Adam Smith’s The Theory of Moral Sentiments (TOMS) explores how individuals assess actions in terms of morality. In today’s terms, morality often centers around decisions about “what is the right thing to do,” involving trade-offs among our own immediate and future needs. Beyond ourselves, we also consider the stakeholders of our life - such as work, friends, family, and our broader community. Morality reflects a balance between personal interests and the welfare of others, often shaped by ethical principles and societal norms. Smith contends every interaction, whether in the marketplace or other areas of life, entails moral judgment. He identifies four sources of moral approval to guide these decisions, acting as four essential agents in weighing any choice. These sources are the giving agent, the receiving agent, the interaction environment, and the unseen. Together, they provide a framework not only for economic transactions but also for broader aspects of human behavior.
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
The Four Sources of Moral Approval
Smith's framework for moral approval starts with individuals. Every action involves an exchange—someone gives, and someone receives. However, the exchange extends beyond just the people involved. The rules of the environment and the long-term consequences also come into play.
Let’s break down each source of moral approval.
Approval of the Giving Agent (Supply): This source refers to the person providing something in exchange. They must act in a way earning moral approval. Their honesty, fairness, and consideration for others affect how their actions are judged. If the giver acts with integrity, they gain approval. If they deceive or act selfishly, their actions may face moral disapproval.
Approval of the Receiving Agent (Demand): The person receiving something in an interaction also plays a role in moral approval. If the receiver accepts goods or services in a fair, honest, and thoughtful way, they too gain approval. The balance between these two agents ensures exchanges happen smoothly.
Approval of the Interaction Environment: This source involves the rules or norms governing the exchange. Legal standards, societal norms, and even unspoken agreements help define the boundaries of interactions. The laws of a marketplace, for instance, help ensure transactions happen fairly and honestly. But moral judgment doesn’t end at legal compliance. Society’s values also guide how people assess these interactions.
Approval of the Unseen: The final source of moral approval is the most complex. This source considers the long-term consequences of an exchange, often involving effects less visible or more difficult to measure. While the first three sources focus on the immediate agents and context, the fourth source extends into the future. It looks at the broader impact of decisions on society, the environment, or even future generations. It asks: what are the unseen outcomes of this action? This is where the economic principle known as "The Tragedy of the Commons" comes into play.
In discussing the “unseen,” Adam Smith’s insights align closely with those of economist Frédéric Bastiat, who highlighted the importance of looking beyond immediate effects in decision-making. Bastiat, in his classic work What Is Seen and What Is Not Seen, warned that focusing only on visible outcomes can obscure hidden costs, leading to unintended consequences that undermine societal welfare. This shared concept encourages us to think beyond what is immediately observable and consider the longer-term implications of our choices. Whether we are evaluating environmental impacts, the potential effects of AI, or resource depletion, the unseen aspects of decisions carry critical weight. By adopting this broader perspective, we recognize that true economic and moral responsibility requires us to account for both immediate and long-term outcomes. Integrating Bastiat’s perspective further reinforces the relevance of Smith’s framework today.
Applying Smith’s Framework to Real-Life Decisions
To see how these four sources of moral approval operate, let's return to the familiar example of Connie and Billy from the article "Adam Smith and how choice architecture makes the invisible hand more visible." In that example, we met Connie, a consumer, and Billy, a butcher, whose interaction illustrates how decisions extend beyond simple transactions to reflect the complex moral approval process Smith describes.
In this scenario, Connie visits Billy’s butcher shop to buy meat for her family. Billy aims to sell high-quality meat, while Connie seeks to balance her family’s needs and budget. Both must navigate their choices with moral consideration.
Billy represents the giving agent in this interaction. His actions earn approval based on how he treats Connie, the quality of his goods, and the honesty of his pricing. If Billy sells poor-quality meat or charges unfair prices, he risks moral disapproval from one or more sources.
Connie, as the receiving agent, must also act with fairness. She weighs her family’s needs, budget, and other considerations, such as the environmental impact of her choices. If she demands too much for too little or doesn’t consider the broader impact of her actions, she too may face disapproval from one or more sources.
Beyond Billy and Connie, the environment of the interaction comes into play. Laws and regulations ensure food safety, guiding how both parties navigate the exchange. Health regulations protect Connie’s family, while business laws ensure Billy operates fairly. Criminal laws prevent Connie from stealing Billy’s meat. These rules offer a framework for moral approval beyond the direct interaction.
Finally, the unseen factor weighs heavily on Connie. She faces a broader decision than just her family’s dinner. The environmental impact of the meat, future consequences of dietary choices, and long-term health concerns all influence her decision. This long-term consideration reflects the fourth source of moral approval. While Billy and Connie can see the immediate benefits of their transaction, the unseen consequences—such as the environmental cost of meat production—are more challenging to measure. Yet, they still affect how society views the morality of the exchange.
Balancing Self-Interest with Moral Judgment
Smith believed individuals act based on self-interest, but this self-interest includes more than selfish desires. Self-interest involves a blend of motivations, both selfish and selfless. Connie wants to get a good price for her family, but she also considers her family’s health and the environment. Billy wants to maximize his income, but he also wants to maintain a good reputation and serve his community.
Smith’s invisible hand works when individuals balance their self-interest with moral considerations. In the case of Billy and Connie, their market interaction naturally balances their selfish and selfless motivations. Billy wants to sell meat, and Connie wants to buy it. They don’t need to explicitly discuss their deeper motivations, as the market reflects them through price and quantity.
However, Smith acknowledges some elements of self-interest require guidance. The fourth source of moral approval—concern for the unseen—is often overlooked because people focus on the immediate benefits of their decisions. Yet, the long-term consequences of actions, such as environmental damage or future health risks, can have profound impacts.
The Role of the Unseen in Modern Decision-Making
The unseen source of moral approval is particularly relevant in today’s world. Many decisions have far-reaching effects, often ignored in favor of immediate gains. Environmental concerns, for instance, show how short-term actions can lead to long-term consequences. Climate change, deforestation, and pollution all represent unseen impacts future generations will inherit. Society needs to pay closer attention to this fourth source of moral approval to ensure actions today don’t cause harm tomorrow.
As John Maynard Keynes famously said, “In the long run, we are all dead,” reflecting a perspective rooted in the industrial era, where impacts often took decades to unfold. But in the information era, change occurs at a staggering pace, bringing the long run ever closer. “As technology speeds ahead, the long run rushes closer, and the damage may be upon us before we know it.” Legal frameworks and societal norms, which govern most interactions, often fail to account for these unseen effects. Environmental regulations may lag behind scientific understanding, allowing negative consequences to unfold. As individuals and society, we must weigh the unseen impacts of our decisions more carefully.
Moving from the Unseen to the Seen
Today, environmental impacts once considered “unseen” have rapidly shifted to the forefront of public consciousness. For over a century, costs associated with environmental degradation were largely ignored or delayed, creating an illusion of minimal impact. Now, however, the consequences of this neglect are visible in unprecedented weather events, fires, hurricanes, and other natural disasters. These crises bring significant economic and social costs no longer dismissed or postponed. The environment’s shift from unseen to seen requires both consumers and producers to reassess the long-term implications of their actions, acknowledging environmental harm is no longer an externality but a real, shared expense society must confront.
Here are examples of environmental costs shifting from the previously unseen fourth source of moral approval to the more immediate first and second sources, directly affecting consumers and businesses:
Higher Insurance Premiums: Increased costs due to rising risks from extreme weather events in high-risk areas.
Operational Disruptions: Losses from weather-related impacts on agriculture, tourism, and supply chains.
Rising Energy Costs: Increased electricity expenses driven by higher cooling demands as temperatures rise.
Compliance and Fines: Costs from adhering to stricter environmental regulations or penalties for non-compliance.
Resource Price Increases: Scarcity of materials like water and minerals raises operational costs, impacting prices for consumers.
This aligns with the concept of the “Tragedy of the Commons,” where individuals acting in self-interest deplete shared resources, burdening the public with unseen costs. When environmental costs are ignored as externalities, they compound over time, ultimately impacting everyone. To mitigate this, today’s decisions must balance immediate benefits with responsibility for these cumulative, often irreversible effects, recognizing the fourth source of moral approval in decision-making.
Building the New Unseen
In a parallel way, the impact of artificial intelligence (AI) on marginalized communities introduces a new unseen factor in moral decision-making, calling for the same fourth source of moral approval. As I highlighted in Unequal Roots, Unequal Outcomes, AI systems embedded with bias could have lasting, unseen impacts on individuals and society. The division and tragic deaths of January 6th, 2021, where Americans turned on each other in the U.S. Capitol attack, are a stark reminder of the dangers inherent in unchecked division. GenAI, capable of influencing and intensifying these divisions, could propel such outcomes even further without strong ethical safeguards.
Dr. Fei-Fei Li, a pioneering computer scientist and co-director of the Stanford Human-Centered AI Institute, cautions, “If we don’t make ethical considerations central to AI development, we risk creating a future where technology, instead of elevating us, divides us further.” Just as we’ve witnessed environmental impacts shift from the unseen to the forefront of societal concern, AI-driven inequities and divisions are moving in a similar direction. Recognizing and addressing these unseen risks is essential to prevent their escalation into irreversible social costs.
Conclusion
Adam Smith’s four sources of moral approval provide a framework for evaluating decisions in both markets and broader life interactions. From the giving and receiving agents to the rules governing the interaction and the unseen consequences, each source plays a crucial role in shaping moral judgments.
In today’s world, attention to the unseen is more important than ever. Climate change, resource depletion, and other long-term impacts require us to weigh our decisions with a broader moral perspective. Smith’s insights remind us self-interest involves more than immediate benefits; it includes responsibility for the future.
By using this framework, we can make better decisions balancing personal interests with the greater good, ensuring we act in ways benefiting not just ourselves but society as a whole.
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