Adam Smith, born on June 16th, 1723, was the founder of modern economics. One of the biggest mistakes made by enemies of the free markets he praised is the notion that he stood for self-serving behaviour, and claimed it served the common good. This is far from what he did say. In his “Theory of Moral Sentiments,” published in 1759, 17 years before his “Wealth of Nations,” he asserted that the most salient human characteristic is our propensity to share sympathy with our fellow human beings. In modern terms we would today call that “empathy.” We identify with our fellow men and women.

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it.”

What Smith is telling us is that we are social animals, not atomistic individuals. We live among our fellow humans and we interact and exchange with them. We identify with them and share their sorrows and joys by reflection. We behave morally towards them because we value their esteem. Indeed, we construct in our minds an “impartial spectator” who represents them, and sees our behaviour from their point of view rather than our own. When tempted to behave in our exclusive self-interest, that inner spectator cautions us that those whose respect we seek will not value us if we do.

This impacts on our economic behaviour. When the butcher, the brewer and the baker provide us with our dinner, they do so from their desire to advance their own welfare, and not from benevolence. But they are human beings and want to behave morally and decently to us. They must not cheat us, because exchange is founded on trust. We pay money for their meat, beer and bread because we prefer that meat, beer and bread to the money they cost us. We value them differently than their producers. They would rather have the money; we would rather have the dinner. Both of us gain something of greater value when the exchange takes place if it takes place honestly. We create wealth when we trade. And because each of them specializes, they can give us better value than if we produced such goods ourselves. But trade depends on trust.

In university economics lecturers often teach that we buy from the cheapest supplier. If any of them had any experience of business they would learn that people like to rely on long-term relationships of trust. You like to deal with people you are comfortable with. You often choose to avoid the risks that come with an unknown contact by sticking with a relationship you know is founded on mutual trust, perhaps with people you have dealt with over the years and whom you know you can rely on.

The point is that while we are motivated to engage in what Smith called “the uniform, constant, and uninterrupted effort of every man to better his condition,” (and every woman, too), we do so within a moral framework. We don’t cease to be human beings when we buy and sell things. That is the subtlety that Smith’s latterday critics fail to grasp.