How did Adam Smith understand self-interest?

Both Adam Smith’s work and modern behavioural economics show us how our decisions are influenced by perceptions of the motivations and moral judgements of others.

When I ask people what’s the first thing that comes to mind about Adam Smith, self-interest is the most common answer. Some of the most well-read responders even dare citing that ‘It is not from the benevolence of the butcher, the baker, or the brewer that we expect our dinner, but from their regard to their own interest.’

It seems to be widely thought that Smith is all about self-interest. But is he really? If we search for self-interest in The Wealth of Nations, we might be surprised. We find all sorts of interests: public interest, private interest, own interest, interest in something. We find several mentions of rates of interest. But self-interest is mentioned only once.

It is not the famous butcher, baker or brewer who are self-interested: we expect our dinner from their regard to their own interest, not from their self-interest. The self-interested are the inferior clergy of the Church of Rome, which subsists on voluntary oblations of the people.

And yet, for Smith, people are very much interested. We may not be self-interested, but we are definitely interested in others: in others’ opinion, in others’ judgement, in how others see us. We are interested in others’ motivation, and in how others perceive our motivations.

In Smith’s view, we always and almost automatically put ourselves in the shoes of another and imagine how we would react in similar circumstances. If we would react the same, we agree with them and approve of their reaction. Conversely, we disagree and disapprove if we would respond differently.

This implies that we have to understand the context in which the other person is acting. Their reaction by itself is not enough. Context is what makes the difference.

For example, would you accept money from me knowing that I won it in the lottery? Would you accept the same amount knowing that I had attacked an innocent person to get it? It is the same amount of money. In both cases, it comes from me. But your evaluation is different – and probably your willingness to accept the money may be altered.

Modern behavioural economics is full of experiments of this kind. The payoff is the same, but the context differs. For example, experimental studies show that people are less insulted by a computer offering them a small share of a pot of money than if another person does it. We are interested in the intentions of the other, not just our self-interest.

A commonly understood self-interested individual would care only about the payoff. Context is irrelevant. But Smith teaches us that we are interested in the motivations of others and in how others morally judge us. It is not self-interest, but interest in the approbation of others that we find in Smith, if we care to read his work with interest.