The article is built upon James Otteson's analogy between the structure of moral and economic rules. In Otteson's interpretation of Adam Smith's works both of them develop from an exchange of information of interacting agents. We develop that concept about Adam Smith's Theory of Moral Sentiments, analyzing those exchanges, and considering them Moral Market processes, in the Austrian Tradition of markets as processes. We think that Smith's emphasis on graduality and his metaphor of the Impartial Spectator allows us to propose a marginalistic approach to those markets stating how, in some of them which we call moral exchanges of justice, and through a great number of exchanges, moral rules of justice emerge. Finally, we present the problems that arise when legislation tries to change the results of these exchanges, in what we called a price control in the moral market.
Adam Smith was a moral philosopher before fathering economics. His Theory of Moral Sentiments (TMS) dates from 1759, and his “An Inquiry into the Nature and Causes of the Wealth of Nations” (WN) is from 1776. Various authors have stated that these two works are part of a unique and coherent intellectual construction. In particular, James Otteson proposed an interesting analogy about the structure of moral and economic rules, stating that for Adam Smith, both of them develop from an exchange of information between people cooperating with each other and interacting in a market, a concept that underlies the human interactions described in TMS and WN (Otteson 2002: 6–7). Otteson finds in TMS the process of the delimitation of a moral market in which sentiments, behaviors, and judgments of approval are exchanged. Basing our interpretation on certain passages of TMS and exploring Otteson’s thesis, we will attempt to show that moral phenomena are a type of market process. To do so, we will state a theory about the emergence of moral rules through what we think it is a Moral Market Process, in open opposition to what can be called an economic analysis of morals.Footnote 1 We will attempt to show the existence of a Moral Market through the description of its main elements. First, we will state the existence of a moral problem, demonstrated by human’s scarcity of affection, which is cushioned partly by the formation of a Moral Market. To demonstrate the existence of this Moral Market, we will show the existence of moral exchanges of individuals demanding and supplying sentiments, behaviors, and judgments of approval and converging on moral prices. We will also suggest that moral prices are determined and vary marginally toward an assumed moral price of equilibrium that is set by the most universal moral rules of justice as a system of signals guiding the agent’s actions in the Moral Market.
It is clear that Smith never wrote about moral markets, prices, moral demand or supply, or marginalistic determination. Therefore, these terms represent our own interpretation of Smith’s ideas. We agree with Smith when he writes that moral relationships (moral exchanges, for us) are explained ab initio by the principle of sympathyFootnote 2 rather than by the utility principle, which explains economic relationships.Footnote 3 Moral exchanges are not initially the result of calculation; they are formed gradually through emotional behaviors that slowly give form to a different cognitive instance that is reflexive and deliberate. Therefore, agents may realize ex post their convenience, subsequently strengthening, for utilitarian reasons, the sympathetic origin that characterizes moral relationships.
As a result of the process of interpersonal exchanges, moral prices emerge as social standards of what is right or appropriate, first in the agent’s sentiments and later, at a rational level, in the sympathy that mediates their judgments of approval.
In this sense, the idea of moral exchange is latent in TMS when Smith describes a sympathetic relationship in which the agent moderates his conduct to obtain the approval of a spectator. This moral relationship appears only if both agent and spectator can match their sentiments. First, the spectator, thanks to an effort of his imagination, sympathizes with the agent, although with a sentiment of lower intensity than the one the agent is experiencing. However, the agent must control his ways of expressing his sentiments through his behavior to obtain the spectator’s sympathy.
In TSM, Smith describes thoroughly and with examples the socialization process (moral market, for us), showing how an agent reaches a tacit agreement with a spectator of sentiments of the first order and then how both, based on the same principle of sympathy, attempt to obtain the moral approval of a spectator of the second order or a meta-spectator and so on, until they achieve the approval of an Impartial Spectator. Smith uses the metaphor of a spectator whom he gradually places farther away from the original event, signifying with this rhetorical figure of speech the increasing level of objectivity and impartiality of his judgments—that is, of moral rules (Smith 1790:68/72).
Smith also finds in the regularity of certain ways of feeling, behaving, and judging by the agents and in the usual adoption of certain moral relationships the cause that would explain the spontaneous appearance of these rules. These rules promote harmony and concord, stating the moral approbation of a behavior. In our hypothesis, moral rules are the result of the process of exchanges that determines the moral equilibrium prices to which every moral market tends to arrive, regardless of its purpose and scope.
We suggest that whereas in economics the free market’s efficiency tends to gradually remove poverty (or at least change its definition), in the same sense, the moral market tends to gradually remove conflict,Footnote 4 reaching greater social harmony through free moral relationships of greater concord and justice in the absence of sufficient relationships based on love and benevolence. From this perspective, we conclude that a legislator or a judge who makes or interprets laws against the free and spontaneous process of the formation of moral rules interferes with the moral prices of the system. We can call these tamperings “moral price controls” that affect the order’s harmony, increasing the level of conflict in social relationships.
After this introduction, In section II, we define some of the main conceptual tools of our work. In section III, we posit the existence of Moral Markets, and we suggest a marginalistic analysis of them. In section IV, we propose a mechanism for the determination of moral prices considering the different kinds of moral exchanges. Finally, in section V, we consider three particular problems: the problem of rationality in moral exchanges, our interpretation of Smith’s metaphor of the Impartial Spectator, and the consequences of intervention in moral markets.
Some conceptual tools
Scarcity and spontaneous orders
The problem of scarcity is inherent to humanity because every good is scarce for its needs, and its energies are scarce. However, essentially, every individual is limited in its rational capacity, finite in its living time, and, relevant to this work, scarce in its generosity and its affections.Footnote 5
The agent that we are considering is an individual to whom operations such as planning and optimizing are as crucial for the fulfillment of objectives as placing himself imaginarily in the other’s place, making moral judgments, or conforming to others’ approval judgments would be for his life of relationships. In other words, in addition to being a teleological individual, he has affective needs that can be satisfied through moral relationships, fuelled by his innate tendencies toward sympathy and reciprocity.
Economics show that there are no markets that scarcity does not influence and that free goods are irrelevant to economic calculation.Footnote 6 Therefore, it is immaterial to speak of markets when the supply of a good is larger than its demand. The same is true in moral markets if the supply of benevolence and magnanimity is larger than their demands. This is the exceptional world of supererogatory behaviors, reserved only for saints and martyrs who offer to others much more than they can be reasonably be expected.Footnote 7 It is with scarcity that economics and morality make sense. In both fields, markets appear as a solution to scarcity, a kind of institutional palliative that emerges spontaneously to solve this limitations.
Under the great umbrella of spontaneous order, Smith included the self-organized condition (in Michael Polanyi’s expressionFootnote 8) of some social regularities and of their free evolution with what Viktor Vanberg calls a causal but not a teleological process. Vanberg states,
“The evolutionary approach of Scottish philosophers reduced teleology to causation, showing how the apparent intentional behaviour, at a socio-structural level can be explained of the mainly unintended result of test and error. The driving force behind the accumulative process of civilization is observed in the continued experimentation of individuals who, following their one purposes, constantly adjust themselves to new circumstances and change both deliberately and not deliberately, the way they handle things.” (Vanberg 1999:193)
Smith states that the process of the economic market is spontaneously guided by personal interest. Therefore, we will say that the process of the moral markets is guided by the sentiments of sympathy and reciprocity.
Sympathy and the familiarity principle
For Smith, individuals naturally tend to sympathize with their fellow human beings, but more with their joys than with their sorrows (Smith 1790, 108). However, we appreciate from others their compassion more than their compliments:
“The cruelest insult, on the contrary, which can be offered to the unfortunate, is to appear to make light of their calamities. To seem not to be affected with the joy of our companions is but want of politeness; but not to wear a serious countenance when they tell us their afflictions, is real and gross inhumanity.” (Smith 1790:59)
At first sight, in this scenario, a counterpoint seems to appear that is similar to the one formed by supply and demand in a market of goods. Prospective buyers want more goods of better quality at lower prices, whereas prospective vendors want to offer lower-quality goods at higher prices. Something similar seems to happen in moral markets; individuals are more willing to offer sympathy and a reward for a pleasure. On the contrary, they demand compassion more eagerly when they are suffering with hurt and sorrow. What does this mean? Sympathy is natural for individuals, but it takes effort from both parts to properly equalize their sentiments.Footnote 9 In other words, it means reducing personal inclinations to be able to attend to the other’s claim. For this reason, sympathyFootnote 10 makes the agent momentarily suppress his natural predisposition to pleasure in the same way that sympathy compels him to control his enormous happiness to avoid raising envy in others.
We sympathize with the situation of the other only as much as our sentiments and our knowledge allow us.Footnote 11 Although we use our imagination to put ourselves in another’s situation, we do so without totally abandoning our own way of feeling. Therefore, thanks to imagination, we can feel, in a vicarious and proxy way, a sorrow or a joy of a lower intensity than the agent who actually experiences it and can achieve an imperfect sympathy (Smith 1790:50).
The intensity of the principle of sympathy is based on stoicism, which orders the intensity of this sentiment in concentric circles, placing the agent in the center. The different circles include the decreasing affections the agent feels for different things and persons (Forman-barzilai 2010:8). James Otteson’s reinterpretation of this idea is the “familiarity principle”:
“Smith argues in TMS not only that the benevolence we naturally feel towards others varies directly with our level of familiarity with them –the more familiar, the more benevolent; and vice-versa—but also that is morally proper that our behavior towards others should be motivated in this way. I call the combination of these two claims, Smith’s familiarity principle.” (Otteson 2002:4)
This subjective way of ordering decreasing sentiments and interests shows that individuals relate first, naturally, to their closest beings and then, diminishingly, with the other members of society, who are figuratively located in the more remote rings.
Smith also considers distance an important factor, but it must be construed not only as an affective concept but also a cognitive limitation (Smith 1790:49/56). Beyond the bonds of affection and vicinity, familiarity implies a specific class of events, matters, and situations shared by all agents. In this way, it is easy to suppose a subjective order for each of them, on which Smith insisted to separate himself from stoicism.Footnote 12
The gradual decrease in intensity that affects the possibility of experiencing sympathy with any individual and the possibility of imagining oneself in a position different than one own’s, explains the idea of a progressive decrease in the intensity of moral exchanges. This phenomenon is intensified in the Moral Market as the number of sentiments exchanged increases. The different intensities of moral exchanges indicate an important distinction between sympathy and cognitive empathy: in cognitive empathy, the use of imagination is emotionless and therefore deprived of affections. We use the name of passions for the sentiments that happen to us directly, and we use sympathy, in general, for sentiments that are lower in intensity and differ from the former and that refer to sentiments we feel with another human being for things that happen to him. Finally, in a third rank with even lower intensity for a person or what happens to him, sympathy is turned to cognitive empathy.Footnote 13
Although moral exchanges can be found in any of these three zones depending on the level of affection between actors and the distance from each other, the processes that involve the main part of moral exchanges are necessarily located near the cognitive empathy zone. Translated to our terms, this means that in moral markets, prices (or standards of conduct, behavior, and judgments of approval) are established near the position of the most remote agents, as we explain in section V.
Decreasing marginalistic sentiments
From the exchange of sentiments and interests generated by the familiarity principle, we can infer three propositions:
As sympathy marginally decreases, exchanges will marginally decrease.
From “a”, it can be inferred that the limit of moral exchange is when marginal benefits approach zero.
The decreasing intensity in the sentiments and in the sympathyFootnote 14 of the agents can be found in the negative slope of a function of moral demand. The law of moral demand states, for instance, that each agent is less willing to give progressively with less gratitude when he feels less compassion and less generosity from his suppliers in successive moral exchanges as a result of the growth of the number of sentiments to exchange. Less gratitude to compensate should be assumed, for instance, if agent (A) feels the need for little admiration and approval before virtuous conduct from the other agent (B), if, for reasons of affinity or affection, B is located in the most remote places from A.
Following Occam’s razor,Footnote 15 we should not formulate another principle when the first one is enough.Footnote 16 Thus, we can define moral supply by stating that the quantities of benevolence, compassion, and magnanimity that are offered grow with the growing approval that may be received. It follows as a corollary that greater effort required to offer them to more distant persons (affectively or circumstantially) would demand more retributions than those needed to compensate the same behavior with nearer beings (affectively or circumstantially).
It can be inferred from all this that the decreasing order in the sentiments of the agent would influence their dispositions to exchange when supplying or demanding moral goods. These characteristics are found in the slopes of the curves of moral demand and supply.
However, is important to state again that moral exchange between moral supply and demand are not recognized initially as a consequence of the speculative action of the agents but as a consequence of the sympathetic bond between them.
The moral sentiment as a moral price
In her work, Alejandra Carrasco (2006) shows that, due to the principle of sympathy, a first approximation exists between agents who, from childhood and throughout their lives, take part in the exchange of sentiments and behaviors. This initial interpersonal exchange begins the socialization process that ends in the moderation and harmonization of the agent’s sentiments as they seek to relate to each other and their search for approval by the others.
In other words, this relationship of moral exchange is born of the human tendency toward sympathy guided by the agent’s search for mutual sympathy and the satisfaction it brings. As Carrasco wrote,
“Morality, in this sense, will be a second order structure, that is mounted over our psychology, over our innate tendencies. This structure, that shows itself in the sense of properness or in the impartial spectator judgments, slowly surges in the socialization process, we are not born with it, but we necessarily acquire it as soon as we realize, with our innate tendency to sympathy (we want to be accepted by the others), that we must control our subjective or natural sentiments of the first order –that make us feel we are the centre of the universe- or we will be never reach the other’s sympathy.” (Carrasco 2006:117/8)
Two ideas can be inferred from this quotation. First, it is the innate tendency to sympathy that leads us to seek the approval of others. In the same way, for Smith, it is sympathy and the common wish to obtain our mutual sympathy that is required to exchange behaviors and sentiments with our fellow beings and to relate to them consciously and unconsciously, seeking their judgments of approval. The other idea is that innate personal sentiments of the first order must be moderated in the process of socialization or moral exchange, giving place to the second-order sentiments mentioned by Carrasco. During the process of socialization, reflective reason produces a more elaborate, superior sentiment that is not innate but is acquired, a result of the process of considering the legitimacy of the other’s sentiments.Footnote 17 Carrasco adds,
“That is why in TSM the perception of the morally good does not match exactly to the perception of “agreeable” but to the perception of “appropriate” (that which we sympathize with becomes agreeable too). If the principle of moral properness derives only from natural sentiments, the virtue of self-control would be unnecessary as well as experience and the impartial spectator to formulate ethical judgments.”Footnote 18 (Carrasco 2006, 118)
The second-order sentiment that Carrasco refers to as a moral sentiment is what we consider a moral price because a price is, by its definition, a rate of exchange that is the result of the process of interaction between buyers and sellers, sympathy, and/or judgments of approval. Numerous individual exchanges produce a kind of “objectivity” that shows the agents’ values and sentiments in society (in the moral markets, in my hypothesis). We will return to this point later.
The revenue and costs of moral exchange: a marginalistic analysis
It seems useful to translate Carrasco’s analysis of moral relationships into moral exchanges. A moral exchange incentivizes agents to moderate their behaviors through self-control (moral cost of the exchange) to obtain the other’s approval or sympathy (moral revenue of the exchange), which is shown in the concord of sentiments reached (moral price of exchange). This exchange means that each agent puts more value on what he receives than on what he gives away. It is because of these differences, subjectively, that the moral benefits of exchange are born.Footnote 19
Naturally, it can be imagined that based on each agent’s different ways of feeling in each event and depending on the distance between them, moral exchanges of different intensities will exist, with different possible moral prices.
Even Smith seems to accept moral prices when a widow exchanges affections with the closest persons to her or when she receives condolences from distant people (Smith 1790:59).Footnote 20 It is reasonable to say that a moral exchange of the first type will report a much greater benefit than one of the second type because the pleasure of mutual company is greater in the first, whereas the costs of the moderation needed for an exchange are clearly greater in the second. Moral exchanges may be more intense or more beneficial for the parts, but, as more sentiments and behaviors are exchanged, the intensity of the exchange decreases marginally.
Smith also admits that sympathy is a process of coincidence in the approbation of an agent’s conduct.
“To this question there is, I imagine, but one reasonable answer, which can possibly be given. It must be said, that when the approbation with which our neighbor regards the conduct of a third person coincides with our own, we approve of his approbation, and consider it as, in some measure, morally good; and that, on the contrary, when it does not coincide with our own sentiments, we disapprove of it, and consider it as, in some measure, morally evil. It must be allowed, therefore, that, at least in this one case, the coincidence or opposition of sentiments, between the observer and the person observed, constitutes moral approbation or disapprobation. And if it does so in this one case, I would ask, why not in every other? Or to what purpose imagine a new power of perception to account for those sentiments?” (Smith 1790.325)
The exchanges between more distant agents will be less morally beneficial for both. Of course, there will be agents so distant from each other that they could never exchange their sentiments because they show apathy toward each other and therefore could never equalize their ways of feeling and judging. We will call them sub-marginal spectators because they do not reach cognitive empathy with the agents in a particular moral market and therefore stay out of them.
We will propose a graph of how, in an isolated exchange between two individuals, the intensity of the exchanges represented by the surpluses of buyers and sellers drops to zero in the margin.Footnote 21
The determination of moral prices
Vernon Smith offers an interesting perspective on moral phenomena in his article “The Two Faces of Adam Smith” (Smith 1997), in which he experimentally shows the existence of a human tendency to social exchange that is the origin of both goods and moral markets as a direct consequence of the Principle of Reciprocity.Footnote 22 This general principle appears in two different forms: through a positive and a negative reciprocity that complements the first type. Positive reciprocity, or mutual altruism, is reciprocity that is an exchange of favors that two players give to each other. This negative reciprocity, which complements the positive one, is essential to the conservation of mutual benefits. As Vernon Smith says,
Negative reciprocity occurs when individuals are punished for “cheating” on a social exchange: i.e., failing to return positive reciprocity to those that had provided to them. Negative reciprocity is the endogenous policeman in social exchange that defines natural rights systems. Positive reciprocity or reciprocal altruism (Trivers, 1971) is subject to invasion by selfish free riders. Hence the importance of negative reciprocity to punish free riders, as an implicit transaction or enforcement force of positive reciprocity. (Smith 1997, 4)
The classification of moral markets
The reciprocity principle allows us to classify moral exchanges into two categories:
Moral exchanges of virtue, in which benevolence, charity, or compassion are exchanged for compassion, and admiration is exchanged for magnanimity. This is an imperfect reciprocity because virtue can very rarely be rewarded.
Moral exchanges of justice, in which mutual respects are exchanged with reciprocal commitments of each agent to control his egoism because it could result in damages to the other or exchanges for the vindication for damages suffered, which are essential to compensate with proper punishment.
Reciprocity, generality, and the passage of time
The equilibrium price of a market is established where supply and demand curves cross, making the quantities exchanged the same. In a moral market, the moral price also shows an equilibrium, which represents the concord resulting from the process of exchange and considering the agent’s sentiments, behaviors, and judgments of approval.
Such concord or equilibrium has different grades of stability depending on the number of sentiments exchanged in the moral market. This matter is evident in the degree of partiality in the judgment of approval of the marginal agents. This suggests the importance of two factors that influence the stability of moral markets: generality and reciprocity.
In the matter of generality, the repetition of a way of feeling or acting from moral agents in similar situations makes their sympathetic approximations easier because for two agents who reach similar sensibilities, the emotional distance between them is shortened, and their personal efforts of self-control required to exchange morally decrease. Therefore, the cost of the moral transaction drops, and the number of moral transactions increases socially. This ease of sympathizing with some subjects may involve a large number of people. In these cases, moral exchanges may extend even between agents who are most socially distant. In an expansive moral market, the first exchanges are between the main actors of an event and their closest spectators and then between more distant ones.
Reciprocity is no less relevant a factor. It is possible to suppose that if greater reciprocity in sentiments, in behaviors, and in judgments of approval exists in the moral market, exchanges would be rapidly multiplied, unlike other markets that do not react so easily.
The passage of time constitutes, for Smith, another important variable. As time goes by, moral rules in society are strengthened as long as they are practiced. They send signals to the agents about what types of behaviors are expected and considered morally proper, modeling their future behaviors. They are considered customs that define standards of behavior for what Smith called the moral properness of a behavior, formed by the judgments of approval of the spectators (Smith 1790:348/63Footnote 23). These behavioral rules are the spontaneous result of the repetitive process of moral exchanges that become stable when moral supply and demand become stable.Footnote 24
In this way, the different equilibrium moral prices appear, and they gradually tend toward a natural equilibrium price in the long run.Footnote 25 This process occurs because more agents become involved in the market, introducing the factors of generality and reciprocity. Furthermore, the moral market expands and moral prices reach some stability, freeing themselves from partialities and subjectivities that affect them in the short run.
The moral prices of the moral exchanges of virtue
The moral rules of virtue that result from moral exchanges are more volatile and fragile due to the absence of reciprocity that is characteristic of these exchanges. Although the approval of virtuous behavior is usually general, that approval is based upon the exceptional character of the behavior, which is nearly impossible for the great majority of approving spectators. Virtue is always more demanded than supplied and has very little quantity of transactions and higher moral prices in comparison with behavior that is considered proper in the moral market. This reason, and no other, avoids the reiteration of this class of moral exchanges, which is reserved only for selected suppliers because it is difficult for them to obtain adequate payback, which is also voluntary according to the definition of virtue.
Therefore, we suppose certain volatility in the moral prices of virtue, which can be represented as a moral equilibrium price in the short run, making a tendency toward equilibrium in the long run impossible. The same is true for vicious behaviors.
The moral prices of the moral exchanges of justice
When discussing these exchanges, and following Vernon Smith, we can find exchanges of respect and exchanges of punishment. We will consider here exchanges of respect due to the approval of a certain behavior. Given the general character of their ways of feeling and the reciprocity in their self-control, it could be said that these proper behaviors are also “right” when the moral transaction receives the generalized approval of spectators in the moral market—even more if the approval comes from more distant spectators and becomes a universally moral rule, such as “Thou shall not kill” or “Thou shall not steal”.Footnote 26
Generally speaking, it can be said that the growth of the number of exchanges due to a greater concord about certain ways of behavior and feeling from the agents and the reciprocity in their exchanges immediately increases the sympathy between the agents and disseminates the furthest agents’ empathy. Thus, a high level of generalization and respect is reached in a moral market with the arrival of new marginal spectators who are morally related to the agents and with previous spectators located in nearer rings.
With reiteration, these exchanges become regularities and make a larger and more consistent market. First in the short term and then in the long term, they tend to lead the moral market to an equilibrium about its indispensable moral relationships of justice. This is due to the market’s expansion; moral demand and supply become more elastic and more stable (for the generality and reciprocity principles mentioned before). Volatility is reduced, and the market becomes more harmonic and mature, with more stable and transparent moral prices.
It may be useful to add to our conclusion the pertinent analogy of Smith in TMS when he notes that the moral rules of virtue are as vague and indeterminate as the rules of poetry, whereas the rules of justice are precise and accurate (Smith:309).
We will now present a graph with the intention of showing the differences between moral exchanges of virtue and moral exchanges of justice. The left and upper part of the graph show the representation of a moral price of virtue (P1), and the right and lower part of the graph (much more within the cognitive empathy zone) have longer curves that represent the formation of a moral price of justice (P2).
Some additional considerations about moral exchanges
The rationality of a moral exchange and its relationship with the extension of the market
Given that the moral quantities that are exchanged grow in relation to a certain matter, and notwithstanding the number of individuals acting in the market, we suggest that moral exchanges will gradually decrease in emotional intensity and increase in rationality.Footnote 27 This can be explained with the addition of new spectators with whom new exchanges are made. In our hypothesis, these exchanges increase in their content of rationality and impartiality as the main actors and their nearest spectators gradually moderate their passions to adapt to the more reflexive judgments of the new and initially more distant spectators and to seek their approval and achieve moral exchanges. Graphically, this can be shown as a movement from the passion zone to the cognitive empathy zone, passing through the sympathy zone.
In this gradual decrease in the intensity of passions, every agent begins to think about what is proper and what is in his interest. This last point is very important because the agent watches, in some way, the transformation of his passions into moderate actions, and his moderations can be seen as more utilitarian and teleological. This matter should not be surprising because if reason provides the discernment to make a moral judgment or to evaluate the properness of a conduct, it should also make a judgment of interest possible. Therefore, in the zone of cognitive empathy, the logic of moral exchanges is very likely the logic of economic exchanges, with the provisos we have made before.
Thus, the larger the market is, the more spectators that are far from the main actors of an event (affectively or cognitively removed from it) and that have difficulty empathizing with them. In these cases, the main actor’s effort of moderation is greater because he must decrease his passion to reach concord with the large number of agents that watch him. He must control himself to receive a part of respect of all who treat them almost impersonally. However, he is aware that they feel with an intensity that allows a sympathetic relationship, and he knows that, in an inverse situation with him as a spectator, he would act in the same way. Therefore, he accepts the relationship because he understands that it is fair and reciprocal, and the exchange of moral judgments and sentiments reaches a concord with impartiality, impersonality, and respect set by those marginal spectators.
The results of this moral exchange process are, essentially, the moral rules of justice. These rules achieve a more universal character as moral exchanges grow in number, in larger markets, and between more distant agents. These rules particularly address the moral sentiment of mutual respect and the concord reached between agents without affection, but they reciprocally appreciate the value of respecting each other’s persons, lives, or properties.
Smith also claims in TMS the independence of these rules of justice, liberating them from the ties of affection and taking them to a frame of neutrality or greater impartiality, where concord between agents distant from each other should gradually become easier. The presence of a spectator and the judgment of the impartial spectator act decisively to rein in the negative influence of the most egoistic passions. This is the touchstone of Smith’s thought, upon which the expansion of a fair order in a society becomes possible.
The metaphor of the impartial spectator in Adam Smith
In the process of socialization, each individual analyzes and judges the behaviors of others and compares them with his own. As he observes and judges, he is also observed and judged from different possible distances. His real judges are idealized as external to the system. That exercise of imagining, abstracting, and making judgments external to the process leads Smith to conceive the idea of an impartial third who observes and judges, as if he were the synthesis of the thoughts and sentiments of everyone. That third individual is the impartial spectator or, as Otteson correctly calls it, “the impartial spectator procedure” (Otteson 2002,43).
For Smith, the first part of this procedure is to resort to the effort of imagination that allows us to put ourselves in each other’s place, to judge the properness of the other’s behavior and, later, to judge ourselves in the properness of ours. As he states,
“We endeavor to examine our own conduct as we imagine any other fair and impartial spectator would examine it. If, upon placing ourselves in his situation, we thoroughly enter in all the passions and motives which influenced it, we approve of it, by sympathy with the approbation of this supposed equitable judge“. (Smith 1790: 222)
In this way, and in contrast to Bentham’s omniscient observer (Bentham 1907), for Smith the observer also acts, and it is only through the experience gained during one’s own actions that one can imagine. Agents operate in moral markets as observers apt to judge the world and to attempt to use their imagination, leaving themselves behind and then, from an external point of view, reinterpreting themselves for a moment and adjusting to their judgment. This is why it is possible to speak figuratively of an external spectator or an observer without our partialities. Each individual must answer for what is expected from him, involving himself or not in the moral market that attracts and repels him through its spectator’s judgments of approval and disapproval.
To speak of impartiality does not necessarily mean a judgment by an external spectator who is immutable and omniscient. Impartiality can be built from our perspective through a dynamic process of human interrelationships.Footnote 28 Therefore, we do not have one spectator, but thousands of them in perpetual motion, with judgments that are continually linked to each other inter-subjectively in the moral market through a continuous process of approval and disapproval.Footnote 29
The figure of the impartial spectator must be considered within the context of the last phase of moral phenomena, in which judgments of approval are exchanged. In this phase, the judgment becomes inter-subjective in the sense that our set of shared experiences enables and at the same time limits our possibility of understanding each other’s feelings. This makes a particular behavior proper, marking the greatest concord between the sentiments, behaviors, and judgments of the participating agents. The mention of this last phase obviously implies the existence of earlier ones, but we will strongly note that the process develops in a certain direction.Footnote 30 This is because the judgments of the furthest spectator with whom new moral exchanges could be made are based upon the main actors’ exchanges with their nearest spectators. We are then speaking of possible second-order relationships and of subsequent orders that imply greater moderation from the main actor and of his nearest spectators to achieve the approval and respectFootnote 31 of the more distant ones, who are merely cognitively empathic and more impartial.
In our hypothesis, this process of moral exchanges, which is gradually extending through the addition of new, more distant spectators, reaches a limit because, at some point, moral exchanges cease to be mutually beneficial. The limit of the market is reached when the judgment of the next nearest spectator does not reach concord and does not have cognitive empathy with the previous spectator, ending the process of exchanges. In this way, we can define the marginal agent, the submarginal agent, and the market price according to the first definition.
In this moment, in the limit of the moral market, two very important matters arise. The first one is related to the size of the market, a matter we associate with the importance of its rules. The second one establishes that in the limit of the moral market the moral price is determined due to the judgments of the farthest agents. We believe that Smith’s position on the impartial spectator may be associated with both matters, but particularly with the second one.
It is important to remember that for Smith, the judgment of the impartial spectator establishes the moral properness of a behavior that is acquired through general approval. We maintain that it is a representation of a process of moral market in which the different agents gradually converge their sentiments, their behaviors, and their judgments until the mutual benefits of these moral exchanges end.Footnote 32 Each agent, dominated by his way of feeling, resigns, at least in part, to his partiality to adapt to the demands of his counterpart. These mutual sacrifices are contained in the price of the moral exchange, which makes them agree at some point.
We call this point the moral price. When we theorize about a supposed equilibrium price that will bring harmony to every agent in the market, we are noting the same concord that can be reached by observing the impartial spectator, which we suggest is the marginal spectator, mainly without sentiments toward the main agent.Footnote 33
The control of moral prices as a cause of social dissonance
Every price is the result of its agents’ inter-subjectivities that, through a market process, mutually adapt to each other, spontaneously originating the discovery of rules that note the degree of properness of a certain conduct and, in the case of a moral rule of justice, reaching generalized approval.
Every moral price of this type is at the same time a result, a signal, and an incentive that guides future behaviors. Therefore, its signals, precise as grammar rules for Smith, slowly become, with the passage of time, objective expressions of order that are deeply rooted in the agents’ minds. Nevertheless, and possibly due to the fundamental utility that those rules have, they are usually enforced and made explicit through legal sanctions or judicial decisions. These institutional artifacts should be understood as evolving mechanisms that allow the evolution of moral rules. Therefore, the tasks of the legislator and the judge should be understood as interventions to clarify rules that arise spontaneously by the process mentioned before.
To consider the moral rules of justice of an order as the long-run supposed equilibrium prices does not imply considering them fixed, and considering them universal does not mean that they are invariable or eternal. It means understanding that they are the spontaneous result of free moral exchanges through which the agents, acting by the sympathy principle, reach concord about their sentiments, reduce conflicts, and provide greater stability to the social order as the moral market extends.
If we imagine the task of a legislator or a judge that is not in harmony with the process we have described, we can assume that their interventions would be in a different direction or at least would disregard the results of the moral market, such as passing laws that interfere with moral prices. In this case, we would call these interferences measures to control moral prices.
Every price control affects the efficiency of an economic market. We can state, with an analogy, that control of moral prices affects the harmony of the order, creating more conflicts and deteriorating relationships. The lack of judicial intervention in case of crimes would validate the harmful effects of the crime, acting as a true incentive for retaliation by the harmed agent’s own hand or the vigilante’s justice to reestablish the lost equilibrium.
We must recall Adam Smith’s notorious passage about “the man of system”; we think that the man of system is the one who will attempt to control the formation of moral prices to impose his own moral judgments.
“The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it”. (Smith, 275)
This is because we will deal mainly with the social process through which, in our opinion, moral rules spontaneously emerge, not with the way in which a particular individual behaves to benefit from coexistence with his peers. We particularly thank Guido PIncione for his comment on this point.
We will not consider the long standing debate about the meaning of Smith’s use of sympathy. Basically we will consider a zone of sympathy a subset of the modern concept of empathy and a zone of pure empathy. By that, we mean empathy that is no longer connected with affections, as sympathy is, but only with cognitive issues.
Smith and Hume disagree about the foundations of morality: “Hume believed that utility was the ‘foundation of the chief part of morals’. Smith, on the other hand, while utility may contribute an additional beauty to virtue, it is never the source of their virtue and rarely the source of moral approbation” (Martin 1990:107)
Answering two anonymous referees’ points we must say that as markets grow and there are more transactions between more distant agents, these two conditions involve more universal approvals about the properness of a certain behavior. This means that more general rules of justice are discovered (agreed on) which are rationally founded and therefore more impartial. That is why we affirm that they tend ro remove conflicts because factions are gradually dilluted to reach an agreement between increasingly distant partners. Steve Pinker has proposed a similar tendency. (Pinker 2011)
In this sense, Dupuy states, “Smith’s agent is radically incomplete. Far from having all the qualities that would let him obtain, by deduction, the moral and social order, he desperately needs his fellows to make an identity for himself” (Dupuy 1992:98). For Ezequiel Gallo, “These two features of human nature combine themselves in the Scottish Thought with a permanent external circumstance. This man, with limited generosity and imperfect knowledge, faces nature which is mean in the provision of resources for the satisfaction of his needs. For Hume this dreadful combination is so crucial that explains, alone, the need of justice” (Gallo 2008:39).
See Menger (1871):87ss). About these goods that he called “non-economic”, he wrote, “It is, then, clear, that in regard to these goods in which the available stock is larger than the needs, economic activity is excluded in the same natural and necessary way in which appears when the goods are in the opposite quantitative relation.”
Similarly, Urquhart states that morality needs a standard sympathetic capacity that is neither total nor inexistent. “Fully sympathetic beings would inhabit an entirely different moral world; and beings wholly lacking the capacity for sympathy, could neither be moral no individuals. Morality then requires both that I have a strong sense of myself as an individual, and that I divide myself, displacing myself, looking at myself, as I only can look at you-from outside” (Urquhart 2010:185 emphasis in the original). In the same sense, according to Hume, “If men were provided of everything with the same abundance and if everyone would have for the others the same affection that they have for themselves, justice and injustice would be unknown to this world” (Hume 1739,:494/5 quoted by Gallo 2008:39).
“When order is achieved between human beings letting them act on their own initiative- restricted only by laws uniformally applied to everyone- we have a spontaneous order in society. We can say then, that the efforts of those individuals are coordinated by the exercise of their own individual initiative and this self-organization justifies liberty in the political field” (Polanyi 1951:159,quoted by Hayek 1960:213).
We use “equalize” in the sense of the process by which two agents who are involved in the same event attempt to eliminate their differences in perception to put each in concord with the other. As Smith wrote, “The person principally concerned is sensible of this, and at the same time passionately desires a more complete sympathy. He longs for that belief that nothing can afford him but the entire concord of the spectators with his own. To see the emotions of their hearts, en every respect, beat time with his own, in the violent and disagreeable passions, constitutes his sole consolation. But he can only hope to obtain this by lowering his passion to that pitch in which the spectators are capable of going along with him. He must flatten, if I may be allowed to say so, the sharpness of its natural tone, in order to reduce it to harmony and concord with the emotions of those who are about him. What they feel will, indeed, in some respects, different from what he feels, and compassion can never be exactly the same with original sorrow; because the secret consciousness of the change of situation, from which the sympathetic sentiment arises, is but imaginary, not only lowers it in degree but, in some measure, varies it in kind, and gives it a quite different modification. These two sentiments, however, may, it is evident, have such a correspondence with one another, as is sufficient for the harmony of society. Though they may never be unisons, they may be concords, and this is all that is wanted or required” (Smith 1776:70/71).
The discovery of mirror neurons and their functions will probably affect in the near future the way we think about “sympathy”. Kiesling (2012) describes three main coincidences between Smith’s concept and mirror neurons research.
As Otteson notes, “Our ability to imagine how others feel depends on two main factors. The first is our knowledge of the agent’s situation. (…) The other variable in the process is the spectator’s own sensibility (2002:44). Accordingly, for Griswold, “Smith is right to emphasize that what he is calling ‘sympathy’ requires conception, that is cognition, as well as imagination” (Griswold 2010:71/72).
According to Forman-Barzilai (2010:139), Smith takes from Hume the idea that sympathy seems to dilute when the object is away from the agent. Paganelli (2010) finds in the role given by Smith to distance, typical of a commercial society, the most fertile ground for moral development because it places individuals “neither too close, nor too far away from each other” (Paganelli 2010:426)
In our opinion, Adam Smith’s “sympathy”, as used in TMS, is, in the modern sense, a subset of “empathy”, at least in Spanish. Considering the English term, for Forman-barzilai (2010):12), “sympathy” is not “empathy”. Fitzgibbons (1995:62/3) states that it has that meaning. Otteson (2002:17) divides the concept of the term into three parts: “Smith, three meanings of sympathy in order, are: natural fellow feeling for others, pity for others and correspondence of sentiments between two or more people” (Otteson 2002:17). We maintain our previously stated position that sympathy is a subset of empathy.
An anonymous referee has remind us of Michael Sandel’s position about acts of for example civil spirit, originating or replicating into new similar acts. We agree with Sandel’s position that civic spirit, solidarity and altruism tend to growth with their use, particularly thorough examples, they are, in a certain way, a structure of social capital. But this must not be confussed with the decreasing slope we posit. Besides the social capital Sandel postulates is more frequently found in small than in larger groups. But it would be perfectly possible a larger society as Sandel proposes, and we still think it does not contradicts our point.
Occam’s razor, or the principle of parsimony or economy, makes simplicity a theoretic virtue. See Baker (2010) for further reading on this point.
Here, we follow the Austrian Tradition of the derivation of supply’s law, which is inferred from the principle of diminishing marginal utility.
Carrasco (2006:131) states, “From our natural tendency to sympathy, that is innate to human nature, and through some learning process, we come to experience and to seek (and to be motivated to) the pleasure of properness. Then the “moral sympathy”, although natural (meaning not artificial nor imposed) in man, is not an innate tendency, but a structure of second order that is based on our psychological construction and that includes in itself some deliberation, assimilation and comprehension. It is a cognitive sentiment” (emphasis in the original). On this subject, Nuzzo (2010:46/7) states that sympathy is an intellectual disposition more than an original sentiment.
Carrasco refers here to moral judgments as we prefer to call them, following Maliandi (2004).
Otteson (2002, 124) states that the motivating wish of moral markets is the pleasure for the mutual sympathy of sentiments.
These are isolated exchanges and, therefore, do not form market prices. Its determination is in a specific combination of space and time, without the possibility of repetition and so without the possibility of establishing a moral rule.
The graphs are merely illustrative for didactic use. They do not intend to have the rigor of a formal model.
Smith (1997:2) writes, “A universal propensity for social exchange is a fundamental distinguishing feature of the hominid line, and that it founds expression, both in personal exchange in small-groups social transactions and in impersonal trade through large-group markets”.
As Dupuy states, “Far from being transcendent, the figure of the Spectator appears then as a kind of mathematical media that emerges from the experiences that everybody has in his own life in society”.
As in economics, in the short run, the fixed factor is the scarcity of an agent’s affection toward the other members of society. In the long run, this scarcity is reduced or made more flexible.
As Smith puts it “The natural price, therefore, is, as it were the central price, to which the prices of all commodities are continuingly gravitating. Different accidents, may sometimes keep them suspended a good deal above it, and sometimes forcer them down even somewhat below them. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it” (Smith 1776:100). Leonidas Montes sustains that for Smith, the natural price is different from the market (or real) one. “The idea of all prices, the use of the word gravitating and the idea of a center or repose appear as additional evidence of Newton’s influence” (Montes 2006,256) (emphasis in the original). For Montes, “If Smith’s depiction of the price mechanism were actually Newtonian, all prices should gravitate towards one another, implying that the natural price should also gravitate to the prices of all commodities” (op.cit,257). Furthermore, Montes concludes, “Newton’s equilibrium applied to economics would rather become a kind of disequilibrium” (op.cit.263).
Carrasco (2010:140) gives examples of these rules: “Positive harm may be we related to culture, as Fleischacker says, but there may also be other kind of harm, not directly to culture, but to humanity as such. To kill another without any justifies cause (i.e. out of improper motives), to harm children for fun, to break promises (which imply voluntarily obligation) and some kind of slavery may be examples of these cross-culture injustices; in other words these will be object of resentment for any cultural impartial bystander”.
An anonymous referee has pointed us towards Fabrizio Simon’s work, especially Simon (2013). We think Simon’s article considers rationality in a teleological sense, in the context of his criticism of the law and economics analysis. Our work instead, considers rationality in a practical sense, which we think is closer to Smith’s use or it as Carrasco (2006) and Carrasco (2010) describe. As Bréban (2017) explains it is the “force of conception” the bridge Smith builds between rationality and sentiments, between the cognitive and the emotional realm. As the distance between the agent increases, the intensity of the imaginative effort to put oneself in the others’ shoes increases. This cognitive effort diminishes the emotional charge and increases and, at the same time, demands more speculations, better foundations and clearer explanations. That is why the impartial spectator is the most distant one and the least emotionally related with the agent.
This is as in the Austrian concept of the market process. For further reading on this point, see Sarjanovic (1989).
Otteson (2002:63) defends the idea that the impartial spectator alludes to an idealized concept of infinite spectators depending on circumstances and experiences. “There is one idealized concept of what an Impartial Spectator would be –a person who is disinterested in but informed about the matter at hand- and hence a true impartial spectator consulted in any particular situation will fit this mold. On the other hand, the exact parameters within which the Impartial Spectator would employ the Impartial Spectator procedure are determined by the facts of the case in question”.
We owe to James Otteson this particular point.
Jorge Streb has call to our attention this.
In a similar way, Otteson (2002:220) writes about the process of the impartial spectator.
Otteson (2002:200) considers the existence of a moral price reflected in the sentiments of the impartial spectator: “The sentiments of the Impartial Spectator are thus analogous to the natural price of a commodity that Smith describes in WN”.
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Cite this article
Castro, W.G., Beltramino, R.E. Moral markets: A marginalistic interpretation of Adam Smith. Rev Austrian Econ 31, 419–437 (2018). https://doi.org/10.1007/s11138-017-0394-z
- Adam Smith
- Moral sentiments
- Marginalistic approach
- James Otteson
- Rational reconstruction