On Smithian Paternalism: Evaluating Adam Smith's Perspectives on Modern "Libertarian Paternalism"

Best known for introducing the concept of the invisible hand, Adam Smith appears (at least on the surface-level) to be the founding champion of laissez-faire economic theory. Both economists and libertarians deify Smith for supposedly pioneering a market framework consisting of purely self-interested participants. But as game theorists continue to prove that people do not solely consider their own payoffs when making decisions, economic scholars have had to reconsider their neoclassical models pointing in favor of a fully deregulated economy. Among left-leaning political circles, these inconsistencies in classic economic theory have added fuel to the notion that Smith’s ideas are merely archaic relics resting on false assumptions (see Norman 2018). These circles of thinkers are considered paternalists, who are thought to be deeply skeptical of free choice (see Goodin 1991). By nature, it follows that paternalists cannot possibly embrace the libertarian schools of thought so pervasively tied to Smith’s legacy.

Given the mounting evidence against fully selfish market players, is it fair for paternalists to discard Adam Smith’s economic views as obsolete? This question miscontextualizes Smith’s beliefs. In reality, Adam Smith is neither the firm advocate of human self interest nor the staunch enemy of state interventionism his colloquial reputation has ascribed to him. While Smith praised free trade and market equilibrium, he also recognized a need for some state intervention and outlined government roles like collecting taxes and regulating banks, among others (see Rockoff 2010; Smith 1976, II.ii). Smith thus balanced respecting an individual’s autonomy with paternalist skepticism of it: he emphasized the value of letting people make their own choices all while conceptualizing institutions that would encourage them to make better decisions. Accordingly, Smith’s moral and economic framework outlined in both The Theory of Moral Sentiments and The Wealth of Nations attempt to balance paternalist ideologies with those of libertarianism. Smith thus implicitly subscribes to a form of what’s known today as “libertarian paternalism.” 

To fully assess the extent to which Smith proposes his own form of libertarian paternalism and the extent to which he deviates from modern libertarian paternalists, I’ve divided this paper into three parts: first, I draw parallels between the core components of Smith’s moral theory and modern game theory to argue that Smith’s moral account of human nature is both empirically-backed and essential to shaping Smith’s views on an ideal system of justice and what role the government should play in protecting it; second, I highlight how Smith’s distinction between his conceptions of “justice” and “beneficence” mark how his moral sentiments determine his views on the level of paternalism a government can reasonably exhibit; and third, I compare the modern libertarian paternalism first coined by Cass Sunstein and Richard Thaler with Smith’s perspectives on individual liberty and government intervention. I’ve structured my argument in this way as a comparison on two fronts: (1) on the micro-level, between Smith’s moral theory and behavioral economic studies, and (2) on the macro-level, between Smith’s political economy and libertarian paternalism. In both comparisons, the macro-level is an application of the micro-level theory to a systemic political, philosophical, and economic framework. I conclude that a form of Smithian libertarian paternalism can be formed from understanding the interaction of smith’s moral and political theory.

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