Daniel Klein: Ronald Coase’s Fitting Tribute to Adam Smith

Economist Ronald Coase got it right about Adam Smith’s beliefs: Human limitations bolster the case for limits on government.

The year 1776 is certainly a landmark year in history, and one of the reasons why is Adam Smith’s The Wealth of Nations,” which first appeared in print that year. In 1976, to commemorate the book’s bicentennial, University of Chicago economist and Nobel Prize winner Ronald Coase wrote a pair of essays that discuss two of Smith’s great works—“The Theory of Moral Sentiments” and “The Wealth of Nations”—and their continued importance. This year marks the 300th anniversary of Adam Smith’s birth, and Coase’s essays once again make a fitting tribute. Here, I comment especially on Coase’s “Adam Smith’s View of Man,” which focuses on “The Theory of Moral Sentiments.”

Progressives’ Misinterpretation of Smith

In “Adam Smith’s View of Man,” Coase writes, “It is sometimes said that Smith assumes that human beings are motivated solely by self-interest. Self-interest is certainly, in Smith’s view, a powerful motive in human behaviour, but it is by no means the only motive.”

Coase makes no bones about his message. In the first paragraph, Coase announces, “The inclusion of other motives in his analysis does not weaken but rather strengthens Smith’s argument for the use of the market and the limitation of government action in economic affairs.”

Coase’s message needs renewed amplification today because it has become fashionable among left-leaning scholars to claim Smith as one of their own. They do this to sustain their denial of the fact that leftism is an outlook that strives for the governmentalization of social affairs. Coase’s essay serves as a corrective to the left’s appropriation of Smith.

In our day and in Coase’s day, opponents of liberty have misrepresented classical liberalism as a theory based on views of man as “rational” and “self-interested.” In the introduction to her 2022 book “Adam Smith’s America: How a Scottish Philosopher Became an Icon of American Capitalism,” Glory Liu says that what she calls the “Chicago School” of economics held “that rational self-interest is the only valid premise for the analysis of human behavior, and that only the invisible hand of the market, not the heavy hand of government, could guarantee personal and political freedom.”

Left-leaning scholars like Liu often suggest that classical liberals find justification for their views in “rational self-interest” and similar verbalisms. Then they object: “But man is not like that!” They act as though the truth about man subverts the politics of Milton Friedman.

But Coase sinks this old ploy. Coase shows what Smith’s view of man actually was, suggesting instead that Smith’s wisdom about human nature bolsters Smith’s classical liberal conclusions. Consider the final paragraph of Coase’s essay:

Smith would not have thought it sensible to treat man as a rational utility-maximiser. He thinks of man as he actually is—dominated, it is true, by self-love but not without some concern for others, able to reason but not necessarily in such a way as to reach the right conclusion, seeing the outcomes of his actions but through a veil of self-delusion. No doubt modern psychologists have added a great deal, some of it correct, to this eighteenth-century view of human nature. But if one is willing to accept Smith’s view of man as containing, if not the whole truth, at least a large part of it, realisation that his thought has a much broader foundation than is commonly assumed makes his argument for economic freedom more powerful and his conclusions more persuasive.

Humans Are Limited . . .

Coase explains how Smith saw the situation: Maintaining a healthy standard of living requires an extensive and miraculously coordinated division of labor. It is the limitations of man’s wisdom, knowledge and benevolence that make freedom the best way to advance and maintain good living. Coase gets at Smith’s great insight: At best, man’s love of mankind is refracted. It is only the universal beholder, the impartial spectator (in the highest sense of that term), that justly loves humankind in all its parts. That universal benevolence may serve as a fulcrum within our conscience. But our conscience is an imperfect lever: Even on their best days, human beings are not to be trusted with the awful powers of government.

Coase notes that benevolence is “an important factor within the family or in our relations with colleagues or friends.” Coase rightly understood Smith to be saying that modern society cannot be organized on the model of the family or small band: “Most of those who benefit from the economic activities in which we engage are unknown to us. Even if they were [known to us], they would not necessarily in our eyes be lovable. For strangers to have to rely on our benevolence for what they received from us would mean, in most cases, that they would not be supplied.”

Coase seems to share Smith’s ethical perspective. In that perspective, the highest good corresponds to what a God-like beholder of mankind finds beautiful. This God-like being is super-knowledgeable and universally benevolent. In Coase’s most famous article, “The Problem of Social Cost” (1960), Coase says that the ethical calling of the economist is to contemplate “the total effect” of a course of action. The total effect corresponds to the action’s consequences as comprehended by the God-like being, Smith’s impartial spectator.

But our comprehension is pitiful. Our information is meager. Our interpretation is simplistic, fanciful and opportunistic. Our judgment is dubious at best. We are not super-knowledgeable—and even still, our knowledge is dumb and untrustworthy.

And we are not universally benevolent. We have but a “feeble spark” of benevolence, as Smith put it. Furthermore, human benevolence is not universal benevolence. Coase writes, “A politician, when motivated by benevolence, will tend to favour his family, his friends, members of his party, inhabitants of his region or country (and this whether or not he is democratically elected).”

Even the wisest and most virtuous person is an ignorant fool in comparison to the God-like impartial spectator. That is true even of the wisest winners of the Nobel Prize, such as Coase.

. . . And So Government Should Be Limited

Our conscience, however, may impel us upward, toward the approval of the impartial spectator, and that means contemplating what the impartial spectator finds agreeable. Coase writes, “Smith’s argument . . . is much stronger than it is usually thought to be. The market is not simply an ingenious mechanism, fueled by self-interest, for securing the co-operation of individuals in the production of goods and services. In most circumstances it is the only way in which this could be done.” Coase had been colleagues with F. A. Hayek at the University of Chicago, and earlier in his career, Hayek had noted that the main merit of Smith’s political philosophy “is that it is a system under which bad men can do least harm.”

Coase, Smith and Hayek display a proper attitude toward government. By no means should we regard the government as aligned with the impartial spectator. Government activism not only obstructs the good that free enterprise would otherwise achieve; government activism is typically a positive evil. When human beings operate as government policymakers, they are still lowly human beings. Coase writes, “When politicians are motivated by self-interest unalloyed by benevolence, it is easy to see that the results may be even less satisfactory.”

Coase is famous for urging interventionists to return to common sense. Coase rejects their textbook strategy of declaring that the free market is “imperfect” and hence “fails” and endorsing fanciful solutions. Coase is combatting double standards: He says we must look at alternative courses of action, such as government interventions, as they really are—each alternative peopled, as it is, by lapsarian man. If you think that free markets “fail” or are “imperfect,” take a look at government and the tragedy it wreaks.

Coase writes, quoting Smith,

Smith allows for a good deal of folly in human behaviour. But this does not lead him to advocate an extensive role for government. Politicians and government officials are also men. Private individuals are constrained in their folly because they personally suffer its consequences: ‘Bankruptcy is perhaps the greatest and most humiliating calamity which can befal an innocent man. The greater part of men, therefore, are sufficiently careful to avoid it.’ But, of course, men who bankrupt a city or a nation are not necessarily themselves made bankrupt. Smith, therefore, continues: ‘Great nations are never impoverished by private, though they sometimes are by publick prodigality and misconduct.’ As he later observes: ‘[Kings and ministers] are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.’

There is a sentence in “The Theory of Moral Sentiments” not quoted by Coase or Hayek but worth hearing now: “The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to.”

Classical liberalism is about preventing the mischiefs that human wickedness gives occasion to. There is nothing as destructive of human wholesomeness as government. Political wisdom is a matter of mitigating this hazard. Classical liberal principles have been the chief civilizational check on destructive government.

Urgently and sadly do the words of Smith, Hayek and Coase ring true today. As we contemplate alternative courses in policy and politics, we need to take responsibility for what Coase called the total effect, even though the total effect can be comprehended by us only very sketchily and imperfectly. Let’s hope that “Adam Smith’s View of Man” is learned anew as we observe this 300th anniversary of Smith’s birth.

Daniel Klein is professor of economics and JIN Chair at the Mercatus Center, George Mason University, where he leads a program in Adam Smith. His contributions to Svensk Tidskrift are listed here.

This essay was first published in Discourse Magazine.