism. Spencer finds that eachbiolog should be helping He also questions
themselves.
ical species seeks its happiness or pleasure and taxation, particularly the poor, arguing ofthat
tries to avoid pain.
Spencer agrees with Mill that the deserving poor should be given an opportu
is valued for its own sake nity to work and support themselves, and he
only happiness
(Spencer, 1904, II, pp. 88-89). At the same time, argues against inheritance since that abets sloth
he argues, because human beings are fallible, we in children and grandchildren of the rich. Note
cannot always maximize utilities nor be sure that that Spencer is not in favor of genocide; rather,
we are, or can orchestrate, even happi our own Spencer argues, it is imperative that each of us
ness, much less the greatest for the should to try to survive,
have both physically and
happiness
greatest number. Thus, the greatest in the economy, on our own. Those who cannot,
by granting
each individual is free to pursue will wither away, neither nor abetted in
equal freedom, helped
his or her own ends and achieve (or fail to their demise. But social interference either in the
Thus the Law of Equal form of governmental charity or taxation should
achieve) happiness.
Freedom allows the "greatest happiness of each not be tolerated. Government intervention and
and everyone" (Spencer, 1851, pp. 60-62, 409; regulation interfere with
selection, they natural
1892b, II, pp. 62-63; see also Weinstein, 1990, are a costly and unfair tax burden to the rich

pp. 140-142). and the working poor, depriving the rich of

Spencer adopts Lamark's theory that, along earned capital for reinvestment and the working
with inherited characteristics, human beings poor of opportunities to improve.

passed on traits as well. So children of

acquired
smart, strong, adaptable parents will inherit those The quality of a society is lowered morally and
traits. However, children of a lazy or slothful intellectually, by artificially preserving those who
are least able to take care of themselves and to
person, for example, would most likely inherit
behave well. if the inferior are helped
For to
those traits as well as charac
parental biological them from that mortality
increase, by shielding
teristics. Thus if those of us less able to adapt
which their inferiority would naturally entail, the
reproduce, we will add to the number of
effect is to produce, after a
generation generation,
devolving individuals, and eventually affect the From diminished use of self
greater inferiority.
development of society. To protect those who faculties already deficient, there must
conserving
cannot independently pursue their own ends or in posterity, still smaller amounts of self-con
result,

protect themselves, then, like aiding another serving faculties (Spencer, 1873, p. 339).
community, is antithetical to evolutionary prin
ciples and interferes with its spontaneity. Future At the same
time, Spencer claims that private
generations will suffer both because capital was charity so
is fine
long as the donors selectively
deflected from productive means to help those choose poor as their The
deserving recipients.
who could help notthemselves, and because result of noninterference and personal altruism
future generations will have to deal with increas with be that the strongest and most fit will
ingly large numbers of individuals who are inca survive, achieve, and reproduce in a
resulting
pable. Thus that society will eventually devolve society of strong, adaptable, entrepreneurs and
and disappear (Spencer, 1851, pp. 59-65). a industrial and technical economy
healthy
Spencer is outspoken against vaccinations, (Spencer, 1851, pp. 278-363; 1884, 1982, pp.
prevention of cattle disease, sewers, municipal 31-70).
fire fighters, community hygiene laws, or safety Spencer concludes that the best society is a
regulations for factories. He rails against labor laissez-faire private enterprise political economy

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 190 Patricia H. Werhane

with almost no government except to protect us modern corporation, as iterations of earlier

from deliberately harming or interfering with military hierarchies. Spencer writes,
each other. A laissez-faire economy best permits
individual economic [a] s devised by Act of Parliament, the administra
entrepreneurial develop our are
tions of almost
ment where each individual can control her public companies purely
democratic. . . . Shareholders elect their directors,
economic life and receive the full benefits of her
directors their chairman. . . .Yet . . . the form
very
labor, and industrialization, as Smith out,
pointed of government, while demo
remaining nominally
creates economic growth and contributes to the as to become
cratic, is substantially so remodeled
positive social evolution of a political economy. a miniature of our national constitution. The direc

Indeed, he argues, community priorities super tion . . . falls under the control of some one

sede those of individuals are

only when rights member of superior cunning, will, or wealth, to

violated or in times of war. Roads, schools, whom the majority becomes so subordinate, that
mail services, land, parks, and utilities the decision on every question depends on the
money,
course he takes . . . a mixture of the monar
should all be private; taxes should be the thus,

to borrow a phrase from the and the democratic elements

minimum possible, and, chic, aristocratic,
is repeated . . . 1892a, III, pp. 52-53).
Robert Nozick, government should be in the (Spencer,
form of a "night watchman" (Spencer, 1884,
Democratic practices are nonexistent in joint
1982, pp. 31-70; Nozick, 1974). stock companies, and the mix of monarchy
In Spencer's early writings, in particular, and hierarchical better describes a
in Social Statics, for universal bureaucracy
Spencer argued form of governance that precedes demo
that a participatory military
suffrage, thinking democracy cratic industrialization in the social evolutionary
protects the rights of each individual and allows
process. Only in a democracy can each individual
each of us a voice. In his later writings he retracts
explore her freedom without interference, both
the idea of universal suffrage. He was worried
politically and within economic enterprises.
that if propertyless workers were able to vote, we
Worse, Spencer argues, the British factory
would have the rule of the majority which itself
system depreciates the worker's ability to think
could decide
against private enterprise or
equal for herself.
liberty. He was afraid that women were not fully
developed or educated to be able to exercise The wage-earning factory-hand does, indeed,
proper judgment in voting. These worries were free labour, in so far that,
exemplify entirely
based on his view that economic liberty is the making contracts at will and able to break them
best means for equal freedom and thus the foun after short notice, he is free to engage with whom

dation of political did believe soever he pleases and where he pleases. But this
liberty. Spencer
that as women became more educated liberty amounts in practice to little more than the
they
to one for another; since,
should be able to vote. His theory about worker' ability exchange slavery

as we fit only for his particular occupation, he has rarely

rights to vote is more complicated, shall
an opportunity of doing anything more than decide
see in the next paragraphs (Doherty and Gray,
in what mill he will pass the greater part of his
1993, pp. 475-490; Paul, 1982, pp. 499-514; The coercion of circumstances often
dreary day.
Francis, 1978, pp. 317-328). bears more hardly on him than the coercion of a
a strong
Given theory and
his night watchman master does on one in bondage (Spencer, 1896, III,
criticism of any form of socialism, Spencer does
part 8, p. 516).
not envision his ideal industrial state to be that
of late nineteenth-century This is not Trade unions are attempts to ameliorate these
England.
merely because of active governmental leg and conditions, but they are not universally effective.
islativeprocesses that were in place nor the exis This is because their claims to be democratic are
tence of complicated bureaucracies usually untrue, and union leaders tend to control
governmental
that mimicked military structures. More impor rather than consult with workers.

tantly, Spencer
seesindustries, and in particular Spencer concludes that we have not yet
the joint-stock company that was to become the reached a stage of social development. If
high

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 Business Ethics and the Origins of Contemporary Capitalism 191

-
evolutionary development includes individual "Cowboy Capitalism" that the best society is
or one in which each of us, on our own horse, so
right not to be interfered with coerced, the
next stage will be that of cooperative communal to speak, works for her own ends. This is partly
committees with an accurate but Spencer also argues
enterprises governed by worker attribution,
democratic and pay is
where that one can only succeed as part of a society
decision-making,
to ability and difficulty, and even that society is merely an aggregate
assigned according though
profits are shared among the workers. Each of individuals. In any society, when there is an
worker will cooperate with the others, produc absence of interference, the best will succeed and
and individuals will be a true will be estab
tivity will increase, actually rewarded; meritocracy
exercise their natural at work lished where the best should be the most suc
liberty (Spencer,
1896, III, part 8, pp. 504-509, 559-563). cessful, and thus the most deserving. Sometimes
is not specific, it surely follows this is translated to imagine that those who have
Although Spencer
that if workers control joint-stock companies, succeeded are, in fact the most deserving. The

they will both become educated into democratic weakest, laziest, and least adaptable should,
processes and antisocialists. From this exercise of deservedly, remain unrewarded and fade away.
sense. Echoes of Spencer are reverberated by those
economic liberty, universal suffrage makes
Thus economic and are who decry welfare, worry about regulation
liberty political liberty
not two distinct but rather they are and government involvement in business, and
principles,
mutually dependent concepts where, because of question taxation. The themes that taxation is a
the Law of Equal Freedom, economic liberty form of slavery and that those who work should

precedes.
not have to bear the burden of those who do not

Spencer concludes, is reiterated today. Arguments abound that gov

ernment interference and regulation only deflect
[t]he ultimate man will be one whose private economic development and destroy incentives.
requirements coincide with publicones. He will
The recent transformation of the national welfare
be the manner of man, who, in
spontaneously ful
system in the United States to a workfare system
filling his own nature, incidentally performs the
on
is justified grounds Spencer would admire.
functions of a social unit; and yet is only enabled
Even a pure Spencerian laissez-faire
so to fulfill his own nature, by all others doing the though polit
ical economy has never been established, the
like (Spencer, 1851, p. 417, rpt. in Spencer, 1896,
III, part 8, p. 601). "night watchman" idea is not dead, and indeed,
is celebrated by leading intellectual libertarians.
The influences of Spencer is subtle, because What is less celebrated is Spencer's critique of
almost no one reads or refers to him any more, industrial hierarchies and his idea that coopera
yet they are clearly important. Whether or not tive self-managed industrial enterprises best
evolution is or should be sponaneous, Spencer's exemplify true evolutionary social progress. In

theory of social evolution has had an enormous order to be consistent, libertarians and others
influence in the social sciences as a framework to who question the role of government in
describe social development and devolution. economic and private affairs, need to think care
Social Darwinism is often equated, wrongly, with fully about the lack of democratization and the

genocide, but correctly with the argument that prevalence of coercion in private institutions such
a welfare state is immoral, that it encourages as the church and the corporation. Spencer is

poverty, and that it is unfair to tax those who can suggesting a form of self
truly revolutionary
support themselves and must bear the burden of management that is decoupled from socialism and
those who cannot. Spencer's critique of bureau Marxism.

cracies is still apt today in describing government Because of

Spencer's influence and that of
or large organizations. North American individ other liberals of his ilk, one tends to read Smith
ualism has its roots in thought. in the way I described earlier: as an egoist, a
surely Spencer's
Along with this individualism Spencer is some laissez-faire economist, and as at least as implying
times attributed what is sometimes called that a night watchman political economy is the

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 192 Patricia H. Werhane

ideal. As a result, there are a number of influ not lost in a Kantian or Aristotelian ideal world
ences from Spencer's work and from this reading of what should be, nor are undermined by
of Smith that have trickled down into neo-clas regulation (See Freeman, 1994).
sical economics and into
twentieth-century What Iwant to suggest in what follows is that

thinking about markets and morality. First, there the popular interpretation of the WN is a mis
is sometimes a preoccupation with the individual of Smith. At least one careful of
reading reading
economic actor both in economic theory and Smith's texts can paint a different of
picture
in business ethics. In business ethics we some Smith's idea of political economy. Smith is not
times focus on dilemmas of
managersindividual laissez-faire economist. Economic
exchanges
as if
they operated in autonomous vacuums occur and markets are
efficient, according to
rather than in corporations (See for example, Smith, because we are not non
precisely merely
Donaldson and Werhane, 1977). Second, at least tuistic, and economic growth on what
depends
some neo-classical economic theory appears, now today we call the rule of law. Individual
utility
and again, to be preoccupied with the individual maximization is not only the
criterion for
non-tuistic2 or self-interested rational utility max rational choice. Indeed, Smith is not a pure util
imizer as the of economic choice and itarian, and values are not merely individual
paradigm
purveyor of economic value, where economic nor even individual considered
preferences, pref
value is often linked to preferences, however erences. Moreover, Smith was the Professor of
qualified or defined (Sen, 1987; Hausman and Moral Philosophy at Glasgow, and argues pre
McPherson, 1996). Thus the individual, as if cisely against, and may not have even imagined,

acting on her own, without social, cultural, reli a separation of ethics from economics, ethics
or corporate influences, is naturally and from commerce, or ethics from his idea of a
gious
primarily motivated by self-interests; in cool viable political economy. So a careful reading of
rational moments, this individual is a non-tuistic Smith, or, at least, one kind of careful reading,
or consid at odds with and such a
utility maximizer of her preferences, finds Smith Spencer,
ered preferences. Third, Smith appears to separate reading can produce some insights into how to
the economic actor in the WN from the ordinary approach ethical issues in business that avoids
moral person to whom he devotes his earlier forms of radical individualism, a preoccupation

work, The Theory of Moral Sentiments. Spencer with egoism, and the Separation Thesis.
focuses on the individual as the primary actor in Let us now turn to Smith's work and examine
an evolving economy. Government Smith's notion of
self-interest, a notion devel
political
should be minimal, and ethical issues arise only oped in Smith's
earlier work, The Moral
Theory of
when one individual (or the government) is Sentiments (TMs). The first thing that is striking
with another individual or govern in the TMS is Smith's emphasis on the social
interfering
ment. So, too, it would appear, one can separate nature of human beings. Early on he proclaims,

ethics, politics, and economics (as we have done

in academia) such that not only are these three [m]an, who can subsist only in society, was fitted
Balkanized but more impor by nature to that situation for which he was made.
fairly disciplines,
All the members of human society stand in need
that they are different mental models
tantly, of each others assistance, and are likewise exposed
and create distinct approaches. Such distinct
? to mutual injuries (Smith, 1759, 1976, II.ii.3.1).
approaches result in The Separation Thesis the
view that politics, economics and ethics (or, Thus it is hard to portray Smith as a radical indi
translated, public policy, ethics andbusiness) vidualist as some of his later readers such as
are three separate endeavors. Therefore, one
Hirschman do (Hirschman, 1977). Smith begins
needs moral philosophers and public policy to
the TMS with this statement:
straighten out managers and companies when
one needs managers
they go astray. Conversely, [h]ow selfish soever man may be supposed, there
and management theory to tell us how it "really are evidently some principles in his nature, which
is" so that the practicalities of doing business are interest him in the fortune of others, and render

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 Business Ethics and the Origins of Contemporary Capitalism 193

their happiness necessary to him, though he derives lences or virtues

of benevolence, altruism, and/or
nothing from it except the pleasure of seeing it or in the vices that include others
justice harming
. . .
(Smith, 1759, 1976, I.i.1.1). in the forms of malevolence or injustice.

Although Smith spends some time explaining

and values are not created
At the same time, Smith argues, "Every man passions interests,
is, no doubt, first and principally from interests or Smith
by nature, merely preferences,
recommended to his own care" 1759, argues, because we between what we
(Smith, distinguish
prefer, what we and what to be
1976, II.ii.2.1). Smith explains what appear to be approve of, ought
statements his analysis approved of. The criteria for either of the latter
contradictory through
of motivation. While that all one's do not consist merely of one's own considered
recognizing
motivations are self-interested in a trivial sense preferences. One
may does not
prefer what one
that they originate in, and are interests of the self, approve of, and one constantly tests one's own
he goes on to claim that not all our interests are values against both what I and others approve of
interests in the self. That is, the self is the subject, and what society deems ought to be approved of,
but not the object, of all our passions and that is, what society values. So, at a minimum,
interests. Smith is highly critical both of Hobbes values are what a society finds admirable and
and Smith's infamous predecessor, Bernard praiseworthy.
Mandeville (Smith, 1759, 1976, Vll.iii.i). Indeed, Smith also grounds many of his conclusions
it was Mandeville, not Smith, who that in an appeal to warmed-over natural law theory.
argued
vices could be transformed into In the TMS Smith sometimes uses expressions
private public
. . .". In both the TMS
virtues3 (Mandeville, 1732, 1988). such as, "men by nature
to Smith, human beings are moti and the WN Smith uses terms such as "the
According
vated by three sets of passions or natural affec natural order," "natural liberty," and "natural
tions, each with its own
set of objects: the selfish jurisprudence," he appeals to natural jurispru
passions, whose object is interests, pleasures, and dence as justification for his theory of justice, and
of the self; the social such as in the unpublished Lectures on he
pains passions Jurisprudence
altruism and
compassion which are directed to explicitly adopts Pufendorf's notion of natural
others; and the unsocial passions such as hate and rights (Smith, LJ, 1762-1764, 1976; [A] pp.
envy which are negative reactions to others. 1-16; [B] pp. 1-10). So Smith appears to appeal
for Smith, none of the passions to some nonrelative basic principles, although
Importantly,
dominates others so that most of us are as natu how those relate to societal values is unclear in

rally interested in others as we are in ourselves. his writings.

Interests are derived from, but are not iden In the WN, self-interest is usually equated
tical to, the passions. Passions are akin to natural with the natural desire to better one's condition
drives; interests are cognitively and emotionally and look after one's own welfare. So at least one
from the Like the passions, commentator contends that "[in the WN\ Smith
developed passions.
each of us self-interests and social interests; unlike gave new dignity to greed and a new sanctifica
the passions, we assign virtues and vices to the tion to the predatory impulses" (Lerner, 1937, p.
of each of the sets of interests. Since ix). Part of the difficulty in reading Smith is that
operations
self-interest have distinct (the self or he is both descriptive and normative, and despite
objects
others, egoism and altruism are not opposites for the fact that he was a student of David Hume,
Smith. Egoists are individuals whose interests are famous for instigating the fact/value distinction,
all of the self as object, but this is not necessarily Smith is notoriously slipshod in making that dis
evil. Virtuous self-love is prudence; its vice is tinction. So Lerner may have confused Smith's
avarice or
greed.
So one can be a virtuous, i.e., description of self-interest in commerce with
a egoist. Even
person a selfish is not his admonitions concerning greed and avarice.
prudent,
necessarily evil unless she harms others or treats Smith repeatedly argues that avarice interferes
others unfairly in the pursuit of her interests. with competition, hoarding capital slows down
Social interests can be exhibited in the excel economic growth, and greed is antithetical to the

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 194 Patricia H. Werhane

ideal of a free political economy as Smith envi butcher, brewer, and baker, do not give away
sions it (e.g., Smith, 1776, 1976, II.iii.25?26, meat, beer, or bread, but they depend on mutual

II.ii.36). So even as we strive to "better our con respect, fair play in business, the honoring of
dition," the demands of morality and the ideal contracts, and indeed, even cooperation to stay
of a free exchange economy in business together in the same town.
political require
prudence and parsimony of one's economic But what about benevolence, and the poor
desires. beggar? One will remember that there are two
But what is the role of the social passions and virtues of the social interests: benevolence and
interests in the WN? One of the most famous justice. It will turn out
that justice is the most

quotations in the WN, of course, is: essential virtue both in the TMS and in the WN,
and it will also turn out that justice, as natural
[i]t is not from the benevolence of the butcher, the
will a critical role in Smith s
or we our
jurisprudence, play
brewer, the baker, that expect dinner,
ideal of a political economy as well.
but from regard to their own interest. We
their
to the TMS, the notion of justice
address ourselves, not to their humanity but to According
arises from the social passions and is the virtue
their self-love, and never talk to them of our own
necessities but of their advantages of what Smith calls impartial social interests.
(Smith, 1776,
Justice is the "consciousness of ill-desert" (Smith,
1976; I.ii.2).
1759, 1976, II.ii.3.4). It is what an impartial
"
Indeed, he says further,
[njobody but a beggar spectator would classify as unfair in social rela
chuses to depend chiefly upon the benevolence tionships even
among strangers. a It is both
of his fellow-citizens" (Smith, 1776, 1976; I.ii.2). negative principle that proscribes deliberately
Has Smith divided "economic man" from harming another and includes the positive notion
ordinary mortals who have a variety of passions, of fair play4 (Smith, 1759, 1976, II.ii.i.9 and
interests, and virtues? Dealing with these quota Ii.ii.l). In the TMS justice is both a
personal
tions out of context, one might be led to that virtue and, as natural "the main
jurisprudence,
conclusion. However, such a conclusion ignores pillar that upholds the whole edifice [of human
two important notions that play central roles in society]" (Smith, 1759, 1976, II.ii.3.4). "Society
commerce and in any political economy: coop may subsist, though not in the most comfortable
eration and justice. state, without beneficence; but the prevalence of
Economic exchanges, even between the most injustice must utterly destroy it" (Smith, 1759,
selfish parties, are not merely competitive nor 1976, II.ii.3.3).
purely adversarial, according to Smith. We have In his unpublished Lectures on Jurisprudence
a natural
"propensity
to . . .
truck, barter, and Smith is carefulto clarify his notion of justice.

exchange" and indeed, "The division of labour By justice he means commutative, not distribu
... is a necessary, tive justice. to Smith, it is always
though very slow and gradual According
consequence of [this] certain propensity in wrong to deliberately harm others, to violate
human nature" (Smith, 1776, 1976, I.ii.l, I.ii.5). their personal rights to liberty, property (however
Our natural desire to cooperate motivates us to societally defined), and reputation, not to honor
work and specializing our or to act unfairly. Thus
and contracts,
together by dividing promises
us
to barter, where one has
labor. It also motivates the perfect duties, always to be just; that is,
appeal to self-interest of others as well as to their it is always wrong to violate the principles

good will in honoring the exchange results in of commutative justice. While other virtues
"mutual and reciprocal" gains (Smith, 1776, such as benevolence are desirable, they are not
1976, Il.i.l). Do we participate in cooperative enforceable since one need not be benevolent to
ventures because it is our self-interest to do so, be moral. Justice, Smith argues, is the only virtue
or does cooperation arise out of our social for which one my use force to ensure. While

passions? For Smith, these two cannot be sepa the beggar has not claim on our benevolence,
rated. It is both natural and an advantage to he does have a claim on equal opportunity and

cooperate in economic affairs. Our friends, the fair treatment. Principles of distributive justice

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 Business Ethics and the Origins of Contemporary Capitalism 195

like benevolence, are not enforceable, since there be either perfectly or continually tending
equal
is conceptual about the extent and to equality" (Smith, 1776, 1976, I.x.a.l). This is
disagreement
fairness of such principles. neither to conclude that economic actors con
Because economic are often or intentionally are always prudent, fair,
exchanges sciously
between a central role in cooperative, nor that markets act independently.
strangers, justice plays
a viable economy. Laws of justice are Rather, the market works most efficiently and
political
essential not only to restrain overindulgent self when prudent parsimonious actors
competitively
interests, but also because we often unfairly act fairly in competitive and cooperative ventures,
cooperate or collude with each other. Thus, whether or not they deliberately intend to do so.
Smith writes, But still, could we not conclude that we are

prudent, fair, and cooperative because it is in our

[e]very man, as long as he does not violate the laws of self-interest, at least long-term self-interest, to
justice, is left perfectly free to pursue his own answer
be so? Smith's would be "yes" and "no."
interest in his own way . . . (Smith, 1776, 1976,
Of course it is in my interest, thus rational, to
IV.ix, 51, my italics). act accordingly. On the other hand, according
But remains the invisible hand
to Smith is naturally
each of us
interested in
there question.
others, thus it is also rational to be cooperative.
Smith wrote,
"Consciousness of ill-desert" is part of human
nature, even though some of us do not play fairly
[The man of commerce] generally, indeed, neither
intends to promote the publick interest, nor knows all the time. Prudence and parsimony are virtues
how much he is promoting it. . . . By directing of us try to emulate, sloth and greed, and
many
industry in such a manner as its produce may be are not admired. So for Smith, a rational person
of the greatest value, he intends only his own gain, is prudent, and fair "by nature,"
cooperative,
and he is in this, as in many other cases, led by an
because this is admirable, and because it is to her
invisible hand to promote an end which was no
advantage to be so.
part of his intention. Nor is it always the worse
Smith was a purist, nor was he naive about
not
for the society that itwas no part of it. By pursuing
agency He was highly critical of
his own interest he frequently promotes that of problems.
the society more effectually than when he really "joint-stock companies", writing,
intends to promote it.
[t]he trade of a joint stock company is always
a court of directors. . . . The direc
Smith is obviously arguing that people in managed by
tors of such companies, however, being the
commerce tend to act in their own self-interest
managers rather of other people's money than of
(i.e., seek personal economic gain). But this
their own, it cannot well be expected, that they
neither means that people of commerce are, or
should watch over it with the same anxious vigi
should be, necessarily selfish or greedy, nor is
lance with which the partners in a private copart
Smith proposing purely laissez-faire markets. watch over their own. . . .
nery frequently
Putting this quotation in the context of the rest and must
Negligence profusion, therefore, always
of the WN, Smith is arguing that markets (the more or less, in the management of the
prevail,
famous invisible hand) work best under condi affairs of such a company (Smith, 1776, 1976,
tions of economic liberty grounded in commu V.i.e.18).
tative justice (the "rule of law"), when people
are parsimonious and prudent, and cooperative Yet at least part of this criticism is leveled because
as well as competitive. Markets work best when there were few corporations in Smith's time, the
embedded in political economy that enforces most notorious being the East India Company
human rights, contractual agreements, and fair which, despite mercantile regulations, exempli
so far as to claim that the ideal fied managerial to
play. Smith goes greed perfection.
- a a macro
is a "level playing field" climate where "[t]he On level, Smith argues that the ideal
whole of the advantages and disadvantages of the political economy is one that protects its citizens,
different of labour and stock . . . creates conditions for well-being,
employments including

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 196 Patricia H. Werhane

economic growth, and provides public services welfare economics. Criticizing the Chicago
in the context of personal liberty, protections of School reading of Smith, Sen points out the
rights, and enforcement of laws of justice (Smith, limitations of rational choice theory, and
1776, 1976, Introduction, IV.vii.c.44 and IV.ix.51 Hausman and McPherson argue that the
and 1762-1764: 1978, [A] i.9). This is hardly modeling criteria one uses in economics function
a "night watchman" of the to frame the kinds of theories
theory political normatively
a position sometimes traced to Smith. outcomes a
economy, particular model will produce.
A viable political economy cannot exist for long What has been given less attention is the
without justice, and it cannot prosper without Separation Thesis. If ethics and economics are
economic development in the form of free not easily compartmentalized, that is both good
commerce. news and bad news. The
Thus, in the Smithian well-func good news is that, as

tioning political economy, ethics

(as prudence Oliver Williamson has recently noticed, if
and personal fairness), economics (the enhance managers behave ethically, transaction costs go
ment of economic well-being of each citizen) down (Williamson, 1985, p. 170). The bad news
and politics (in the form of protection of rights is that management cannot use the excuse, "We
and commutative justice through the laws and did it for business reasons, even though, on moral

guardians of the system) are all interrelated, grounds, the behavior raised some
questions."5
inseparable, and necessary for a well-functioning, If ethics and economics are mutually dependent
just, political economy. constructs, then a morally "good" company that
What can be concluded from this reading of fails in the market IBM in the late 1980s)
(e.g.,
Smith is that the "popular view"of Smith creates is really no better than the unethical behavior
a questionable paradigm and is not the only way of a manager (e.g., Ivan a morally
Boesky),
to think about politics, economics, and ethics. questionable company (e.g., Bre-X), or a ques

Just as one set of economists, in partic tionable activity of a company (Shell Oil's
political
ular, neo-classical economic theory, appealed to behavior in Nigeria) that is economically suc
Smith for some ground for their conclusions, so cessful. On a practical level,
challenge the is to
too, we can appeal to Smith to tell another story tell a new story about
business, to create new
about commerce and free enterprise. This story mental model wherein the interrelationships
might include: questioning the range and scope between commerce, ethics, and public policy are
of rational choice theory and agency theory, formulated as a positive construct that makes

pointing to the normative aspects of positive and sense to management as part of their competitive
welfare economics, raising questions about the advantage.

alleged autonomy of markets (e.g., the "market Spencer's challenge is even more difficult.
for corporate control"), and exploring what Corporate democratic self-management has
kinds of stories one can tell about free enter seldom been conceived as part of libertarian

prise if ethics, economics and politics cannot be democracy, and even employee ownership is

neatly compartmentalized. usually decoupled from employee control. Will

Much of this critical project is already under we see the growth of truly cooperative employee
way. Since 1989, we have seen examples of democratic economic enterprises as we
managed
where, without a rule of move into the next century? Or will monarchies
"cowboy capitalism"
law, new capitalist economies Agency flounder. and aristocracies prevail in the world's corpora
theory and rational choice theory are objects of tions despite political democratic tendencies to
a number of attacks, some by eminent econo the contrary?
mists such as Robert Frank and Amartya Sen. Rereading Smith and Spencer forces us to
Sen, in his book, On Ethics and Economics (1987) question some traditional assumptions about
and David Hausman and Michael McPherson, in democratic free enterprise. Such analyses help us
a newer book, Economic Analysis and Moral to envision democratic capitalism not as a static
focus on the normative aspects of well-defined system but rather as an evolving set
Philosophy,
economics and, in the case of Sen, of of political economies where a particular pre
positive

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 Business Ethics and the Origins of Contemporary Capitalism 197

vailing view is not and should not be the sole fair play, which they cannot admit of (1759, 1976,
model. Smith and Spencer, each in quite different II.ii.2.1).

ways, suggest how free enterprise can work to 5

That is almost a direct quotation from the former
create viable fair, or democratic economic insti
CEO of Lockheed when, in 1977, he paid $12
tutions that protect and even enhance human million in extortion to Japanese government agents in
liberty. While we may not agree with all their order to get the Lockheed 1011 contract he wrote,
conclusions, we are at not to take them "From a purely ethical and moral standpoint Iwould
peril
seriously. have declined such a request. However, in this case I
would most certainly have sacrificed commercial
success." (Kotchian, 1977, p. 11.)
Notes

1
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