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How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness, by Russ Roberts
MANY economists today try to predict interest rates, explain how unemployment can be reduced, forecast next quarter’s gross domestic product, and so on.
The presumption is that economics “is like some giant clock or machine whose innards can be mastered and then manipulated with some degree of precision”, explains author Russ Roberts. Roberts is a research fellow at Stanford University’s Hoover Institution, and points out that economists are probably worst at this type of precision.
Economics “is about something more important than money. Economics helps you understand that money isn’t the only thing that matters in life. Economics teaches you that making a choice means giving up something.”
Two hundred and fifty years ago, the Scottish moral philosopher Adam Smith wrote a book entitled The Theory of Moral Sentiments, describing how and why people behave as they do. This book was followed by An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, and which gave birth to the theory of economics.
To make economic decisions, you have to understand yourself and others, which is the connection between The Theory of Moral Sentiments and Wealth of Nations. However, Moral Sentiments is a difficult read, written in the language of the eighteenth century, and with long sentences.
Robert’s contribution lies not only in highlighting this obscure book, but in making it accessible and revealing the relevance of Adam Smith’s thinking.
Today, Moral Sentiments would fit the genre of behavioural economics, a field that straddles economics and psychology.
Behavioural economics challenges modern economics, which presumes people make economic decisions based on choosing to get more for less. In 2002, Daniel Kahneman received the Nobel Prize in Economics Sciences together with Vernon Smith for experimental work they did revealing the flaws in what was considered by economists as rational decision-making.
Moral Sentiments underpins Adam Smith's economic thinking. It makes the work of both Kahneman and Smith in behavioural economics a modern continuation of Smith’s thinking.
In Moral Sentiments Smith provides sound advice on how to treat money, ambition, fame and morality. He has firm views on what will make people happy, and why happiness does not follow material success.
Ideas covered by Smith include our potential for self-deception, why power and fame are so seductive, and the limits of our rationality. He also explains why life is so complex and, often at the same time, so orderly.
Adam Smith observed: “My neighbour will help me if there’s something in it for my neighbour.” Trading with one another, in goods and in kind, is a way of giving something in return for my neighbour’s help.
In The Wealth of Nations, Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Life is complex and often, at the same time, so orderly.
On the other hand, we often act selflessly, sacrificing to be helpful to others. What spurs us to take care of our neighbour, Smith explains, is the desire to be honourable, to satisfy what we imagine an impartial spectator would expect. We desire people to respect us for what we are, not for what we project.
Bernard Madoff was admired and respected by his investors for what they thought was his prowess with their money. However, the returns he promised were not a function of his genius as an investor, but his genius in deception. Madoff must have known he was a fraud; he expressed relief at being arrested.
Warren Buffett, in contrast, is able to grow a $90 000 investment into $100m. He gave his son, Peter, a once-off gift of $90 000 of stock in his company, Berkshire Hathaway. Peter chose to drop out of Stanford at 19, and sold the equity to fund his desire to be a musician. Popular economics, looking only at maximising financial returns, would see this as a fundamentally flawed decision.
After years of struggling, Peter Buffett built a solid music career writing songs for movies and television, and won an Emmy award.
Smith never respected the pursuit of fame and fortune. He held that we want people to like us, respect us, and care about us. We want our peers to respect us for what we do and who we are. That is what makes people happy.
Peter Buffett chose happiness over enormous wealth. Smith would have approved.
Smith has much to teach still today. His psychological insights into why men carried gadgets in their pockets in the 18th century mirror our desire for the latest gadgets today. So, too, are his insights as to why people want to be famous, and why so many pay attention to the famous.
Understanding the complexity of people and their decisions (behavioural economics) makes economics so much stronger and more valuable. The title of Roberts' book, How Adam Smith Can Change Your Life, highlights the genius of the founder of economics who had his base in human behaviour.
Readability: Light -+--- Serious
Insights: High -+--- Low
Practical: High ---+- Low
- Fin24
*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.
