Kenneth Boulding’s Extension of Adam Smith’s Ethical Framework

Abstract

This paper examines the conceptual relationship between Adam Smith’s theory of moral sentiments and Kenneth Boulding’s integrative systems approach to economics. Rather than claiming a direct intellectual lineage, we argue that Boulding’s work addresses a specific limitation in Smith’s moral framework: Smith’s restriction of justice to commutative duties (non-interference with persons, property, and promises) leaves the systematic organization of beneficent motivations underdeveloped, which modern economies require. Through a close analysis of Smith’s concept of beneficence in The Theory of Moral Sentiments and Boulding’s grants economy in The Economy of Love and Fear, we demonstrate that Boulding provides theoretical resources for understanding how moral motivations beyond reciprocal exchange can be systematically integrated into economic analysis. This comparison illuminates both the strengths and limitations of Smith’s naturalistic approach to moral economics. It suggests how contemporary business ethics might move beyond the stakeholder–shareholder debate toward a more comprehensive understanding of corporate moral agency.

1. Introduction

The relationship between moral philosophy and economic theory has been a persistent concern since Adam Smith’s foundational works, Smith [1] and Smith [2]. While scholars have resolved mainly the supposed tension between The Theory of Moral Sentiments (TMS) and The Wealth of Nations through the “unity thesis,” a different question remains underexplored: how might Smith’s moral framework be extended to address systematic forms of economic cooperation that transcend market exchange?

This paper argues that Kenneth Boulding’s work, particularly his concept of the grants economy, provides theoretical resources for addressing what we term the “beneficence gap” in Smith’s moral economics, Boulding [3]. Smith clearly distinguishes between justice (perfect duties of non-interference) and beneficence (imperfect duties of positive assistance). Still, his framework struggles to account for systematic, institutionalized forms of beneficence that operate on a large scale in modern economies. Specifically, while Smith treats beneficence as episodic and dependent on individual moral sentiment, Boulding offers a framework for understanding institutionalized altruism as a systematic feature of economic life.

The argument proceeds in three stages. Section 2 analyzes Smith’s treatment of beneficence in TMS, identifying what we call the “beneficence gap”—his framework’s inability to account for systematic, institutionalized forms of positive social cooperation. Section 3 examines Boulding’s grants economy and integrative systems as providing theoretical resources for addressing this gap. Section 4 demonstrates how these frameworks complement rather than contradict each other, with Boulding systematizing what Smith left underdeveloped. Section 5 applies this synthesis to contemporary business ethics, arguing that it offers a more comprehensive understanding of corporate moral agency than either stakeholder or shareholder approaches. Section 6 addresses potential counterarguments about motivation, efficiency, and power relations before concluding with implications for future research.

2. Smith’s Beneficence Problem

2.1. The Architecture of Moral Sentiments

Smith’s moral philosophy rests on the mechanism of sympathy, mediated through the impartial spectator. As Smith explains in TMS:

When we approve of any passion as suitable to its object, it is because we imaginatively place ourselves in the situation of the person who feels it, and assess whether we would feel the same in that context.1

This sympathetic process generates moral judgment through our capacity to imagine ourselves in another’s position and assess whether their sentiments correspond to what we would feel in similar circumstances. The impartial spectator emerges as an internalized judge who represents the moral perspective of society as a whole. Rathbone argues that although Smith’s impartial spectator connects individual behavior to social norms via sympathy, the moral evaluations it enables remain embedded within a deterministic social framework that lacks theological transcendence, Rathbone [4].

2.2. Justice Versus Beneficence

Smith’s crucial distinction between justice and beneficence appears in his discussion of virtue:

Justice, on the contrary, is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society… must in a moment crumble into atoms.2

Justice consists in “barely doing no hurt to our neighbor” and involves perfect duties that can be enforced. Beneficence, by contrast, involves positive assistance to others and constitutes an imperfect duty that “cannot be extorted by force”:

The man who does not recompense his benefactor, when he has it in his power, and when his benefactor is in need of his assistance, is no doubt guilty of the blackest ingratitude.3

Yet, Smith immediately adds that such ingratitude, while morally reprehensible, cannot be legally punished: “The benefactor is not bound to anything by the gratitude of his beneficiary.” (Smith, Theory of Moral Sentiments, II.ii.1.8).

2.3. The Systemic Challenge

This distinction creates what we call the “beneficence gap.” While Smith acknowledges that beneficence is morally praiseworthy and socially valuable, his framework provides no systematic account of how beneficent motivations might be institutionalized or sustained at scale. Individual acts of kindness remain contingent on personal sentiment and circumstance. Crucially, Smith distinguishes between what the impartial spectator “requires” (justice) and what it merely “recommends” (beneficence), leaving the latter as episodic rather than systematic.

The limitation becomes evident when Smith acknowledges that institutions themselves can shape moral development. As he notes: “The man whose whole life is spent in performing a few simple operations… has no occasion to exert his understanding.”4 This suggests that institutional design affects moral capacity. Yet, Smith’s framework for designing institutions that systematically cultivate beneficent motivations remains significantly underdeveloped compared to his framework for constraining harmful ones.5

3. Boulding’s Integrative Systems

3.1. The Tripartite Framework

Boulding’s major contribution lies in systematizing what Smith left underdeveloped. In The Economy of Love and Fear, Boulding identifies three fundamental organizing principles of social systems:

The first is the Threat systems (coercive power): “Do this or we will do something you do not want”. Second, is the Exchange systems (reciprocal trade): “Do this and we will do something you want.” And lastly, the Integrative systems (grants and identity): “Do this because of what you are and what we are.”

As Boulding explains, “The integrative system is perhaps the most neglected of the three, yet it may well be the most important, for it is the system that gives substance and meaning to all the others” Boulding [3] (p. 7).

3.2. The Grants Economy

Boulding’s concept of grants—one-way transfers motivated by love, loyalty, duty, or identity—provides a systematic framework for understanding beneficent behavior. This is not merely a descriptive account of what happens; it constitutes a normative framework for understanding how moral economies should function:

A grant may be defined as a one-way transfer of exchangeables. It represents a surrender of exchangeables without any explicit agreement regarding a reciprocal transfer.

Boulding [3] (p. 5)

The grants economy is not merely a residual category for all those transactions that are not market transactions. It has its dynamics, institutions, and problems.

Boulding [3] (p. 6)

Critically, Boulding argues that grants are not anomalous exceptions to economic rationality, but rather constitute a fundamental category of economic behavior with its internal logic and dynamics. This represents a systematic response to Smith’s beneficence gap: rather than leaving beneficence to individual moral sentiment, Boulding shows how institutions can be designed to channel and sustain beneficent motivations. Grants create and maintain social identities, build organizational loyalty, and generate public goods that markets alone cannot provide.

3.3. The Image and Moral Imagination

Boulding’s epistemological framework in The Image offers additional insights into how moral motivations operate systematically. He defines the image as “the total cognitive, affective, and evaluative structure of the organism or the organization” [6] (p. 4).

Unlike Smith’s impartial spectator, which primarily validates existing social norms through sympathetic judgment, Boulding’s concept of the image includes transformative potential:

The image not only interprets the messages that come to it; it also rearranges itself as a result of the messages, so that the image is constantly being changed by the messages which it receives.

Boulding [6] (p. 8)

This distinction is crucial: Smith’s impartial spectator primarily functions as a mechanism of moral judgment, evaluating whether sentiments are appropriate to their respective objects. Boulding’s image serves as a framework for identity formation and motivation. Consider how moral communities evolve in response to social movements: civil rights activism did not merely apply existing moral standards but transformed collective images of justice and human dignity. This suggests a more dynamic account of moral development than Smith’s framework readily accommodates, though both serve as internal moral compasses that subordinate raw self-interest to broader social vision.

4. Conceptual Comparison and Extension

4.1. Complementary Rather than Contradictory

The relationship between Smith and Boulding is best understood as complementary rather than contradictory. Smith’s framework excels at explaining how self-interested behavior can be channeled through institutions to produce beneficial social outcomes. Boulding’s framework addresses how non-self-interested motivations can be systematically organized to address social needs that markets cannot meet.

Consider Smith’s famous passage about the butcher, brewer, and baker:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their interest.6

This passage is often misinterpreted as dismissing benevolence entirely. Smith’s point is more limited: market exchange efficiently coordinates self-interested behavior without requiring extensive moral motivation from participants. This leaves open the question of how benevolent motivations might be systematically organized in other contexts.

Boulding’s grants economy provides an answer. While markets efficiently coordinate reciprocal exchange, grants coordinate one-way transfers motivated by identity, loyalty, and care. Both systems are necessary for a functioning society.

4.2. Institutional Implications

This complementarity has important institutional implications, but it also reveals a methodological divide that must be acknowledged. Smith was fundamentally a theorist of emergent orders, suspicious of rational design, and confident that beneficial social outcomes could arise from individual actions guided by appropriate institutional constraints. Boulding, by contrast, embraced systems theory and was less skeptical of purposive interventions in social organization.

Consider corporate philanthropy. From a purely Smithian perspective, such behavior appears either as disguised self-interest (reputation building) or as a violation of fiduciary duty to shareholders. Boulding’s framework suggests a third interpretation: corporations as institutions that both participate in exchange systems and express collective identity through grants. This is not merely a description, but a normative claim about what corporations can and should become.

5. Applications to Business Ethics

Consider Patagonia’s environmental activism and workplace culture. Beyond meeting regulatory compliance or appeasing stakeholders, Patagonia’s commitments—such as donating one percent of sales to environmental causes and embedding ecological stewardship into its corporate mission—embody a coherent institutional identity. That identity is reflected in human-resource outcomes: Patagonia’s overall employee turnover rate has been reported at approximately four percent, with voluntary turnover at its U.S. headquarters closer to 2.3 percent, in stark contrast to the U.S. retail sector’s annual average of roughly 57 to 60 percent.7 This disparity suggests that integrative identity practices—rooted in genuine organizational values—may contribute to markedly higher employee retention, thereby reinforcing the long-term viability of the integrative systems Boulding envisioned.

5.1. Beyond Stakeholder Theory

The debate between shareholder primacy and stakeholder theory has dominated contemporary business ethics. Both approaches assume that corporate responsibility can be understood primarily in terms of balancing competing interests or claims. See, for example, Friedman [10] and Freeman et al. [11].

The Smith–Boulding framework proposes an alternative approach. Rather than asking “To whom is the corporation responsible?”, we might ask “What forms of social organization does the corporation embody and promote?” This shifts attention from stakeholder management to institutional character.

5.2. Corporate Moral Agency

This reframing has implications for corporate moral agency. Smith’s framework suggests that corporations, like individuals, are moral agents insofar as they are subject to the judgment of the impartial spectator. This primarily constrains corporate behavior within the bounds of justice and fair dealing.

Boulding’s framework suggests that corporations might also be moral agents in their capacity to create and sustain integrative systems. Corporate culture, employee loyalty programs, community investments, and environmental initiatives can be understood as expressions of corporate identity that go beyond both legal compliance and stakeholder management. This connects to emerging literature on moral capital and institutional logics, where organizations develop distinctive moral identities that guide decision-making [12].

5.3. Practical Implications

Consider a specific case: corporate responses to natural disasters. A purely exchange-based analysis might view disaster relief as either a means of reputation management (serving long-term self-interest) or as a misallocation of shareholder resources. A grants-based analysis recognizes disaster relief as an expression of corporate identity and social membership that serves integrative functions not reducible to exchange logic.

This does not mean all corporate grants are equally valuable or justified. Boulding’s framework provides criteria for evaluation: grants should express authentic institutional identity, serve genuine social needs, and contribute to sustainable integrative systems rather than mere image management.

6. Limitations and Counterarguments

6.1. The Motivation Problem

Critics might argue that Boulding’s framework is naively optimistic about human motivation. Smith’s genius lay in showing how beneficial social outcomes could emerge from ordinary human motivations without requiring extensive moral transformation. Boulding’s reliance on love, loyalty, and identity might seem utopian by comparison.

This criticism has some force, but it misunderstands Boulding’s project. Boulding does not claim that integrative systems can replace exchange systems, only that they complement them. Moreover, grants are motivated by existing human capacities for identification and care, not by impossible moral ideals.

6.2. The Efficiency Problem

A second criticism might focus on efficiency. Market systems coordinate behavior efficiently by providing clear signals (prices) and incentives. Grant systems might seem to lack such coordination mechanisms, leading to waste or misdirection. Boulding acknowledges this challenge but argues that efficiency must be understood in a broader sense. While grants may be less efficient than markets at coordinating reciprocal exchange, they may be more efficient at creating and maintaining the social bonds that make market systems possible in the first place.

Furthermore, Boulding was well aware of this challenge and did not view grant-giving as an economically irrational act. He argued that the grant-giver is a calculating agent who channels resources to where they believe will have the greatest impact, constantly weighing whether the outcome justifies the personal sacrifice. This ‘calculus of sacrifice’ ensures that even one-way transfers are subject to a form of efficiency logic, albeit one grounded in identity and perceived social value rather than market prices [3] (pp. 31, 83–84).

6.3. The Power Problem

A third criticism might note that Boulding’s framework inadequately addresses power relations. Corporate grants might serve to legitimize inequality or deflect attention from structural injustice rather than addressing genuine social needs. As Fraser warns, a politics focused only on recognition can “deflect attention from economic injustice and obscure the structural bases of social disadvantage” Fraser [13] (p. 30).

This criticism highlights a significant limitation in Boulding’s work. His framework requires supplementation with a more critical analysis of how grant systems can either reproduce or challenge existing power relations. Young’s work on structural injustice suggests that moral responsibility extends beyond individual charitable acts to include responsibility for institutional arrangements that systematically advantage some groups over others, Young [14]. However, this limitation does not invalidate the framework; instead, it points to areas for further development.

A refined Smith–Boulding synthesis addresses this by employing Smith’s impartial spectator as a test for moral authenticity. Consider, for example, a fast-food corporation that funds charities to combat hunger while simultaneously lobbying to weaken or repeal minimum wage laws. An impartial spectator, seeing both the public ‘grant’ and the private lobbying that contributes to its own workers’ reliance on food banks, would judge the company’s beneficence as inauthentic. The ‘grant’ fails the test because it is fundamentally undermined by a core business practice that violates Smithian justice. It is thus re-categorized as mere image management, not a genuine integrative act. A critical grants economy, therefore, must distinguish between grants that challenge structural inequalities and those that merely ameliorate their symptoms.

6.4. The Problem of Corporate Capture

Finally, a significant challenge, raised thoughtfully by a reviewer, is how this synthesis addresses the classic Smithian problem of corporate capture. Smith was famously critical of the ‘monopolizing spirit’ of corporations, viewing them as prone to collusion and corruption. The Boulding–Smith synthesis addresses this by integrating Smith’s realism with Boulding’s normative vision. Smith’s framework provides the essential external constraints: a robust system of justice, competition, and regulation is necessary to police corporate behavior and punish harm. Boulding’s framework, in turn, provides the internal compass: the concept of an ‘integrative system’ offers a way to cultivate a corporate identity that is oriented toward genuine social good, not just disguised self-interest. The two are mutually dependent; a healthy moral economy requires both strong legal guardrails to prevent corporate malfeasance and a strong integrative vision to inspire corporate beneficence.

7. Conclusions

This analysis has demonstrated that Kenneth Boulding’s work provides theoretical resources for systematically extending Adam Smith’s moral framework. While Smith’s theory of moral sentiments offers profound insights into how justice and beneficence operate at the individual level, it struggles to account for institutionalized forms of beneficence that operate on a large scale in modern economies.

Boulding’s grants economy and integrative systems approach addresses this limitation by providing a framework for understanding how non-reciprocal transfers can be systematically organized and sustained. This extension is particularly relevant for contemporary business ethics, which has struggled to move beyond the stakeholder–shareholder debate toward a more comprehensive understanding of corporate moral agency.

The Smith–Boulding synthesis does not resolve all questions about the relationship between morality and economics, but it does suggest productive directions for further inquiry. By taking seriously both the constraints of human nature that Smith identified and the aspirational possibilities that Boulding articulated, we might develop more nuanced approaches to the moral challenges of economic life.

Future research may explore how this framework applies to specific contemporary challenges, such as platform capitalism, environmental responsibility, governance of artificial intelligence, and global supply chain management. In each case, the question would be not merely how to balance competing stakeholder interests, but how to design institutions that embody and promote both efficient exchange and meaningful social integration.