Misreading Adam Smith and revisiting mainstream economics – II

Tryin to reach a nuanced understanding

A 4 November 2025 Project Syndicate (PS) article ‘Adam Smith and the moral economy we have lost’ pointed out the strong moral linkage of Adam Smith’s earlier book The Theory of Moral Sentiments, with his more famous work in the shape of The Wealth of Nations. The article indicated in this regard ‘With the 250th anniversary of The Wealth of Nations approaching next year, the world is gearing up to honor Adam Smith. But which Smith should be recognized? The hard-nosed “founding father” of modern economics, or the philosopher who wrote The Theory of Moral Sentiments? Scholars have wrestled with this question, a riddle known as “Das Adam Smith Problem,” for centuries, because it concerns not just dualities within Smith’s thought, but also our own uneasy relationship with morality and markets. …Yet the German historicists were wrong, or at least incomplete. Later readers– from Jacob Viner, a founder of the Chicago school of economics, in the 1920s, to the editors of the “Glasgow Edition” of Smith’s works in the 1970s (who saw only a “pseudo-problem based on ignorance and misunderstanding”)– showed that the two books shared a philosophical spine. Far from renouncing his earlier moral philosophy, the later Smith had extended it to the economic sphere. The “invisible hand” was never meant as an ode to greed; it was a metaphor for the way that social benefits can arise from individual human motives (or “passions”), provided that institutions channel them appropriately.’

In fact, countries following economic policies based on these philosophical underpinnings, saw rise in income inequality, and poverty, and diminishing of political voice. Moreover, implementation of neoliberal policies, even in developed countries led to similar consequences, but given lack of intensity of such policies meant lesser impact than in the developing countries

This misreading of Adam Smith, and the divergence this, and the overall approach of neoclassical economics created in terms of moving away from the overall underpinnings of classical economic thought– although the theory of comparative advantage was only advantageous to those who practiced either under misguided understanding, or under duress by the colonial powers on the colonies, or in the post-colonial times under the influence of ‘Chicago boys’-styled policymakers, in terms of domestic policymakers, or among those working at the multilateral institutions like International Monetary Fund, or World Bank, for instance. 

Hence, the same article ‘Adam Smith and the moral economy we have lost’ highlights that the reason behind reading Adam Smith had both the  (wrong) infatuation of over-emphasis on bringing mathematical formalism in depicting the motivation of economic man, and overall economy, but also greed, whereby the article pointed out ‘The misunderstanding endures because modern economics, in its quest for predictive precision, amputated Smith’s psychology. In the 20th century, as models grew more mathematical, “economic man” was stripped of sentiment and context. The Enlightenment’s nuanced moral agent was replaced by a stick figure of rational calculation.’ it strongly appears that it is more than that. It was the Nobel laureate economist Amartya Sen who brought the original debate back to the fore. “The so-called Adam Smith Problem,” he wrote, “is largely of our own making.” For Sen, Smith’s idea of self-interest was never naked greed, but a sentiment woven into the fabric of social life – one disciplined by prudence, justice, and benevolence. The contradiction, Sen suggests, lies not in Smith, but in our own impoverished reading of him. It is we who have elevated greed as a virtue.’ 

So, in that sense it was not just an outcome of bringing greater mathematical formalism into the economics being laid out by classical economics of Adam Smith, but rather strongly apparently is a pathway chosen by design by policymakers in general over the centuries that oriented economics as a tool to serve vested interest, may that be of colonizers over colonies, or of a brand of multilateralism that has perpetuated similar extractive thought process, with envisaging limited role of government, and in turn, of the demos, and their rights, and opportunities.

This has had immense negative repercussions on formulation of economic philosophical underpinnings of policy over the centuries, primarily due to a number of lopsided assumptions. Hence, for instance, the evolution of neoclassical economics– and related neoliberal policies– on these assumptions, which in turn, lent heavily from this mis-reading of Adam Smith, contributed immensely to not only the creation of First and Third worlds, but also not allowing countries following these policies to narrow the gap.

In fact, countries following economic policies based on these philosophical underpinnings, saw rise in income inequality, and poverty, and diminishing of political voice. Moreover, implementation of neoliberal policies, even in developed countries led to similar consequences, but given lack of intensity of such policies meant lesser impact than in the developing countries. 

Highlighting the need for revisiting philosophical underpinnings of so-called ‘sound’ mainstream economics, and their application virtually without such revision in the policy of multilateral institutions, especially in terms of creating a much more symbiotic relationship between public and private sectors in a mission-oriented way, renowned economist, Mariana Mazzucato indicated in her recent co-authored article ‘A new economics for the 21st century’ as follows: ‘The IMF and the World Bank sit at the center of an international order whose default advice still reflects an economics not supported by real-world evidence. What they model, measure, and recommend shapes how development and macroeconomic policy are done around the world. They help determine who has access to liquidity, and on what terms; whose debt is treated as sustainable; whose public investment is seen as credible; and whose policy autonomy is constrained. The wealthy countries that fund and control these institutions are not exempt from the consequences of the same economics.’

Moreover, the article highlighted formulation of a ‘global council’ in its effort to better operationalize ‘new economics’ indicating in this regard ‘A Global Council on New Economics for the 21st Century, co-chaired by one of us (Mazzucato) and First Vice-President of the Government of Spain, Carlos Cuerpo, will bring these elements together. Our goal is to translate the new economics into operational principles organized around justice, equality, sustainability, and global solidarity. The argument for a new economics is being won. Now we must show what comes next.’