This article explores Adam Smith's concepts of self-interest and the invisible hand, principles that have shaped economic thought since the 18th century. Smith’s influential work, The Wealth of Nations, published in 1776, coincided with the birth of the United States, providing a foundation for the nation's economic framework. [i] In this article, we delve into the nuances of self-interest and examine Smith's earlier work, The Theory of Moral Sentiments, to gain a deeper understanding of how the invisible hand influences modern decision-making. We also highlight how choice architecture can illuminate this process, offering practical tools for making better decisions aligned with self-interest.
Definitive Choice is a user-friendly application designed to assist you in making optimal decisions.
About the author: Jeff Hulett is a career banker, data scientist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at jeffhulett.com.
Introduction Introduces Adam Smith’s moral framework, emphasizing how self-interest and moral approval influence human decision-making.
Self-interest maps all our preferences Explains how self-interest includes both selfish and selfless motivations, shaping all human choices.
A self-interest mapping example - Billy and Connie Uses a real-world example of a butcher and consumer to illustrate how self-interest operates in everyday decisions.
The invisible hand optimizes our collective self-interests Discusses how Smith’s invisible hand balances individual interests to benefit society.
The golden rule and stakeholders guide the invisible hand Highlights the role of moral principles, like the golden rule, in guiding self-interest.
Making the invisible hand more visible Shows how modern tools and choice architecture help clarify decision-making aligned with self-interest.
Conclusion and Notes Summarizes the key insights on self-interest, moral approval, and the role of decision tools in optimizing choices, and provides resources for readers to further explore these concepts.
2. Self-interest maps all our preferences
Self-interest is often misunderstood, frequently confused with selfishness, but the two are not the same. [ii] As 17th-century philosopher Rochefoucauld noted [iii], “Virtues are lost in self-interest as rivers are lost in the sea,” highlighting how self-interest can encompass much more than selfish desires. Economist Daniel Klein, an Adam Smith scholar, adds [iv], “Virtue is about what it is we make of our self-interest.” Rather than being purely selfish, self-interest is an aggregation of all our preferences, blending selfish and selfless motivations in varying degrees.
For example, most people’s preferences fluctuate between selfish and selfless, forming a nuanced map of self-interest. In rare cases, some may exhibit predominantly selfish tendencies, such as those with narcissistic traits. However, for most, self-interest is a blend. This can be seen in the way our choices reflect both immediate personal needs and the consideration of others. As an insightful comparison, "just as savings may be considered delayed consumption, selflessness may be considered delayed selfishness." In this way, selfless actions, like environmental efforts or caring for children, can be seen as investments in future benefits, aligning longer-term goals with short-term sacrifices. [v]
How self-interest relates to selfishness and selflessness
Adam Smith’s belief that optimizing individual self-interest leads to societal benefit underscores this dynamic. The invisible hand guides individuals as they spontaneously negotiate and reconcile their preferences through market interactions. This process allows the aggregation of selfish and selfless interests in a way that contributes to the common good, showing how individual motivations—whether selfish or selfless—serve society as a whole.
3. A self-interest mapping example - Billy and Connie
Consider the example of Billy, a butcher, and Connie, a consumer, to illustrate how self-interest plays out in everyday decisions.
Connie-the-consumer: Connie buys meat from Billy, but her choices are shaped by a blend of selfish and selfless motivations. She wants to get the best price for her family (selfish), but also considers their dietary needs and environmental impact (selfless). For example, Connie may want to buy meat that fits her family’s preferences (selfless) while also avoiding complaints when they don't get what they want (selfish).
The aggregation of these motivations forms her self-interest, determining the amount and type of meat she buys from Billy.
Billy-the-butcher: Billy, on the other hand, wants to maximize his income by selling as much meat as possible (selfish), but he also has family commitments and enjoys singing in his church choir (selfless). Time spent away from his butcher shop could reduce his revenue, yet his involvement in the church might enhance his shop’s reputation and generate more business (a blend of selfish and selfless interests).
The aggregation of Billy’s motivations shapes his self-interest map, influencing how much meat he offers to customers like Connie.
In both cases, Billy’s and Connie’s self-interests come together naturally without explicit negotiation. This is the invisible hand in action—their preferences are spontaneously balanced through their interactions in the market. Neither needs to overtly reconcile their selfish and selfless motivations with the other. Instead, the market's pricing and quantity of meat sold reveal their aggregated self-interests. This dynamic process reflects how individual motivations align through market interactions, guided by the invisible hand, creating a balanced and functional marketplace.
4. The invisible hand optimizes our collective self-interests
Adam Smith’s profound insight into human nature revealed how individual self-interests are naturally balanced through market interactions, resulting in optimal outcomes for society. He viewed markets as more than just economic transactions; they were arenas where people’s self-interests—ranging from selfish to selfless—were moderated and aligned with each other. As Smith described in The Theory of Moral Sentiments, this moderation happens through sympathy: “We are immediately put in the mind of the light in which we will view our situation, and we begin to view ourselves in the same light; for the effect of sympathy is instantaneous… we always endeavor to bring down our passion to that pitch.” Through interactions in the marketplace, extreme self-interests are tempered as individuals adjust their behavior in response to the preferences of others.
The moderating convergence of self-interested market interactions - or, as Smith says, "...bringing down our passion to that pitch" - is a signaling mechanism central to the invisible hand. For example, in the case of Billy the butcher and Connie the consumer, the price and quantity of meat they exchange reflect the aggregate of their individual preferences. Legal guardrails, such as prohibiting Billy from selling unsafe meat or preventing Connie from stealing, help maintain fairness in the marketplace. However, these rules are minimal and are designed to nurture the natural signaling process rather than dictate behavior. They also prevent social extremes, such as neuro-diversities like narcissism, from pushing the edges of acceptable behavior. In this way, the legal system allows the invisible hand to work while keeping extreme or harmful behaviors in check.
Smith’s moral philosophy extends beyond economics, rooted in his earlier work The Theory of Moral Sentiments, where he explores self-interest through the lenses of prudence, justice, and benevolence. He believed that for self-interest to be defensible, it had to align with these moral principles. This is why Smith’s insights are not just about commerce but about human interactions in general. Smith's era, the Enlightenment, was a time when thinkers challenged the dogmas of the church and other societal norms, advocating for a more naturalistic understanding of human behavior. In many ways, Smith, like his Enlightenment peers, was more interested in describing how people are, rather than prescribing how they should behave. As Walt Whitman would later say, “Be curious, not judgmental.” Smith’s curiosity about human nature led him to develop a framework where people can discover what they ought to do through their own experiences and interactions, rather than being told explicitly.
Smith’s understanding of human behavior was also ahead of its time in recognizing how our emotional responses shape decision-making. [vii] His ideas on the asymmetry between how people perceive losses and gains became a foundation for modern behavioral economics, influencing Nobel Prize-winning research by Kahneman and Tversky over 200 years later. [viii] These insights show that Smith’s invisible hand is not just an economic theory but a profound understanding of how human nature shapes market outcomes.
Ultimately, Smith believed that the invisible hand optimizes collective self-interests, not by dictating actions, but by allowing individuals to naturally reconcile their preferences through market interactions. This process, when guided by basic legal and moral guardrails, leads to a harmonious society where self-interest benefits not just the individual but everyone involved.
5. The golden rule and stakeholders guide the invisible hand
While Smith’s era is often characterized by a questioning of strict religious dogmas, his worldview was still deeply influenced by moral and religious teachings. Central to his philosophy is the moral tenet of the golden rule: “Do to others as you would have them do to you.” Smith believed this principle was key to expressing self-interest in a way that balanced personal gain with concern for others. He taught that people naturally strive for authenticity, which, in his view, meant not just doing well for oneself but also doing well by others. This idea is captured in his statement: “Man naturally desires, not only to be loved, but to be lovely.”
In expressing self-interest, the golden rule plays a crucial role in guiding how we balance our inward and outward motivations. For Smith, this moral compass is activated through what he called the "impartial spectator." The impartial spectator is like a virtual observer—someone whose judgment we imagine as we make decisions. This imaginary figure represents all those people we don’t want to disappoint, and their perspective is detached from our immediate circumstances. In many ways, the impartial spectator functions like our conscience.
Smith suggested that we engage in an internal dialogue with this impartial spectator, shaping our actions to meet the standards we believe this observer would hold. This helps us reduce the self-deception we might otherwise use to justify questionable behavior. However, Smith recognized that we each have a “local” impartial spectator, what he called “the man in the breast,” who might be influenced by personal biases. To counter this, he recommended periodically calibrating our local impartial spectator with a more universal one—a broader societal view. Interestingly, even when we act selflessly, part of our motivation may still be selfish, as we desire to look good in front of this impartial spectator.
A great modern example of this concept can be seen at Colvin Run Elementary School (CRES), where the motto, “Do the right thing when nobody is looking,” was instilled in students. This is a Smithean principle in action. By encouraging children to place their own impartial spectator on their shoulder, the school aimed to promote self-regulated behavior, reducing the need for constant oversight. This approach not only fostered good behavior but also allowed more time for teaching and learning, demonstrating the practical impact of Smith’s philosophy. Please note: CRES was attended by the author's four children.
An essential aspect of Smith’s invisible hand is that it is inherently social, shared between individuals. While often applied to market and economic interactions, Smith’s framework is much broader, encompassing all human interactions. The marketplace is just one example of how individuals’ self-interests, guided by empathy and moral principles like the golden rule, aggregate to create outcomes that benefit society as a whole.
Bringing down our passion to that pitch
Adam Smith's invisible hand operates through a process called "sympathy modulation." This concept refers to how interactions between people help balance and moderate their emotions and preferences. Smith's use of the term “sympathy” is closer to what we would today call “empathy.” It goes beyond a one-sided feeling; sympathy modulation is shared between the parties involved, helping them adjust and develop a more balanced view of their own emotions and preferences.
For instance, if Joan experiences the loss of a close family member, she will feel deep grief. Her friend Sue, while sympathetic, cannot fully experience that loss because it is not hers. However, Sue can build an empathetic appreciation for what Joan is going through by imagining Joan's loss as if it were her own. Then, Sue can offer support by helping Joan reflect on the positive aspects of her relationship with the lost family member. In turn, Joan helps Sue understand the weight of her grief. Sue’s sympathy helps bring Joan’s overwhelming grief down from a heightened emotional state, while Joan helps elevate Sue’s emotional understanding. Over time, their emotions converge toward a more balanced state, represented by a middle ground where both parties have modulated their sentiments. It is likely Sue's sentiments will never fully rise to reach Joan's level of grief since the lost loved one was Joan's loss and not Sue's. However, their grief sentiments will come closer together.
This sympathy modulation framework is not limited to personal emotions—it also forms the basis of the invisible hand in economic markets. Just as Sue and Joan modulate their grief, market participants like Connie the consumer and Billy the butcher modulate their economic needs. Connie’s sentiment of hunger is satisfied by Billy, who provides her with food, while Connie’s payment for the meat helps Billy meet his own needs. This balance of supply and demand is driven by the same sympathy modulation mechanism that brings balance to personal emotions.
Smith’s brilliance lies in his recognition that commercial transactions are often intertwined with emotional judgments, just as emotional interactions can have practical, objective consequences. [x-a] This insight is key to understanding how the invisible hand works. Smith’s earlier work, The Theory of Moral Sentiments, lays the foundation for his moral and social theory, which he later applies to commercial markets in The Wealth of Nations. By connecting humanistic relationships with economic transactions, Smith shows how our self-interests are reconciled through a natural process of sympathy modulation.
Self-interest, in Smith's framework, is how individuals weigh their preferences. The invisible hand is the mechanism that reconciles these preferences among many participants in a marketplace. This weighing process—driven by sympathy modulation—is a natural byproduct of our human nature. To apply Smith’s concept, it is essential to broaden our view of the marketplace. It can refer to the exchange of goods like meat, but also the exchange of ideas, employment, relationships, and more. The invisible hand describes how individual self-interests aggregate to create optimal outcomes for all participants.
As the term suggests, the invisible hand operates out of sight. We cannot see it directly, but we observe its effects in the outcomes of our interactions and the interactions of others. The invisible hand works spontaneously, driven by individual preferences and guided by basic legal and social guardrails. It is also dynamic, constantly adjusting as individuals update their self-interests in response to changes in others’ preferences.
The stakeholders of our sympathies
Each person's self-interest is a complex mix of selfish and selfless preferences, shaped by the various stakeholders in their life. These stakeholders—whether family, employers, or community members—are like a team of partial spectators, each with their own motivations. Their self-interests may not always align with yours, but through market interactions, the preferences of all stakeholders are aggregated and reconciled, leading to a balanced and efficient outcome for the entire group.
Stakeholder preference groups can be categorized into four broad, and sometimes overlapping, categories: Self, Employer (or source of income), Family, and Community. [x-b] As highlighted in the earlier example of Billy and Connie, they are each driven by a mix of motivations from these four stakeholder groups. Every group's preferences are located at different points on the selfish-to-selfless continuum. The dynamic nature of self-interest means that these motivations tug between selfish and selfless, leading to challenging trade-offs. When motivations from different stakeholder groups conflict, making those trade-offs becomes increasingly difficult.
For example, Connie is deeply concerned about the environment, but she also knows her family prefers carbon emission-causing and water-intensive meats rather than plant-based protein alternatives that produce less carbon and use less water. Connie must find a balance between the interests of her community and her family. This presents a trade-off in her preferences.
Similarly, Billy loves his family and wants to spend more time with them, but he also needs to provide for them. Time spent with family is time he could have used making another sale at his butcher shop. Billy must balance the interests of his family with those of his employer, weighing the trade-offs between these competing priorities.
Smith’s Four Sources of Moral Approval, discussed in the notes, help connect our moral sentiments with market interactions. These sources of moral approval align closely with the four stakeholder preference groups. [xi]
The phrase "weighted balance" is key here, as it suggests that certain motivations and stakeholder interests carry more importance than others. Determining how to weigh these motivations is both crucial and highly challenging without assistance.
How the invisible hand builds from self-interests
How the invisible hand builds from self-interests: Individual preferences are not static; they are weighted and aggregated to a single point on a person's self-interest map. Additionally, these preferences are dynamic, constantly evolving based on the context. Behavioral economists refer to this as "framing," where people's preferences shift depending on how a situation is presented. [xii] This explains why marketing is such a powerful tool. If self-interests were fixed, companies would not need to spend billions on advertising. [xiii] However, the significant amount spent on marketing highlights how easily self-interests can be influenced.
Framing effects and dynamic preferences example: Consider Connie, who is on her way to pick up dinner for her family. Before getting into her car, she prioritized her family’s taste for animal-based protein. However, on the way, she listens to a podcast that explains how animal meat production contributes heavily to carbon dioxide emissions. This information reframes her decision-making process. The environmental concern now weighs more heavily on her mind, shifting her preference away from buying animal protein for dinner. In this scenario, Connie's decision has been influenced by framing, as her willingness to buy animal-based protein decreases based on the new information she received.
This example demonstrates how framing and dynamic preferences influence our self-interests, which are always subject to change based on the situation and external influences. The invisible hand, in turn, helps aggregate and reconcile these preferences across all market participants, creating a balance that reflects the shifting motivations and decisions of everyone involved.
6. Making the invisible hand more visible
The decision-making process is a cycle, continuously updated as we assess our self-interests and make optimal choices. Understanding your self-interest when making decisions is key. By doing so, both your outcomes and those of others will improve.
This process starts with your self-interest, which drives preferences. These preferences carry weight, shaping the utility of decisions—whether you are buying a car, a house, or meat. You then use this weighted model to choose the best alternative. Once the choice is made and implemented, the outcome adjusts your self-interest, and the cycle repeats.
Self-interest and the invisible hand create a complex and ever-changing decision environment. To make the best choices, decision support is often needed. Today’s data overload increases variability in decision-making. Sympathy modulation becomes difficult to achieve accurately, and without a clear process, decision confidence weakens.
Our brains evolved to make quick, survival-based decisions, which limits our ability to navigate modern, complex choices. This instinct-driven approach introduces cognitive biases that disrupt clear judgment. While future evolution may address this challenge, decision tools are crucial in the present. There are many other decision challenges as well—please refer to the notes section to learn more. [xiv]
It is common to misjudge the preferences driving decisions, leading to underconfidence or overconfidence. To correct this, choice architecture plays an essential role. It is a method built on decision and behavioral sciences, designed to help curate data and overcome cognitive biases. It helps clarify complex self-interests and preferences. Using choice architecture, especially for financially significant decisions, improves decision accuracy and helps develop skills for all decision-making.
Choice architecture makes the invisible hand more visible.
Definitive Choice, a smartphone app, offers decision support across many areas of life. It is user-friendly, while advanced decision science algorithms work behind the scenes. The app’s "Decision 6™" approach organizes what matters most to you and compares alternatives in small, digestible steps. As a smartphone tool, you can use it while gathering information, providing expert-level decision assistance. The dashboard ranks and displays the best choices based on your preferences.
Definitive Choice includes many preloaded decision templates, though personalizing the criteria and alternatives allows for a more tailored decision process.
Using tools like Definitive Choice makes decisions easier through DECISION A-C-T:
Accelerated: Faster, more cost-effective decisions, encouraging flexibility.
Confidence-inspired: A structured approach that boosts confidence in the decision and encourages commitment.
Transparency-enabled: Clear reporting and visuals to communicate the decision process effectively.
By using choice architecture, decisions become clearer, and the invisible hand becomes more apparent.
7. Conclusion
In this article, we examined the concepts of self-interest and the invisible hand, both introduced by Adam Smith in his groundbreaking work The Wealth of Nations. Smith’s ideas laid the foundation for modern economic thought and influenced the development of the United States and other Western economies. We explored the intricacies of self-interest, distinguishing it from selfishness, and how the invisible hand functions to reconcile individual interests through market interactions. Real-world examples like Billy and Connie demonstrated how preferences are shaped by a combination of selfish and selfless motivations, moderated by sympathy and moral considerations.
Additionally, we discussed how the invisible hand operates within both economic and emotional contexts, driven by dynamic and situational preferences. Tools such as choice architecture provide vital assistance in navigating complex decision environments, where cognitive biases and data overload can impede sound judgment. Definitive Choice, a smartphone app, was introduced as an effective tool to help individuals optimize decisions by weighing preferences, overcoming biases, and achieving confidence in their choices.
Ultimately, by understanding self-interest and employing decision tools like choice architecture, we can bring the invisible hand into clearer focus, making better decisions for ourselves and society as a whole.
Notes
Photo Credit: The invisible hand graphic superimposed on the lead image was provided by Public Herald, a nonprofit investigative news agency.
[i] Of all the founders, Alexander Hamilton was the most influential architect of the American economy. Hamilton was the majority writer of The Federalist Papers, a series of articles helping to operationalize the new U.S. Constitution. The Federalist Papers provided a starting point for the U.S. Economy. As the first Treasury Secretary in George Washington's inaugural administration, Hamilton built the Federal economic system from scratch. Hamilton was very industrious. Starting from scratch, he quickly built the Treasury Department to thirty-nine employees. Compared to Jeferson's State Department, with only five employees. During his tenure, Hamilton architected or placed in motion the U.S. currency, trade, tariffs, taxation, and many other basics we take for granted today.
Chernow, Alexander Hamilton, 2004
Hamilton was obviously influenced by Adam Smith and The Wealth of Nations. Hamilton’s Final Version of the Report on the Subject of Manufactures was provided to the U.S. Congress in 1791. Adam Smith was directly quoted 3 times in this important report. In several other pronouncements, Hamilton either directly quotes or uses Smith-based concepts as support.
Bourne, Alexander Hamilton and Adam Smith, The Quarterly Journal of Economics, Vol. 8, No. 3 (Apr., 1894), pp. 328-344
[ii] Hall, SELF INTEREST RIGHTLY UNDERSTOOD, Adam Smith Works, 2018
[iv] Klein, Is It Just to Pursue Honest Income? Economic Affairs, 2019, 39(3): 400-409
[v] The self-interest map along the selfish-selfless continuum can be recast using the consumption-savings framework commonly described in economics. In this framework, economists analyze the intertemporal allocation of time, effort, and resources over one’s lifetime. On the self-interest map:
Selfishness resembles consumption, where individuals prioritize immediate benefits, satisfying their self-interests today. The uncertainty of payoff is lower in the present.
Selflessness aligns with savings, where individuals defer their interests for future gain. The uncertainty of payoff is higher because the benefits are realized over a longer timeframe.
For example, consider environmental sensitivity. Separating recyclable materials from other trash can be seen as a selfless act, as it may not provide immediate personal benefit (consumption). However, this action contributes to a sustainable environment, benefiting future generations or even ourselves in the long run (savings).
Another example is our dedication to raising children, which seems entirely selfless. However, Richard Dawkins in The Selfish Gene argues that our devotion to offspring is driven by the biological need to pass our genes to the next generation. Dawkins coined the term "survival machine" to describe the human body and brain as mechanisms to ensure genetic survival. In this light, caring for our children can be viewed as a long-term investment in ensuring the continuation of our genetic line, much like savings. Historically, this uncertainty was managed by having large families. Today, with advancements in medicine and legal protections, the existential uncertainty of passing on genes has decreased, allowing people to feel more comfortable with smaller families. The "job" of the survival machine is completed once grandchildren are born.
Some economists equate self-interest with selfishness, but this oversimplifies the concept. The intertemporal framework reveals the distinction: just as savings is delayed consumption, selflessness is delayed selfishness. Our motivations along the self-interest continuum are time-dependent, shaped by whether we seek immediate rewards or invest for future returns.
Browning, Crossley, The Life-Cycle Model of Consumption and Saving, JOURNAL OF ECONOMIC PERSPECTIVES, VOL. 15, NO. 3, SUMMER 2001
Dawkins, The Selfish Gene, 1976
Stoic philosophy has much in common with Smith's moral philosophy. One of Smith's teachers, Francis Hutcheson, was a Stoic scholar. Marcus Aurelius was a leading Stoic living around the time of Jesus Christ. Aurelius promoted acting for common wealthfare as one of the core tenets of virtue. Aurelius recognized the dynamic, interrelated nature of selfish or selfless behavior. He considered selfless behavior as an investment in our own well being. Much the way today's savings is an investment in future consumption. Effectively- Stoic philosophy suggests the best for others will be the best for you.
Aurelius, Meditations, 180 CE
[vi] Adam Smith certainly believed in markets. He believed people were naturally drawn to markets to "truck, barter, and exchange." Smith also believed governments play an important enabling role for markets.
"Smith was a classical liberal, meaning a liberal in the original use of the word-someone who valued liberty and favored limited government. He saw a central role for government in providing national defense, a system of courts, and basic elements of infrastructure, such as roads and bridges, areas where he thought the private sector would struggle without government help."
Roberts, How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness, 2014
Determining the 'essential minimum' for regulatory rules is subject to ongoing debate. Markets may be subject to market failures, especially when externalities are not properly valued. Pollution is an on-point example. Scientists have shown the earth is heating and many undesired outcomes may occur (rising oceans, melting ice caps, increase weather variability and extremity, etc.) Because the carbon emissions associated with industrial processes have traditionally had little cost to the producer, this pollution externality has been created and is now becoming highly relevant as a significant cost to the rest of the world. The negative impacts of global warming are a market failure outcome example.
Pettinger, Market Failure, EconomicsHelp, accessed 2023
[vii] Roberts, How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness, 2014
[viii] Kahneman, Tversky, Prospect Theory: An Analysis Of Decision Under Risk, Econometrica, Volume 47, Number 2, 1979
[ix] Liu, Adam Smith’s America: How a Scottish Philosopher Became an Icon of American Capitalism, 2022
In the "Theory of Moral Sentiments," Smith's aim was to describe how people make judgments. At the center of his theory was the notion of "sympathy." Today, how Smith defined "sympathy" is more in line with our modern view of "empathy" as central to the golden rule. In her book, Dr. Liu states:
"For Smith, the answer was found in one concept: sympathy. Sympathy was a capacity to feel with and feel for others; it was both the mechanism by which we try to understand our fellow human beings first by imagining ourselves in their position, seeing things from their perspective, and in turn, seeing ourselves as well as the object of our desires."
[x-a] Roberts, How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness, 2014
[x-b] Freeman, R.E., and Dmytriyev, S., 2017: Stakeholder Theory and Social Identity: Rethinking Stakeholder Categorization
This article reviews traditional and modern stakeholder categories, highlighting their social and economic roles. It emphasizes how categories like employer and community overlap with self-interest in decision-making contexts
[xi] In The Theory of Moral Sentiments (TOMS), Adam Smith outlines four sources of moral approval, which are applicable in both market exchanges and broader life interactions. These sources represent the approval between individuals engaged in any type of interaction, whether it is a market transaction—like Connie buying meat from Billy—or a personal interaction—like Sue consoling Joan after a loss.
The four sources of moral approval, as described by Smith (TOMS 326-327.16), are:
Approval of the giving agent (supply): The individual providing something in the interaction.
Approval of the receiving agent (demand): The individual receiving something in the interaction.
Approval of the interaction environment: The rules or norms governing the context of the interaction, such as laws and societal standards.
Approval of the unseen: The long-term impact of the first three sources, which involves future consequences and outcomes.
Smith notes that the fourth source is the most difficult to evaluate because it deals with future outcomes that are less visible and often uncertain. This is where most people require guidance, as long-term consequences are harder to assess.
To apply this to Connie’s decision to buy meat for her family, we can think of Billy’s perspective as the first source and Connie’s perspective as the second. Both must approve the terms of the transaction for the sale to happen. The third source includes the laws and norms that govern the interaction, such as food safety regulations or business hours, which act as a kind of third-party approval.
Connie’s concern for the environment represents the fourth source of moral approval. The environmental impact of the transaction, while significant, is harder to measure and often overlooked in the present. Factors like the tragedy of the commons or ethical dilemmas (e.g., the Trolley Problem) complicate the evaluation of long-term effects, such as the degradation of natural resources.
All four sources must be weighed when making decisions, and trade-offs often arise. The first three sources generally have the power to reject an interaction if their needs are not met. However, the fourth source, representing future impacts, does not have an immediate voice. For example, the environment cannot directly protest its exploitation; it is up to the individuals involved in the interaction to account for and protect future well-being.
Hulett, Jeff, What Drives Our Choices: Adam Smith’s Moral Framework Explained, The Curiosity Vine, 2024.
[xii] Editors, Framing effect, behavioraleconomics.com, accessed 2023
[xiii] Navarro, Global advertising spending 2000-2024, Statista, 2023
[xiv] Hulett, Jeff. Top 6 reasons why Personal Finance success starts with choice architecture, The Curiosity Vine, 2023.
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