Smith to Entrepreneurs: Go Forth with Prudence

adam smith entrepreneurship entrepreneurs just sentiments

September 28, 2022

Kacey Reeves West examines Smith on entrepreneurs and prudent entrepreneurship from princes to politicians to businesswomen.

"Smith cautions that these life-changing opportunities might tempt individuals to abandon virtue and embrace vice. For that reason, Smith calls on individuals to tackle life-changing opportunities with prudence and justice lest they fall prey to disordered ambition."

Adam Smith’s writings leave us with unresolved puzzles. The Theory of Moral Sentiments (TMS) cautions us against the dangers of ambition, while the “liberal plan” of The Wealth of Nations (WN) gives free reign to certain types of ambition. Scholars continue to explore and debate the contrarieties found in Smith’s writings. 
There are several puzzles surrounding Smith’s thoughts on ambition in economic enterprise and his understanding of entrepreneurship. Some readers say that Smith had little appreciation of entrepreneurship and the dynamism of free markets. Smith balks at the projector who undertakes new projects and endorses the status-quo ceiling on lending at interest, and some take this as evidence of Smith’s skeptical attitude toward entrepreneurship. Others, however, have speculated on what Smith says between the lines. Jon Diesel (2021) suggests that Smith dissembled in his endorsement of the interest-rate ceiling, and Dylan DelliSanti (2021) suggests that Smith deliberately downplayed the dynamism of liberalism and therefore obscured the role that entrepreneurship and innovation play in the economy.
Here I treat a related issue: Can the morals of TMS be squared with entrepreneurship? The present essay is based on my article “Prudent Entrepreneurship in Theory of Moral Sentiments,” published in Business Ethics Quarterly. I argue that entrepreneurship can indeed find moral sanction in TMS. Furthermore, Smith advises entrepreneurs on how to maintain virtue: Tackle both small and large opportunities with prudence. My argument does not involve claims of esotericism on Smith’s part, but like the articles by Diesel and DelliSanti my argument tries to resolve Smithian puzzles surrounding ambition.   
The projector vs. the prudent man: Who is the entrepreneur?
Although Smith certainly criticizes the projector, it is not because the projector takes entrepreneurial risk. Rather, it is because the projector foolishly risks squandering social resources. At WN 315.74, Smith criticizes projectors for the “distress” that they bring “upon themselves and upon their countr[ies].”[1] Yet because the projector stands as the most obvious reference to the entrepreneur in Smith’s works, scholars have assumed that Smith’s distaste for the projector translates to a distaste for entrepreneurship (e.g. Campbell and Skinner 1976; Rashid 1988; McCloskey 2016). But such an interpretation tends to assume that entrepreneurs universally resemble the impulsive, “chimerical” projector (WN 316.77).

That leads us to an important question: What is entrepreneurship?

One approach identifies entrepreneurship by new-venture creation assumes: “entrepreneurs create organizations, while non-entrepreneurs do not” (Gartner 1988, 11). Another, the “trait approach,” highlights personal characteristics, like age, manner, attitudes, and risk tolerance (Howell 1972; Brockhaus and Horwitz 1986). Meanwhile, William Baumol (1990; 2010) argued that entrepreneurship can take the form of many different activities and that entrepreneurs bear little resemblance to each other. Saras Sarasvathy (2001; 2008) expands on Baumol to present a model of effectual decision-making. And other theorists have variously associated entrepreneurship with creating, imagining, owning, bearing uncertainty, discovering opportunity, leading and persuading, and so on.

Let’s see whether the facets of entrepreneurship can be squared with a character in TMS who, at first glance, seems to have little to do with entrepreneurship. In Part VI, Smith presents a character sketch of the prudent man. Unlike the projector, the prudent man is cautious, dependable, and modest. These character traits alone might seem to exclude the prudent person from any definition of entrepreneurship rooted in the trait approach. Yet Smith takes care to show that the prudent person is willing to take risks, as long as those risks are apprehended with care. Smith writes: 
[The prudent man] has no anxiety to change so comfortable a situation, and does not go in quest of new enterprises and adventures, which might endanger, but could not well increase, the secure tranquility which he actually enjoys. If he enters into any new projects or enterprises, they are likely to be well concerted and prepared. He can never be hurried or drove into them by any necessity, but has always time and leisure to deliberate soberly and coolly concerning what are likely to be their consequences. (215.12, emphasis added)
Smith also takes care to show that the prudent person’s actions are virtuous and well-regarded by others. He praises prudent persons for receiving constant support from the impartial spectator and notes that the virtue of prudence serves as a basis for excellent conduct (TMS 215.11, 216.14). And notice that Smith says the prudent man deliberates “soberly”—in WN (357.15) Smith indicates that “sober” is exactly what projectors were not.

The prudent man, then, not only has the capacity to resemble an entrepreneur in his ability to “locate new ideas and put them into effect” (Baumol 1968, 65), but also receives approbation in the Smithian moral framework. Acknowledging that the prudent person can be an entrepreneur underscores that Smith’s beef with the projector is not that he launches new projects but that he launches new projects in an imprudent manner. We can think of Smith as anticipating Baumol’s (1990) distinction between productive and destructive entrepreneurs.
Two principles for moral entrepreneurship 
My argument that the prudent man can serve as an example of productive entrepreneurship in Smith’s works finds support in TMS Part III, Chap. IV, in which Smith lays out a moral framework for the pursuit of wealth, career, or legacy. Smith’s framework consists of two principles:

Principle 1: Pursue small matters not with tumultuous passion but with the general “tenor of conduct” that governs your life and trade (TMS 172.6).

Principle 2: Pursue large matters with earnest ambition that is bound by both prudence and justice. (TMS 173-4.7).

When we consider these principles in the context of business and trade, it becomes clear that Smith views prudence as a necessary ingredient for moral conduct in enterprise. Prudence should be thought of as a prerequisite to “sober” entrepreneurship; it is a hinderance only to enterprising without sobriety.

The first principle, which relates less to entrepreneurship, concerns routine decisions that do not drastically alter the course of one’s life but rather influence one’s livelihood as they add up over time. We can think of a baker who owns his own shop. If a vulnerable traveler walks in and asks to buy a loaf of bread, the baker can either sell the loaf of bread for its usual price or overcharge the ignorant traveler. Although the “miser” who is “anxious in small matters for their own sake” would overcharge the traveler for the bread, the person of “exact oeconomy and assiduity” would not alter his behavior but rather preserve the “scheme of life which he has laid down to himself” and treat the traveler as he would any normal customer (TMS 173.6). The person of “exact oeconomy and assiduity” does so because he recognizes that acting virtuously—and thus maintaining a reputation as a shopkeeper who acts virtuously—is worth more than the chance to earn an extra shilling. As Smith elaborates in Lectures on Jurisprudence (LJ): 
[W]herever dealings are frequent, a man does not expect to gain so much by any one contract as by probity and punctuality in the whole, and a prudent dealer, who is sensible of his real interest, would rather chuse to lose what he has a right to than give any ground for suspicion. (539.328, emphasis added) 
Thus, the first principle reveals that prudence is a necessary ingredient for everyday business dealings.

The second principle concerns big decisions that can drastically alter the course of one’s life in a single moment, and relates more to entrepreneurship. By no means does Smith say that people should steer away from big opportunities. Indeed, Smith writes that if a person does not strive to take advantage of an “extraordinary job” that presents itself to her, she will be considered a “poor-spirited fellow” by her peers (TMS 173.7). But Smith advises that we should approach big opportunities differently than we approach routine decisions.

Smith cautions that these life-changing opportunities might tempt individuals to abandon virtue and embrace vice. For that reason, Smith calls on individuals to tackle life-changing opportunities with prudence and justice lest they fall prey to disordered ambition:
Those great objects of self-interest, of which the loss or acquisition quite changes the rank of the person, are the objects of the passion properly called ambition; a passion, which when it keeps within the bound of prudence and justice, is always admired in the world, and has even sometimes a certain irregular greatness, which dazzles the imagination, when it passes the limits of both these virtues, and is not only unjust but extravagant. Hence the general admiration for heroes and conquerors, and even for statesmen, whose projects have been very daring and extensive, though altogether devoid of justice… (TMS 173.7, emphasis added)
Here, the virtue of prudence takes center stage. If the entrepreneur does not practice prudence in his pursuit of a new business advantage, he risks becoming a destructive projector. The passage also underscores how the virtue of prudence itself is distinct from the prudent man. Whereas the prudent man might not seek out big opportunities, or even hesitate to take them on, the virtue of prudence is still necessary for the pursuit of large entrepreneurial undertakings.
Localism and prudence
Smith tells us to undertake big decisions with prudence and justice. But what does that mean as a practical matter? Smith gives pertinent examples at TMS 173.7, where he writes of the prince who wages battle to protect his nation, a member of parliament who competes to win a reelection, and a businessman who strives to obtain an uncommon advantage. The common thread in these examples is that the object of each character’s pursuit aligns with his livelihood. The prince tends to his own matters, as does the businessman. Neither party attempts to meddle in affairs that are not his own—it would be imprudent for them to do so.
These examples are significant because they underscore the important theme of localism in Smith’s work. Smith recognizes that individuals do not have an unlimited capacity to sympathize with others, nor do we have unlimited power to do good. Rather, individuals naturally face geographical and relational constraints. We sympathize with what is focal to us, such as a problem in our community, more easily than with what is not focal to us, such as a problem in a community in a foreign country (Matson 2022). Smith teaches that individuals should embrace their natural limitations and focus on accomplishing what is in their control— cooking dinner for their family—rather than what is not in their control—solving world hunger. Smith’s intention is not to endorse clannish or self-centered behavior, but rather to push us to take action on matters where our efforts are effective (Forman-Barzilai 2010, 22). 
The theme of localism also surfaces in the discussion of the prudent man and the projector. While the projector chases far-off opportunities that he has little knowledge of, the prudent person “does not go in quest” of new opportunities (TMS 215.12). Rather, the prudent person’s deep expertise of her trade allows her to remain alert to new opportunities and judge them without becoming deluded by vain ambition. In some cases, the prudent person’s proximity to her work also acts as an incentive for her to continue practicing prudence. Contrast the “prudent dealer” of LJ 539.328 with the director of a joint stock company that Smith mentions in WN 741.18. Whereas the prudent dealer’s position as the residual claimant incentivizes her to handle transactions with honesty and probity, the limited liability held by the director incentivizes him to handle transactions with “negligence and profusion” (LJ 539.328). 
There is a key relationship between prudence and proximity: The deep knowledge of an individual’s trade that comes only when she dedicates her full attention to what is at hand, rather than the politics of “clubs and cabals” (TMS 13.7), is necessary for prudent decision-making. 
Takeaways for the modern entrepreneur
I do not draw prudent entrepreneurship out of Smith’s writings to suggest that the modern entrepreneur should adopt a series of strict rules, but rather that she consider how prudence or localism might be relevant to her affairs. After all, Smith wrote in the tradition of virtue ethics which sought to offer “loose, vague, and indeterminate” guidelines as opposed to exact rules (TMS 175.11). The two principles set out above are vague in nature. And their application depends heavily on circumstances. Smith wrote at a time when business was stifled by social and political constraints. That remains true today, but in different ways. Each entrepreneur faces a world of challenges and opportunities, and that world is always changing. 
We find in Smith both condemnation of imprudent projectors and endorsement of prudent entrepreneurs. Although projectors occasionally turn a profit, it comes at the risk of squandering resources and missing out on more sober opportunities. And although prudent persons sometimes suffer losses, their careful planning often mitigates the effects on others. That Smith understands entrepreneurs to receive approbation from the impartial spectator based on their motives, as opposed to their balance sheets, reveals that Smith is concerned with the total effect that an entrepreneurial venture has on society. For Smith, the world is complex, and our sense-making grows complicated. In going forth, entrepreneurs should proceed creatively but, above all, prudently. 

Kacey Reeves West is a fourth-year PhD student in the Department of Economics at George Mason University and a PhD Fellow at the Mercatus Center. Kacey has taught economics as a lecturer for Christendom College, George Mason University, and George Washington University's Central Asia Program. Her research focuses on Smithian political economy.

This essay is part of the AdamSmithWorks series Just Sentiments curated by Daniel B. Klein and Erik Matson. New essays will be published on the fourth Wednesday of the month. You can read more about the series in this Speaking of Smith post, "Just Sentiments- Welcome!". Klein and Matson lead the Adam Smith Program in the Department of Economics at George Mason University, in association with the Mercatus Center. In the program, they study big ideas in jurisprudence, politics, ethics, and economics as they were pursued during the original arc of liberalism, especially in the 18th century in Britain.

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[1] References to WN, TMS, and LJ are formatted as page.paragraph, e.g., 315.74 means page 315, paragraph 74.