Modernity, Morality, and the Idea of Free Market @ 250

Professor (Dr.)  Satya Narayan Misra | Distinguished Professor of Economics and Writer |

It was Adam Smith, who in his magnum opus, The Wealth of Nations (An Inquiry into the Nature and Causes of the Wealth of Nations , 1776), made a seminal statement that “market forces, as if by an invisible hand, will promote the welfare of all.” As this idea still retains its surreal charm, there is a swirling debate about whether to celebrate Smith’s idea of making a country wealthy, or the philosopher who wrote The Theory of Moral Sentiments (1759), which had an ethical underpinning. Scholars have wrestled with this question—a riddle known as the “Adam Smith Problem”—for centuries, because it concerns not just dualities within Smith’s thought, but also our uneasy relationship with morality and markets. The problem was first formulated in late 19th-century Germany, where economists of the historical school saw a glaring contradiction between the compassionate, sympathy-driven moral psychology of Smith’s first book and the self-interested calculus of the second, where he famously observes: “It is not from the benevolence of the butcher, the baker, the brewer, that we expect our dinner, but from their regard to their own interest.” This contradiction suited the intellectual temper of the time. As industrial capitalism took hold, with mechanization of production through innovations like the steam engine and textile machinery, economics was busily reinventing itself as a ‘science,’ while philosophy and theology were left to fret over the moral wreckage. Lord Byron, in his poem Darkness (1816), wrote, “A sickly, saffron glow shone dimly through the fog.”

The Adam Smith Problem thus became a projection of modernity’s own split personality: one half absorbed by efficiency, the other by conscience. For Karl Marx, industrial capitalism epitomized widespread exploitation of labor in the grand pursuit of wealth. Equity became his main theme, trumping efficiency; social justice over wealth creation.

However, Jacob Viner, a founder of the Chicago School of Economics in the 1920s, showed that the two books shared a philosophical spine. For Smith, the “invisible hand” was never meant as an ode to greed; it was a metaphor for the way social benefits can arise from individual human motives, provided that institutions channel and regulate them appropriately. As Smith’s contemporary and friend David Hume observed, the scaffolding of social order rests on a blend of self-love and sympathy. Smith’s own answer to the human predicament was not to abolish self-interest but to channel it through habits of virtue, civic trust, and the judgment of an imagined “impartial spectator.” Markets in this vision were not moral vacuums but extensions of moral life.

In the 20th century, as models grew more mathematical, the “economic man” was stripped of sentiment and moral underpinning.

Amartya Sen’s Contention

It was 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.” 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. Recent scholarship has added to this insight. The Harvard economic historian Emma Rothschild shows that the division between the moral and the economic is a historical artifact—one that we need to urgently dispense with. Smith’s answer was neither state socialism nor unbridled markets, but something subtler: a moral economy grounded in sympathy and the pursuit of human flourishing.

Stiglitz’s Stinging Riposte

As the financial crisis struck the USA in 2007, with contagion affecting several countries, faith in the infallibility of free markets suffered a severe setback. Nobel laureate Joseph Stiglitz argued that the central gravamen of Smith—that “private pursuit of self-interest would lead, as if by an invisible hand, to the well-being of all”—has proved to be unfounded. As he observes in his book The Price of Inequality (2012), it “led to the banker’s well-being, with the rest of society bearing the cost.” Markets by themselves often fail to produce efficient and desirable outcomes, and there is a role for the government in correcting these market failures by designing policies (taxes and regulations) that align private incentives with social returns.

It was Hayek, an acolyte of Smith, who in his book The Road to Serfdom (1944) strongly critiqued central planning in the USSR and advocated for unbridled markets. In a stinging riposte, Stiglitz argues in his book Road to Freedom that unregulated markets prioritize the freedom of corporations and the wealthy over individuals, leading to rising inequality and social injustice.

Keynesian Take

The first major financial crisis struck the USA in the 1930s. John Maynard Keynes was the first to point out that there would be no automatic equilibrium of the market, as classical economists like Smith believed. He flagged the importance of public investment during an economic depression to bolster effective demand and reduce unemployment. His seminal ideas about the criticality of government intervention found resonance during the pandemic years of 2019–2020, when countries embraced fiscal stimulus rather than relying solely on free markets and the private sector. Keynes advocated the welfare state, while Stiglitz emphasized regulating free markets to prevent financial crises.

The Clash of Ideas

The economic battle of the twentieth century was between capitalism and communism. With the disintegration of the USSR in 1991 and the fall of the Berlin Wall in 1989, Francis Fukuyama, in his book The End of History (1991), proclaimed the triumph of capitalism and liberal democracy. The economic crisis of 2008 revealed the fallibility of market forces and showed how the Midas touch of Smith’s “invisible hand” can be a mirage. Greed, conflicts of interest, and crony capitalism often derail the smooth interplay of market forces.

In his significant book Moral Limits of the Market, Michael Sandel highlighted how we are shifting from a market economy to a market society, where everything—including vital organs—is for sale. This erodes moral values and civic virtues. Moreover, there is a growing realization that merit goods like primary education and basic healthcare should be available to all, regardless of ability to pay. Clearly, markets need proper regulation by the state, which also has a responsibility to provide essential goods to those unable to afford them.