Perspectives from Smith on Wealth and Happiness

wealth of nations invisible hand morality mercantilism wealth happiness poor man's son tranquility pursuit of wealth

Erik W. Matson for AdamSmithWorks

May 13, 2020
Does wealth increase our happiness? In some ways the question lies close to the heart of Adam Smith’s intellectual and public project. The Wealth of Nations (WN) represents his effort to reform British policy and gradually establish a system of natural liberty—a system of limited government and the rule of law in which a commercial society flourishes.1 He sees the liberal society’s capacity for increasing wealth as an important virtue. And he sees increasing wealth to be desirable inasmuch as it enables people to better their condition, that is, inasmuch as it increases happiness.

Yet Smith’s view of the relationship between wealth and happiness is not entirely straightforward. There are certainly some domains over which an individual’s wealth and happiness have a positive relationship. For instance, happiness increases with the pursuit of wealth at least inasmuch as wealth is pursued to secure the necessities of life. But Smith thinks that many of the perceived benefits of wealth are illusory. Wealth is largely unrelated to the things that truly make us happy, such as community and the conscious pursuit of virtue. Some modes of pursuing and increasing wealth can even lead to unhappiness by detracting from our present enjoyment and corrupting our peace of mind. The wealth-happiness relationship is complicated further still by the fact that Smith understands that wealth-seeking that leads to individual unhappiness can, under the right circumstances, positively impact the happiness of others. How then should we characterize Smith’s attitude about wealth? When is he willing to morally authorize its pursuit?

What is wealth? What is happiness?
Up until the late eighteenth century, wealth was principally conceived of only at the national level. This conception derives from an economic view now referred to as “mercantilism.” The core of mercantilist doctrine in all its varieties was a focus on accumulating stocks of precious metals at the cost of foreign rivals, to secure military power and the durable capability to acquire material goods (see Viner 1991). A consequence of this doctrine was a somewhat confused identification of wealth with money. Consider the comments of 16th century English pamphleteer Clement Armstrong: “The whole wealth of the realm is for all our rich commodities to get out of all other realms therefore ready money, and after the money is brought in to the whole realm, so shall all people in the realm be made rich within” (quoted in Heckscher 1955, 2:187). As a policy matter, the conflation of wealth and money led to a focus in economic policy on aiding production for the sake of exporting domestically-produced goods in exchange for foreign stocks of precious metals.

Smith took issue with mercantilism in general and with the conflation of wealth and precious metals or money in particular. He famously writes in WN that “consumption is the sole end and purpose of all production”, criticizing the fact that “the mercantile system […] seems to consider production, and not consumption as the ultimate end and object of all commerce and industry” (WN IV.viii). As opposed to mercantilist thinkers, Smith identified wealth not with stocks of metals, but with consumption levels, or the amount of real goods and services people can enjoy: “Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life” (WN I.v.1). His conception of wealth is therefore an individual one; the true wealth of nations consists in the consumption levels of individuals within the nations.

What about happiness? Smith doesn’t treat happiness systematically in his work. But from his scattered comments, especially in TMS, a general view can be pieced together. There are two general ways to think about happiness. The first is simply as a transient state of mind, as in “I feel happy when the sun comes out,” or “she seems happy today.” The second is a broader notion of well-being corresponding to a sense of human flourishing or “a life that goes well for the person leading it” (Haybron 2011). Smith largely seems to use the term in the second sense. In the very first sentence of TMS, for instance, he maintains that there are principles in human nature “which interest [us] in the fortune of others, and render their happiness necessary to [us]” (TMS I.i.1.1; 9). We are not principally interested in the passing moods of others, but in their enduring well-being.

Smith’s notion of happiness can be understood to have three nested components: material provision, social engagement, and the tranquility that comes from acting virtuously. The most obvious material component of happiness is simply the consumption which is required for self-preservation. Happiness requires a living person to be happy, a living person to live well. Smith refers to the requirements for self-preservation as “the necessities of nature” (food, clothing, shelter) which he says can, in modern commercial society, be supplied by “the wages of the meanest labour” (TMS I.iii.2.1). The material component of happiness beyond self-preservation or subsistence is a general level of conveniences that affords a degree of amusement and relaxation. Such conveniences also bring with them a degree of future security—wealth beyond subsistence enables savings and reduces anxiety about the supply of necessary provisions in the future.

Wealth beyond subsistence has another positive, albeit indirect, impact on happiness. It can enable social engagement by bringing with it a degree of social recognition. People, sadly, often fail to recognize and dignify those who fall noticeably below their own material state. “The poor man”, Smith tells us, “goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his hovel” (TMS I.iii.2.2). Smith doesn’t dwell on the point, but a clear implication is that community-specific ranges of wealth foster social acceptance, which is a universal human desire and an important part of happiness. Indeed, he tells us that “the chief part of human happiness arises from the consciousness of being beloved” (TMS I.ii.5.2). Such consciousness requires ongoing relationships—to know and to be known. We are naturally constituted to take pleasure in sharing experience with others and to enjoy genuine company.

The third component of happiness is tranquility. Tranquility for Smith is not a matter of indifference or disengagement with the world; rather it is a state of contentment in light of having fulfilled one’s moral obligations, in light of cultivating and acting in line with one’s conviction of the good. It consists chiefly in the approval of one’s conscience. The desire for the inward approval of the conscience also comes from our social nature. As we develop relationships with others, we learn to accommodate our feelings and actions in line with what they approve of. We desire to receive the praise and love of our social group and feel discontent upon earning their disapproval. But we also naturally develop a desire to do things that our companions would approve of and that they would love. Even in instances where no one is watching, we are uneasy to think that people would disapprove of our actions. We strive to subject ourselves to the inward judgments and command of our conscience. This accommodation puts us on the path towards virtue. We develop our sense of virtue as we refine our ideas about what sorts of actions warrant approval. We feel true tranquility only when we act in line with this sense. The actual experience of social approval, love, and acceptance combined with a knowledge that we in fact deserve to be approved of is perhaps the greatest expression of happiness— “what so great happiness as to be beloved, and to know that we deserve to be beloved?” (TMS III.1.7; 113).

When do the pursuits of wealth and happiness coincide?
It is clear that pursuing wealth to secure the necessities of life, some conveniences and amusements, and a baseline degree of social recognition makes a direct and positive contribution to one’s happiness. Beyond such a level, however, the nature of the wealth-happiness relationship becomes ambiguous. Increases in wealth—even large ones—often don’t improve our happiness. The natural feeling that increases in wealth will continue to make our lives better is largely deceptive. At best Smith thinks that increases in wealth might lead to short-run, novel excitement, as when acquiring a new watch. This kind of excitement, although it might initially be mistaken for happiness, quickly passes. The Stoics, he says, were “very nearly in the right; that, between one permanent situation and another, there was, with regard to real happiness, no essential difference” (TMS III.3.30; 149).

The pursuit of wealth after a point might decrease happiness. Constantly chasing wealth in order to change one’s permanent material and social situation can crowd out social engagement and tranquility. Smith understands that the pursuit of wealth can hurt our relationships for several reasons. First, time is scarce. Spending time fixating on and pursuing wealth means not spending time developing and enjoying one’s friendships. Second, successfully and radically changing our permanent situation might alienate us from those we care about. It is sometimes difficult, Smith thinks, for people who experience major changes in fortune to retain their old friends, or at least to maintain the same camaraderie with those friends. This is partially due to jealousy—“a sentiment of envy commonly prevents us from heartily sympathizing with [their] joy” (TMS I.ii.5.1). But it also might be the result of simply no longer sharing a significant amount of experience with one another, living different lifestyles, etc.

The pursuit of wealth can lead to psychological distortions that engender self-deception and disturb tranquility. Smith writes that “the great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another” (TMS III.3.30). What he means is that we easily overestimate the extent to which increases in wealth and social-standing will contribute to our happiness. Such overestimation leads us to act differently than we otherwise would, often violating our sense of prudence, justice, and virtue more generally. We grow anxious and restless. And inasmuch as it leads us to act imprudently or unjustly, the overestimation of the contribution of wealth to our happiness corrupts our future tranquility. During later moments of clearer perspective, we look back and regret our anxiousness and improprieties (see TMS III.3.31).

In terms of an individual’s happiness, then, there are diminishing returns to the pursuit of wealth. But there is a twist. An individual’s pursuit of wealth within the appropriate institutional context has positive effects on the happiness of others. The appropriate institutional context is what Smith refers to as the “equal and impartial administration of justice,” which secures “to each man the fruits of his own industry” (WN IV.vii.c.54). Such an administration entails the enforcement of the “sacred laws” of justice that protect “the life and person of our neighbor,” “his property and possessions”, and “what is due to him from the promises of others” (TMS II.ii.2.3). If these laws of justice are respected and impartially enforced, the only way for individuals in private life to increase their wealth is to offer goods and services to others in exchange. The desire to provide goods and services as a means to one’s own pursuit of wealth leads to increases in material goods and innovation, including scientific and cultural developments. The increase of material goods in turn enables more and more people to secure the material necessities of life, independent of patronage or any other kind of dependency, indirectly increasing the happiness of many.

Piecing the perspectives together2
When does Smith think that the pursuit of wealth should be morally authorized? An important set of passages comes in the fourth part of TMS, where Smith tells and comments on a parable of a “poor man’s son.” “The poor man’s son,” he writes, “whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich” (TMS IV.i.8). The poor man’s son sets out ambitiously to improve his permanent situation in terms of wealth and social status, devoting “himself for ever to the pursuit of wealth and greatness” (TMS IV.i.8). Yet throughout his labors, Smith tells us that the poor man’s son “sacrifices a real tranquility that is at all times in his power” (TMS IV.i.8). For the sake of the trappings of wealth, he experiences great anxiety—"more fatigue of body and uneasiness of mind than he could have suffered through the whole of his life from the want of [the trappings of wealth]” (TMS IV.i.8). At the end of his life, he realizes that power and riches merely serve to secure “trinkets of frivolous utility” (TMS IV.i.8); they are very often not worth the great cost by which they are acquired. “[P]ower and riches” finally appear to be “operose machines contrived to produce a few trifling conveniences to the body […] which in spite of all our care are ready every moment to burst into pieces, and crush in their ruins their unfortunate possessor” (TMS IV.i.8).

Smith proceeds to offer some commentary on the parable. He says that the poor man’s son’s perspective at the end of his life is foreign to us when we are in “better health and better humour” (TMS IV.i.9). In normal states we naturally find wealth and power worth pursuing. He continues, “it is well that nature imposes upon us in this manner” because “it is this deception which rouses and keeps in continual motion the industry of mankind” (TMS IV.i.10). Nature’s deception drives mankind “to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the arts and science” (TMS IV.i.10). As a consequence of the normal way we conceive of wealth in relation to our happiness, the earth “has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants” (TMS IV.i.10). The economic mechanism by which this occurs involves the invisible hand. Ambitious and aspiring individuals who pursue power and riches for their own ends—Smith speaks here of “the proud and unfeeling landlord”—are deceived in thinking that they will reap the benefits of the “whole harvest” of their “extensive fields” (TMS IV.i.10). But given their limited physical capacity for consumption of food, and the need to hire labor to maintain their growing estates, the rich are “obliged to distribute” much of their material wealth “among those, who prepare, in the nicest manner, that little which [they themselves make] use of. . . all of whom thus derive from [their] luxury and caprice, that share of the necessaries of life” (TMS IV.i.10). The rich
are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of society, and afford means to the multiplication of the species. (TMS IV.i.10)

There are at least two lessons that can be drawn from the parable and Smith’s commentary. First, Smith cautions against the pursuit of wealth outside certain bounds. The virtue of prudence, which Smith speaks of as “the character of the individual, so far as it affects his own Happiness” (TMS VI.i title), moderates our expectations of what wealth can do for our personal fulfillment. It is true that prudence encourages “real knowledge and skill in our trade and profession,” diligent self-application, and parsimony (TMS VI.i.6). But the prudent person is chiefly concerned with wealth only insofar as it enables her to enjoy friendship and tranquility. When the convenience and amusement of wealth is overestimated, or when wealth is pursued for the vain sake of power, its pursuer will, like the poor man’s son, tend towards unhappiness. Accordingly, Smith shows reluctance to morally authorize the pursuit of wealth beyond the bounds of prudence. It should be noted, however, that the circumstances of prudence will likely differ considerably across individual cases. For Smith, prudence, unlike commutative justice, is a becoming virtue, affording a general idea, not “certain, infallible directions for acquiring it” (TMS III.6.12). Whether or not an individual is acting prudently requires a good deal of knowledge about his or her circumstances.

The second lesson from Smith’s commentary on the poor man’s son is that the pursuit of wealth within the rules of commutative justice leads to positive-sum outcomes. Although Smith condemns greed and inappropriate ambition exhibited by the “proud and unfeeling landlord[s]” (TMS IV.i.10), his commentary highlights the beneficial tendencies that result when even greed and ambition are bound by the rules of justice. His analysis dovetails with earlier comments by Bernard Mandeville (1988 [1714]), who argued that private vices might lead to public benefits if those vices are channeled through an appropriate social and legal framework.3 Smith does not see private vice as essential to modern society. But he does point out that even the misguided pursuit of wealth and greatness can, under the right conditions, have important positive effects for others. Again, the specific ways this plays out are through the encouragement of cultural and scientific refinement and population growth. His understanding of these effects leads him to advance a political presumption of liberty with respect to wealth-seeking:
The sovereign is completely discharged from a duty, in attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society. (WN IV.ix.51)

Smith’s thinking on the relationship between wealth and happiness suggests both encouragement and moderation. On the one hand, he sees that the pursuit of wealth within the bounds of justice increases the wealth of nations, which has enormous potential to support larger populations and provide people with the basic necessities and many conveniences of life. On the other hand, he understands that wealth is not sufficient for happiness, and can sometimes be a distraction. Wealth provides a basic material framework in which the higher components of happiness—relationships and the tranquility that comes with virtuous action—might be cultivated, but it does not ensure happiness. Such an understanding can be used as a lens through which the twin pillars of Smith’s project can be viewed. Wealth of Nations concerns itself with outlining the political and economic case for “the liberal plan,” authorizing the pursuit of private interest within the bounds of commutative justice. Theory of Moral Sentiments often focuses on moral education and the encouragement of virtue: prudence, friendship, and benevolence within the system of natural liberty, to spur and inform the pursuit of true happiness.

Haybron, Dan. 2011. “Happiness.” In The Stanford Encyclopedia of Philosophy, edited by Edward N. Zalta.

Heckscher, Eli. 1955. Mercantilism. Edited by E.F. Soderlun. Translated by Mendel Shapiro. 2nd ed. Vol. 2. 2 vols. London: Bradford and Dickens.

Mandeville, Bernard. 1988. The Fable of the Bees. Vol. 1. 2 vols. Indianapolis: Liberty Fund.

Matson, Erik W. 2020. “A Dialectical Reading of Adam Smith on Wealth and Happiness.” Journal of Economic Behavior & Organization. Forthcoming.

Smith, Adam. 1981. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by R.H. Campbell and A.S. Skinner. 2 vols. Indianapolis: Liberty Fund.
———. 1982. The Theory of Moral Sentiments. Edited by D.D. Raphael and A.L. Macfie. Indianapolis: Liberty Fund.

Viner, Jacob. 1991. “Mercantilist Thought.” In Essays on the Intellectual History of Economics, edited by Douglas Irwin. Princeton: Princeton University Press.

  1. References to The Wealth of Nations, hereafter “WN,” are to Smith (1981), followed by book, chapter, part, and paragraph. References to The Theory of Moral Sentiments, hereafter “TMS,” are to Smith (1982b), followed by part, section, [when one exists], chapter, and paragraph.
  2. This section draws on my longer essay (Matson 2020).
  3. Note that Mandeville and Smith’s conception of an appropriate social and legal framework is different. Mandeville saw the need for much more active political control, especially in managing trade balances.