Adam Smith’s Theory of Moral Development, Human Nature and Commerce

Abstract

Adam Smith’s The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) offer a distinctive perspective on moral development that avoids succumbing to the limitations of capitalism and utilitarianism by supporting both moral agency and the importance of enabling structures and systems in commerce. Corruption of moral sentiments cannot be averted by enforcing only mechanical structures and systems of compliance with governance rules, regulations, and disciplinary processes to control employees. Compliance then follows a means-to-an-end logic for maximising profit, which becomes a barrier for autonomous moral development or is even incapable of moral decision-making, as suggested by Hannah Arendt. Smith’s originality lies in grounding this analysis with an affirmative view of human nature and liberty, which enables him to move beyond purely legalistic or moralistic approaches to understand and counter moral failure. Smith offers a distinctive perspective on moral development in commerce, integrating human cognition, moral philosophy, and enabling structural and systemic design that avoids the displacement of responsibility noted by Albert Bandura. For Smith, the corruption of moral sentiments is distorted by the natural need for praise from others at all costs, as opposed to praiseworthy conduct. His remedy is a two-fold process of moral education in which the impartial spectator extends the natural desire for praise to prioritise honour and integrity in behaviour that is praiseworthy. However, moral education also requires a structural social space that is not prescriptive or legalistic to enhance the freedom to develop morally by exercising the choice to strive towards ethical behaviour. In this manner, self-interest enables moral development through natural means that prioritise honourable conduct and perpetuates sympathetic sentiment in which the well-being of others is considered.

1. Introduction

Contemporary analyses demonstrate the pervasive nature of moral sentiment corruption globally, penetrating various societal strata that are related to a lack of “transparency, accountability and consistency, as well as institutional weaknesses such as in the legislative and judicial systems, provide fertile ground for growth of rent seeking activities in such a country” [1] (p. 33–34). Historical discourse often highlights moral failings as inherent to human nature and cultural constructs, suggesting an intrinsic, divisive element within humanity [2] (p. 1–10). Unethical conduct is often attributed to innate human depravity, manifesting as vanity, greed, selfishness, power abuse, and other vices indicative of limited moral capacities. This “mechanistic conception of human nature as rational and self-interested…leads to an over-emphasis on institutional engineering and the strengthening of oversight and control” [3] (p. 109). Rigid organisational control of governance compliance policies, legal frameworks, codes, and structural mechanisms aimed at mitigating corruption, particularly within business sectors, public institutions, and government, has become common practice [4] (p. 1–8).

Yet, corruption persists in both business and governmental realms [5] (p. 285–339), with compliance structures and systems increasingly perceived as structures and systems for surveillance and control that provoke worker suspicion of capitalistic and utilitarian agendas, rather than fostering a space for moral development [6] (p. 416–430). Compliance governance and management in business are then viewed by employees as capitalistic and bureaucratic instruments that follow a means-to-an-end logic for maximising the business’s profits, with little consideration for the autonomy of workers and their moral formation [7] (pp. 446–483). According to Hannah Arendt [8], controlling compliance structures and systems is not conducive to moral development but rather functions as mechanisms that exacerbate distrust and moral decision-making capacity, thereby intensifying the deterioration of moral sentiments. Arendt’s phrase to the banality of evil highlights that moral judgement is not an automatic feature of human agency, but rather an activity that can wither under certain institutional arrangements [8]. Therefore, autonomous moral capacities can be degraded under conditions of bureaucratically induced habituation [9]. This assertion is corroborated by moral development theories that prioritise autonomous moral maturation, although these theories diverge in their emphasis on rule-based, rational, psychological, and social process paradigms [10,11,12].

Sigmund Freud’s work concentrated on the psychological and unconscious dimensions of morality. According to Freud [13] (pp. 30–45), the development of moral conscience was attributed to the formation of the superego, which he linked to internalised parental authority, resulting in feelings of guilt. This emphasis on emotion introduced an affective perspective that was subsequently integrated into more cognitively oriented theories. In other words, Freud sees morality as a psychological imposition or constraint of desire.

In the work of Jean Piaget [10] (pp. 97–133), he introduced a shift toward more rule- and justice-based theories, accompanied by cognitive progression prevalent in Freud’s work. He initially advocated that children’s moral development progresses from adherence to established rules towards a more autonomous morality characterised by considerations of intention and fairness as primary criteria for judgement. Expanding upon Piaget’s framework, Lawrence Kohlberg [11] (pp. 170–187) outlined six stages of moral reasoning distributed across three hierarchical levels, namely: preconventional, conventional, and postconventional. The stages culminate in the formulation of universal ethical principles predicated upon justice and rights.

In response to Kohlberg’s justice-oriented paradigm, Carol Gilligan [12] (pp. 73–105) proposed an alternative ethical framework that emphasises care, prioritising empathy, responsibility, and interpersonal relationships. Gilligan argued that moral maturity is achieved through the harmonisation of self-care and care for others, as opposed to strict adherence to abstract normative principles. From a behavioural perspective, Albert Bandura [14] (pp. 22–28) asserted that moral behaviour is acquired through processes of modelling and reinforcement. His later research on moral disengagement elucidated the mechanisms by which individuals justify unethical conduct. Later, James Rest [15] (pp. 5–15) synthesised these theoretical traditions into a neo-Kohlbergian framework, identifying four critical components—moral sensitivity, judgement, motivation, and character—that integrate cognitive, emotional, and behavioural dimensions of moral functioning.

The synthesised moral development traditions’, as suggested by Rest, forms a developmental continuum that enhances understanding of moral development while retaining elements of a stadial development process with prescriptive rules. Piaget and Kohlberg emphasised cognitive development, while Freud and Gilligan contributed insights into emotional and relational aspects. Bandura [16] and Rest [15] further incorporate social and contextual dimensions that collectively offer a comprehensive model of moral development. Unfortunately, a significant limitation of these theories is their inherent rationalism and cultural biases, which predominantly focus on educational and psychological settings, thereby limiting their applicability in real-world commercial contexts that often involve complex ethical dilemmas.

I argue that Adam Smith provides foundational insights into the role of human nature and moral development. An analysis of The Theory of Moral Sentiments (TMS) [17] and The Wealth of Nations (WN) [18] provides a foundational perspective on nature as an alternative to moral prescription, emphasising human nature and moral development within the commercial sphere. Smith’s proposition highlights that human nature and inherent motivations are foundational to moral development, rather than being sources of corruption. Although originating from a Western context, it provides an important dialogue partner with non-Western cultures due to its focus on human nature, moral sentiments, sociability, and integrity, which is contextually sensitive. Crucially, Smith advocates for moral development to be supported by structures that promote human freedom, integrity, honourable conduct, and the pursuit of praiseworthiness. The reference to both structures and systems is pertinent as Smith posits that the configuration (structure) and operation (systems) of an organisation are vital in fostering human nature and freedom.

Contrary to Freud’s psychological impositions, Smith sees it as a social achievement grounded in sympathy rather than fear. Piaget explains morality through cognitive structures and growth, while Smith explains it through socially cultivated moral perceptions. Furthermore, Smith rejects the notion that moral maturity entails a formal linear progression and universal moral principles, as advocated by Piaget and Kohlberg; instead, it lies in a dynamic process that is informed by engaged social understanding and judgement [17] (TMS III.2.32). This does not mean that Smith is opposed to stages of moral development; he is opposed to formalism, abstract cognitive sequencing and universal psychological architecture detached from social practices. Smith’s difference is ontological and normative, not temporal. Smith’s account points to a process of normative reorientation in which moral judgement is continually calibrated through the impartial spectator that assesses social interaction. Moral maturation, on this view, is neither the incremental acquisition of abstract rules nor a linear progression from fear of punishment to altruism, but a socially embedded and potentially discontinuous process that can enable agents to resist popular opinion in the pursuit of what is genuinely praiseworthy [17] (TMS III.ii.7).

However, the impartial spectator is revisable, vulnerable to corruption, and dependent on institutional conditions. For Smith, moral development is dynamic and can be interrupted; in such cases, moral formation can be negatively influenced by factors such as ideology, power, controlling or prescriptive structures, as argued by Arendt and Bandura. Smith admitted that moral sentiments can be corrupted by factors such as the desire for wealth and controlling structures [17] (TMS I.iii.3.1). Therefore, Bandura’s [16] research on moral disengagement provides empirically grounded mechanisms that illuminate precisely why the compliance systems criticised in this paper fail to cultivate moral agency. Moral disengagement offers empirical validation of a concern already present in Smith’s moral theory. Bandura explains how moral agency is undermined, and Smith explains how it can be cultivated.

For Smith, the corruption of moral sentiments occurs through desires for wealth, fame, and power, which are countered by moral education. In this context, the natural desire for love of praise and praiseworthiness must be reinforced by organisational assemblies that create spaces for responsible conduct. This freedom of choice is essential to move beyond mere moralistic and legalistic compliance strategies, as they place the responsibility for moral development within the institutional structure, rather than with the people working in the organisation. Smith’s critique of the destructive effects of structurally imposed moral control and the resulting corruption of moral sentiments is grounded in his affirmative theory of human nature and natural freedom, which he formulated in response to moralistic objections against the commercial activities and hedonism of eighteenth-century society [19] (pp. 436–462). The theory is affirmative in the sense that the cultivation of ethical competence is not constrained by legalistic frameworks in which fear of punishment functions as the primary incentive for compliant behaviour—an arrangement that does not, in fact, promote genuine moral development. From this vantage point, Smith’s positive account of human nature and liberty is articulated through the concepts of the love of praise and of praiseworthiness, which are fostered in an enabling social environment that allows the impartial spectator to reflect upon, evaluate, and voluntarily advance ethical conduct [20,21,22].

Arendt notes that prolonged immersion in compliance-oriented systems can damage the very capacity for moral reflection. On this reading, the crucial advantage of Smithian enabling structures over mere deregulation lies precisely in their ability to preserve and exercise an internal two-in-one dialogue of judgement that Arendt regarded as the primary bulwark against thoughtless evil. Her conceptualisation of this internal dialogue, which can be understood as the silent intrapsychic discourse through which individuals critically assess their own actions, exhibits a pronounced functional affinity with Smith’s notion of the impartial spectator and its fragility [9]. In other words, Arendt’s work raises the question: What if the internal dialogue that enables love of praiseworthiness has been degraded or destroyed by prior institutional experience?

The first section of this article is a discussion of Smith’s theory of moral development by focusing on sympathy and the impartial spectator. This is followed by Smith’s argument in support of commerce as a real-life setting for moral development and his view of wealth. The third section underscores Smith’s two-stage view of natural moral education, from which the argument is extended by emphasising the significance of supporting structures and systems for moral education as an alternative to legalistic and moralistic compliance systems.

2. Moral Development, Moral Sentiments and the Impartial Spectator

To contextualise Smith’s theory of moral development, it is essential to highlight the role of nature, liberty and enabling organisations (although qualified as a function of structure and system) in moral development. This perspective of Smith supports David Hume’s subscription to the self-governing guidance of nature in morality and political economy that correlates with the functioning of the mind and body—principles of nature [17] (TMS I.iii.3.1). This includes cognitive and neurological functioning, as well as social engagement and its effects on all spheres of society. Therefore, Hume argued that it is “universally acknowledged that there is a great uniformity among the actions of men, in all nations and ages, and human nature remains still the same in its principles and organisations” [23] (p. 150). In other words, people are universally characterised by shared motives and behaviour. Smith did, however, acknowledge that contextual differences influence how people behave, specifically the difference between Europeans and other cultures [17] (TMS V.2.9).

In the opening paragraph of TMS, Smith confidently declares that human nature, however selfish it may be, is benevolent. Smith [17] (TMS I.i.1.1) advocates that there are some principles in human nature that give a person an interest in the “fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it”. These principles are described in the same paragraph as sentiments that involve compassion with others (or empathy). This is also not dependent on a person’s moral achievement or character; rather, it is a universal phenomenon shared by all people. Smith [17] (TMS I.i.1.1) states that the sorrow of others often makes us sad.

… this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the law of society, is not all together without it.

In other words, human passions reflect aspects of human nature that are oriented, whether we act upon them or not, toward others. Later, Smith clarifies that the primacy of benevolent sentiments is not always guaranteed, and in some instances, a tension may arise between selfish and benevolent sentiments. Still, the perfection of human nature produces harmonious sentiments in society as a function of freedom of choice. Smith [17] (TMS I.i.5.5) states that “to restrain our selfish affections and indulge our benevolent affections, constitutes the perfection of human nature; and can produce alone among mankind (sic) that harmony of sentiments and passions in which constitute their whole grace and propriety”.

Although Smith argued that self-interest is a natural and necessary motive in human affairs, it focuses on the advantage of others, rather than their benevolence. As famously noted in The Wealth of Nations, “it is not from the benevolence of the butcher, brewer, or baker that we expect our dinner, but from their regard to their own interest” [17] (TMS I.ii.2). Anything less will turn people into beggars. Self-interest, therefore, serves society through healthy competition and ingenuity. Nonetheless, Smith did not reduce human motivation to selfishness, because people have an innate natural choice to resist self-indulgent behaviour that may be at the expense of others. Sympathy is our capacity to imaginatively enter the feelings of others, which is equally foundational to self-interest. The basic precept of nature, according to Smith, is “to love ourselves only as we love our neighbour” [17] (TMS I.i.5.5)

Rather than being oppositional or in conflict with each other, self-interest and sympathy are complementary. Sympathy moderates the pursuit of egoistic motives through sympathetic sentiments, in which people consider others to maintain social harmony, among other things. In commercial society, where interdependence is essential, this balance becomes crucial for both individual and collective interests. Therefore, unchecked self-interest can lead to corruption and exploitation, but when regulated by sympathy, it fosters social cohesion.

To guide this balance, Smith introduces the concept of the impartial spectator, which is an internalised reflective ability that guides a person toward self-command and prioritises a love of praiseworthiness, the foundation of the love of praise, rather than an exercise in vanity. This imaginative figure enables individuals to judge their own actions as if from the standpoint of an objective, disinterested or neutral party. It is not identical to external public opinion, which can be fickle or corrupt, but rather a socially conditioned natural moral capacity to view the world through the eyes of others [17] (TMS III.2.32). This is confirmed by Macedo [24] (pp. 287–299), who notes that the impartial spectator is a person’s natural critical and reflective capacity that assesses the difference between virtue and folly.

Nevertheless, there are limits to the ability of human nature to maintain moral sentiments that uphold social harmony because these sentiments can be corrupted due to “ungovernable passion” that disturbs our state of harmony. According to Smith [17] (TMS I.i.5.6), the virtue of self-control is therefore important to control these passions in the best interest of the person and others with “…. self-command which astonishes us by its amazing superiority over the most ungovernable passions of human nature”. Although there may be situations that test the limitations of self-control by silencing the “…. voice of human weakness, or reduce the violence of passions to that pitch of moderation to, in which the impartial spectator can entirely enter into them” [15] (TMS I.i.5.8). Certain of these uncontrollable passions are met with approbation like eating in an uncontrolled manner when in the case of hunger [17] (TMS I.ii.2.2) or wild screams of pain when tortured [17] (TMS I.ii.2.12) because people view this as a common weakness of human nature and is met with approbation, e.g., in another situation eating uncontrollably will be fronded upon, similarly scream without any reason because unsocial passions are inappropriate and not approved [17] (TMS I.iii.3).

For Smith, moral development is closely tied to the natural motivations and passions that shape our thoughts and actions. However, these motivations are guided by the impartial spectator that tempers passions and enhances conduct that supports the common good and social harmony. It means that a person may resist public opinion and instead support a course of action that may be subject to criticism from others due to the conviction that public opinion is not morally justified. A danger is that the impartial spectator can become a function of social convention and determinism due to the social embeddedness of the impartial spectator [25,26]. Nevertheless, Smith argues that the social nature of the impartial spectator does not mean that people succumb to social determinism, because, as Hanley [21] noted, there is a distinction between vanity and integrity. This perspective is further developed when Smith differentiates between “the man (sic) without” and the “man within” [17] (TMS III.2.115). The man without is a reference to the actual judgement of others and the desire for actual praise as against blame. The man within is more a reference to a value judgement, such as praiseworthiness and blameworthiness. Smith [17] (TMS III.2.115) notes that the man within is a “much higher tribunal… of their own conscience” for the “well-informed spectator”. This is the “man within the breast, the great judge and arbiter of their conduct”. Bandura [16] argues that compliance regimes institutionalise this displacement by design, and moral evaluation (“the man within”) is replaced by auditability, with conscience being subordinated to rule adherence that results in the displacement of responsibility (to be discussed in Section 5).

Striving to do what is honourable is crucial in a situation where corruption has become endemic, and a culture of corruption has become pervasive. Smith was aware of this, and he therefore delved into great depth on how nature provides an alternative, specifically in relation to wealth and money. Before we delve into Smith’s moral education, it is essential to understand his view of wealth, commerce and the corruption of moral sentiments because for Smith, wealth and commerce were not the cause of moral decline. Commerce was rather the space for moral education, amongst others [17] (TMS III.3.25). In other words, the real world presents us with challenges to our morality, while also providing the space to choose an alternative, responsible course of action beyond mere compliance.

3. Moral Development, Commerce and Wealth

The commercial is for Smith, rooted in self-interest within an ethical system. The point is that WN represents a practical stage of moral development, in which socio-economic engagement stimulates moral growth, a perspective already noted by Smith in TMS. Therefore, the importance of commerce for moral development and self-interest that Smith raises in WN is not in conflict with sympathetic sentiments. Alternatively, self-interest and sympathy are founded on human nature. Accordingly, Smith [17] (TMS II.ii.2.1) states that commerce is the way nature directs people:

Every man, therefore, is much more deeply interested in whatever immediately concerns himself, than in what concerns any other man: and to hear, perhaps, of the death of another person, with whom we have no particular connexion, will give us less concern, will spoil our stomach, or break our rest much less than a very insignificant disaster which have befallen ourselves.

The implication is that we strain ourselves and engage in vigorous competition to advance ourselves. Smith supports commerce by stating that in “…. the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors” [17] (TMS II.ii.2.1). However, the damage that this love of wealth may cause led Smith to argue that sympathy is also with victims of moral corruption. Therefore, the victims of corruption, who have acquired ill-gotten wealth, are an example of the natural sympathy for the person who has been violated. Smith [17] (TMS II.ii.2.1) warns:

But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of … They readily, therefore, sympathise with the natural resentment of the injured, and the offender becomes the object of their hatred and indignation.

Alternatively, to avoid such a situation, “the impartial spectator may enter into the principles” of a person’s conduct to “humble the arrogance” of our self-love [17] (TMS II.ii.2.1). In this way, the hustle and bustle of commerce is a space for moral development and sustained social harmony. Smith [17] (TMS III.3.25) accentuates the role of commerce in moral development by stating:

The man of real constancy and firmness, the wise and just man who has been thoroughly bred in the great school of self-command, in the bustle and business of the world, exposed, perhaps, to the violence of injustice of faction, and to the hardships and hazards of war, maintains this control of his passive feelings upon all occasions….

According to Hanley [21] (p. 150), Smith’s support of virtue in commercial society:

Smith’s vision of excellence, on the other hand, is the direct consequence of his insistence that the interdependence of commercial society is too entrenched to be transcended. The aim of his portrait of the wise and virtuous man is then not to define an alternative to the forms of life afforded by commercial society but to define the best form of self-sufficiency available within the context and confines of an interdependence which cannot be abandoned without grave material consequences.

In other words, human nature tends toward engagement with others and interdependence, but because self-sufficiency is also a natural desire, we are not dictated by others or social conditioning. The problem, according to Smith, is that the moral development of the person may become susceptible to the corruption of moral sentiments. Smith championed virtue in his moral education, but he also concurred that wealth could become a problem that erodes virtue and praiseworthiness in many cases.

We desire both to be respectable and to be respected. We dread both to be contemptible and to be contemned. But, upon coming into the world, we soon find that wisdom and virtue are by no means the sole objects of respect; not vice and folly, of contempt. We frequently see the respectful attention of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. [17] (TMS I.iii.3.2)

According to Smith [17] (TMS I.iii.3.1), the universal cause of the corruption of moral sentiment is the result of the admiration of the wealthy and neglect of the poor:

This disposition to admire, and almost worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean conditions, though both necessary to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.

Smith explains that the reason for this is the disharmony caused in society because while the wealthy are elevated, the poor are not recognised. While it is natural for all people to feel accepted, the poor feel neglected. This naturally makes wealth something to strive towards. Smith [17] (TMS I.iii.2.1) vividly explains the sentiments of the poor:

He feels that it either places him out of the sight of mankind, or that if they take any notice of him, they have, however, scarce any fellow-feeling with the misery and distress which he suffers. He is mortified upon both accounts; for though to be overlooked, and to be disapproved of, are things entirely different, yet as obscurity covers us from the daylight of honour and approbation, to feel that we are taken no notice of, necessarily damps the most agreeable hope, and disappoints the most ardent desire of human nature.

From Smith’s perspective, the difference between wealth and poverty and the sentiment evoked by it is the basis for the implosion of social harmony. On the one hand, the worship of wealth can influence the impartial spectator to divert from the precept of respect for others, when for our own gain. At the same time, the experience and passions of the poor create a caveat that makes aspirations for wealth a function of existential worth and recognition. Subsequently, money is a means to social acceptance and self-worth, which in turn makes opportunities to gain wealth an existential dilemma. Smith is emphatic that the pursuit of wealth can undermine moral education and corrupt moral sentiments, and people’s self-interest can reach excessive levels in the pursuit of the supposed means to happiness. Read through a Bandurian [16] lens, this phenomenon can be understood as a form of socially reinforced moral distortion, which means that when admiration and reward flow disproportionately toward wealth and power, social learning processes recalibrate moral aspiration itself. The problem, therefore, is not liberty per se, but the patterns of reinforcement embedded in commercial environments.

Another form of corruption related to patterns of reinforcement is when a person may fake their wealth for social acceptance. “There are hypocrites of wealth and greatness, as well as of religion and virtue” [17] (TMS I.iii.3.7). Another form of corruption is pretending to be something you are not. Smith [17] (TMS I.iii.3.7) notes that there are “hypocrites of wealth and greatness, as well as of religion and virtue; and a vain man is as apt to pretend to be what he is not, in the one way, as a cunning man is in the other”. The person is an imposter, and the impartial spectator has no means to understand what they do not know. This form of moral corruption results in self-delusion and harsh judgement of others.

Further, Smith also mentions positions of power as another form of the corruption of moral sentiments. Smith [17] (TMS I.iii.3.7) underscores the government officials who use their position to gain wealth by stating:

In many governments, the candidates for the highest stations are above the law, and if they can attain the object of their ambition, they have no fear of being called to account for how they acquired it. They often endeavour, therefore, not only by fraud and falsehood, the ordinary and vulgar arts of intrigue and cabal, but sometimes by the perpetrations of the most enormous crimes, by murder and assassination, by rebellion and civil war, to supplant and destroy those who oppose or stand in the way of their greatness.

Positions of power sometimes lead to detestable principles that are generally refuted because they cause confusion and disrupt society’s harmony [17] (TMS II.ii.3.8). However, the position is used to acquire wealth, which Smith mentions is the universal case of corrupt moral sentiments. The admiration and even worship of wealth and power accentuate people’s misplaced understanding of what wealth and power truly entail as a means to happiness in life. An aspect of wealth that Smith also addresses in the parable of The Poor Man’s Son [17] (TMS IV.1.9).

In the narrative, the son of a poor man is filled with ambition to acquire wealth, only to end up in a state of unhappiness in old age when he realises that the things he thought would make him happy did not yield the desired result [27] (pp. 1–10). The implication is that this uncritical adoration of wealth leads to the corruption of moral sentiments. This is because moral judgement can become distorted by thinking that the wealthy are virtuous or have the means to attain happiness [28] (pp. 104–118). This assumption, according to Smith, is flawed because we soon realise that wealth is more respected than wisdom and the vices and follies of the wealthy are not apparent [17] (TMS I.iii.3.1). The natural sympathy with wealth is linked to our desire for respectability and abhorrence for suffering and not having the comforts of life, and therefore people may neglect the poor. Hanley [21] (p. 138) concedes that the deception of the lure of wealth and greatness was a major point of contention for Smith, although “Smith praises the beneficent social effects encouraged by this deception”.

The investigation of Hanley [21] of Smith’s view of commerce supports Smith’s optimism about the moral possibility of commerce, while also highlighting his warning, as referenced in Rousseau’s criticism, that commercial society lowers the standards of virtue and hinders people’s self-actualisation. He convincingly argues that virtue was fundamentally important to Smith, specifically in combating the corruption of moral sentiments. To support this Hanley [21] (p. 141) states that “… Smith fully agrees with Rousseau that men (sic) in commercial society depend on others not only for material goods but also for the moral good of recognition, which itself is the source of potential corruption”. Smith was sympathetic to Rousseau’s criticism of commercial society and the possibility that vanity would corrupt people. James R. Otteson [29] (pp. 101–133) supports Hanley’s interpretation, emphasising Smith’s belief that virtue can emerge from within commercial society if guided by enabling institutions and moral training through sympathetic sentiments. Enabling structures, for Smith, is not merely the absence of policy but rather the enhancement of liberty and moral formation by championing integrity and honourable conduct.

Smith’s emphasis on the importance of social engagement and moral formation differs from Rousseau’s view of moral development by noting that the transcendence of the person through isolation from others is a means to circumvent our social duty and is not beneficial to the well-being of society because it views commerce as a problem and not part of nature’s solution to moral development. Smith’s moral autonomy through commercial activities “calls only for the transcendence of the opinions of others and not the transcendence of the active duties to others which he deems the proper responsibility of the virtuous individual” [21] (p. 138). For Smith, it is through nature and commerce that people fulfil their duty in society. The danger of vanity and the corruption of moral sentiments can arise naturally. Charles Griswold [30] (pp. 222–225, 262–266) and Samuel Fleischacker [28] (pp. 104–118) emphasise that Smith’s moral theory centres on self-command, rather than withdrawal from social life. In other words, engaging with and not withdrawing from the challenges of commercial life is essential for moral development, not its downfall. To avoid the downfall, Smith proposes a two-stage process of moral development, grounded in human nature. The point is that socio-economic engagement is an event that encourages moral development of all stakeholders.

4. Moral Development, the Love of Praise and Praiseworthiness

Smith is acutely aware of the limitations of aspiring to wealth and that having a natural disdain for poverty may result in moral dilemmas and even criminal behaviour. He delves deeper into human nature to analyse what the foundations of self-worth and the desire for acceptance, such as the love of praise, entail. Smith denounces vanity by stating that to be “… pleased with such groundless applause is proof of the most superficial levity and weakness” [17] (TMS III.ii.4). However, a person derives no joy from praise that is not deserved. In time, undeserved praise ends in disapproval when the truth of our scandalous behaviour is revealed. Accordingly, Smith notes that “…love of praise seems, at least in great measure, to be derived from that of praise-worthiness” [17] (TMS III.ii.3) because praise without legitimacy is meaningless and will eventually be exposed and disapproved. Smith [17] (TMS III.ii.4) writes that the

most sincere praise can give little pleasure when it cannot be considered as some sort of proof of praiseworthiness. It is by no means sufficient that, from ignorance or mistake, esteem and admiration should, in some way or other, be bestowed upon us.

Smith [17] (TMS III.ii.7) concludes that nature provides the solution to the problem of vanity in moral development:

Nature, accordingly, has endowed him, not only with a desire of being approved of, but with a desire of being what ought to be approved of; or of being what he himself approves of in other men. The first desire could only have made him wish to appear to be fit for society. The second was necessary in order to render him anxious to be really fit. The first could only have prompted him to the affectation of virtue, and to the concealment of vice. The second was necessary in order to inspire him with the real love of virtue, and with the real abhorrence of vice. [15] (TMS III.ii.7)

Hanley [21] (p. 144) notes that Smith was aware of the enticement of wealth and therefore:

the task of Smith’s moral education is then to promote the restoration of this balance by first presenting an ethical disposition suitable to citizens of commercial modernity which explains how praise and praiseworthiness can be balanced, and, secondly, to present an ethical ideal of human excellence or perfect praiseworthiness which while not itself commercial, is yet consistent with the ends of commercial society.

The first step in normative moral education is the love of praise. Smith also qualifies due to the lure of vanity, as discussed [21] (p. 145). Nevertheless, the first step in moral education is informed by the second, namely, the love of praiseworthiness, which underscores the importance of virtue and honour, because praise from people is meaningless if a person knows it is undeserved. Moral education is there to balance human nature, which is both defined by the love of praise and the love of praiseworthiness, which can be threatened by the aggressive “pursuit of esteem in commercial society” [21] (p. 144). Hanley’s argument that love of praiseworthiness underscores virtue in Smith’s view of moral development implies that love of praise serves as a moral corrective to vanity. As if the love of praise is a mere primary desire that is faulty. As stated above, Smith considered the two motivations for working together. In other words, one cannot succeed in moral development without the other. Hanley [21] (p. 142) states that for Smith, “nature, in its wisdom, antecedently invested man with a love of praiseworthiness capable of withstanding an amplified love of praise”. As individuals strive for social recognition, they risk substituting genuine virtue for superficial admiration and vanity, according to Hanley.

On the contrary, Smith notes that love of praise may excite the desire to be accepted and cover our flaws, but the love of praiseworthiness and virtue, which is stronger, cannot function without the social orientation related to the love of praiseworthiness. This more dynamic view of moral development in Smith is supported by Griswold [30] (p. 217), who underscores that for Smith, moral development was embedded in his theory of beauty. In other words, the beauty of virtue is what motivates moral development and not mere moral judgement. Nature and sentiment remain the guides for moral development, rather than rationalism.

However, moral development often fails, and in the realm of business ethics, the effects of corruption are substantial. Unfortunately, the result is the implementation of compliance structures with rules and regulations that must be adhered to. This does not mean that rules and regulations are not necessary, it is rather the type of structures and systems that are important from a Smithian perspective. Smith argues that for moral development to be successful, the natural liberty of people must not be impeded by structures and systems, whether social, cultural or governmental [18] (WN I.i.1).

Arendt’s reference to the banality of evil (mentioned earlier) emphasises that moral judgement is not an inherent and automatic attribute of human agency, but rather a fragile activity that can atrophy under institutional configurations [8]. She states that the “…. essence of totalitarian government, and perhaps the nature of every bureaucracy, is to make functionaries and mere cogs in the administrative machinery, and thus to dehumanise them.” [8] (p. 289). The problem is that a person’s self-reflective ability to consider what is moral is usurped by the structure. This ability exhibits a notable functional affinity with Smith’s concept of the impartial spectator. Arendt stresses its susceptibility to degradation through routinised bureaucratic practices and habituation. Something that Smith also suggests, pointing to the fragility of the impartial spectator [9].

Successively, Bandura’s theory of moral disengagement delineates the psychological mechanisms by which individuals deactivate self-regulatory processes that would otherwise constrain unethical conduct suggested by Smith and Arendt [16]. Bandura affirms that the “… exercise of moral agency has both inhibitory and proactive aspects. People do not ordinarily engage in reprehensible conduct until they have justified to themselves the morality of their actions. In this process of moral disengagement, people can disavow a sense of personal agency by displacing or diffusing responsibility.” [16] (p. 193). The displacement of responsibility is particularly salient for the manuscript’s critique of compliance-oriented governance regimes. When authority structures frame actions primarily in terms of formal rule compliance, responsibility is effectively relocated from individual agents to the institutional system. Agents may then act “correctly” in procedural terms, while substantive moral accountability is displaced upward to superiors or outward to organisational structures.

Taken together, Arendt’s warning about the institutional erosion of moral reflection and Bandura’s analysis of the underlying sociopsychological mechanisms reinforce Smith’s argument for institutional designs that extend beyond simple deregulation. Such designs must incorporate enabling conditions for individual liberty and for the cultivation of moral judgement and character.

5. Enabling Structures and Systems of Moral Development

Smith opens The Wealth of Nations [17] with the assertion that any structure and system must enable human freedom, whether it is commercial or any other. In the context of his view on moral development, these enabling structures refer to real-life events that shape morality. In other words, the structure of organisations should support the system of natural liberty to avoid the corruption of moral sentiments [31]. In support of this statement Smith states, “It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another” [18] (WN I.i.1). Any structural obstruction of this principle of human nature influences people’s natural liberty.

All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men [18] (WN IV.ix.51)

In other words, the structures must provide fair opportunities for people to freely engage in their chosen activities and exercise their moral autonomy. Economic interdependence fosters mutual recognition, cultivates self-command, and supports the diffusion of civilising virtues [17] (TMS V.1). Concurring, Tegos [32] (pp. 292–2005) notes that Smith sees in commercial modernity both a danger and a potential moral advance that depends on how recognition is structured, and which norms govern public esteem. Hill [20] (p. 130) supports this view by arguing that the moral deficiency of corruption is due to disabling structures that have systemic influences that limit liberty:

Corruption consists in violations of the system of natural liberty, including violations that corrupt the naturally self-governing behaviour of individual actors. In other words, corruption is instigated by obstructions to the ‘natural’ course of progress rather than by progress itself; accordingly, more progress is generally his solution to any of the pathologies of modernity.

Impeding the natural liberty of self-governance stands in the way of moral development, just as wealth can corrupt moral sentiments and disrupt social harmony. Fleischacker [33] (pp. 1–13) agrees that Smith supported a strong but “minimal state” or a less prescriptive state, allowing nature to guide personal moral development, such as moral conduct driven by fear of reprisal.

Smith limits the activities of governments because he considers it crucial to the development of virtue that people have plenty of room to act, and shape their feelings, on their own. Becoming a good human being is ultimately a task that each individual must take up for him or herself. People develop better moral judgement by actually making moral judgments, and virtue requires the practice of virtue; we cannot achieve these things simply by following the say-so of an authority.

The opposite is also true; if structures impede natural liberty, it may lead to increased moral delinquency. According to Smith, the taxation system of his time is a prime example. Smith writes [18] (WN IV.ix.3.3) the following: “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state” [18] (WN IV.ix.3.3). But not to impede the liberty of people due to excessive taxation. Smith [18] (WN IV.ix.3.6) states that every “…. tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state”. This results in bloated state budgets for state employees with no benefit to the public (e.g., excessive military spending); a disproportionate tax burden that disrupts businesses; excessive penalties for tax evasion; and a complicated and invasive tax system [18] (WN VI.ix.3.7).

Smith’s focus was on the impact of public office corruption on the values he cherished. By doing this, Smith broke with degenerative corruption of the body politic in exchange for modern public office corruption, according to [20] Hill (p. 137):

Corruption was no longer to be understood as an inevitable consequence of prosperity, a diffuse condition infecting the entire polity, or a problem of classical or Christian virtue to be remedied by a return to more primitive conditions, asceticism or the cultivation of civic virtues. Rather, it was a matter of boundaries, good governance and rules instituted by a properly constituted and clearly separated state that governed in the interests of all the people, not just self-interested elites. It was also about a new kind of civil society inhabited by industrious and just agents whose behaviour was regulated by the cool, modern virtues of commercial strangership.

In other words, structural limits on the nature and liberty of people impede their moral development because they are institutionally bound to follow laws and regulations that impede their freedom of expression. Moral education and the natural love of praise and praiseworthiness through the reflective capacity of the impartial spectator are restricted. Hill [20] (pp. 119–124) notes that the structural corruption incurred by the state is a clear example of interference in people’s natural liberty to engage in commerce. The problem is that the interests of elites are prioritised above those of the public. “Smith saw government profligacy as synonymous with corruption because it pointed to the fact that rulers were ruling in their own interests, rather than in those of the people” [20] (p. 128).

Structural corruption of Smith’s time also involved the administration of tax collection, the amount of tax, and the collection process. Smith [18] (WN IV.ix.3.4) notes that the “…tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person”. The reason for this is that “…. uncertainty of taxation encourages the insolence and favors the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt” [18] (WN IV.ix.3.4). This is a practical arrangement to ensure the taxpayer has the funds to pay the tax and is not forced to incur debt. In this case, the tax system, information gap, and people’s natural moral development are exploited for devious means to escape or reduce taxes. Furthermore, these structures become a restraint on moral development and cloud the impartial spectator’s judgement. This supports Smith’s view that the government and its structures are a racket controlled by certain groups of the wealthy classes for their own benefit, through the misappropriation of funds, cronyism, nepotism, and the erosion of the moral foundation of society [34] (pp. 87–113). According to Smith, the administrative problem creates the possibility of corrupting moral sentiments. The institutional aspect, therefore, stands in the way of the moral education that Smith envisions.

This was similar for the legal system and not limited to the state in terms of the fees of the court, stamp duties and cost for legal documents or “corruption of the law of language” because “judges indeed might, in this case, be under the temptation of multiplying unnecessarily proceedings upon every cause, in order to increase, as much as possible, the produce of such stamp duty” [18] (WN V.i.3.20). The church was also involved in corrupt activities. Smith notes that the Poor Laws enacted by Queen Elizabeth following the destruction of monasteries in England are a good example of institutional corruption by the church. These laws were intended to provide guidelines for the care of the poor, requiring each congregation to fund those within its boundaries; however, they became corrupt structures [17] (TMS I.X.ii.4.5).

The increase in poverty during this time placed a significant burden on the congregation. They, therefore, tried to find a loophole to lighten the financial strain. One such loophole is that poor people were not allowed to reside in certain areas and were therefore not considered the responsibility of the local community. Charles II addressed this loophole by establishing concrete criteria for residence, whereby residence for more than forty uninterrupted days constitutes residency and entitles one to assistance [17] (TMS I.X.ii.4.6). However, even this intervention could not prevent the creation of new inventions. To limit the eligibility of poor people to reside in an area, a complaint process was developed that required the sanction of two judges, who would deny a person residency. In many cases, churchwardens bribed these judges to return poor people to their original congregations. In another case, there was deliberate administrative oversight due to neglect in registering people on arrival in a new area. These and other practices had the unintended consequence that commercial activities and manufacturing were curtailed because people could not obtain residence.

This example illustrates Smith’s argument that structural controls can be directly linked to the neglect of impoverished individuals. This can also be observed in contemporary society, where capitalism and structural disparities between wealthy and impoverished nations exacerbate economic inequality. In this regard, free trade can be viewed as an oxymoron that veils unequal capitalist structures and market dynamics. Smith’s idea of free market economics is embedded in enabling structures that enhance human flourishing. Although Smith did not have a problem with the difference between wealth and poverty. He did not hover, rejected any mechanism or structure that limited a person’s access to means of improving their situation.

Smith’s criticism of these practices is part of the historical reality of his time, when the British Empire promoted its imperial agenda with increases in military spending, debt, a system of patronage and high taxes [35] (pp. 1–34). According to Smith, the government’s control over private spending and taxation contributed to the systemic corruption of public institutions, leading to smuggling and the general moral decay of the time, without considering their policies [20] (pp. 641–642). Something that was also prolific in the legal system, which Knud Haakonssen [36] (pp. 1–24) argued, underscores that Smith’s moral philosophy cannot be separated from his political economy. Moral sentiments such as self-command, justice, and beneficence must be cultivated within legal and economic frameworks that reward praiseworthiness rather than prestige or political favour. In support of this statement, Emma Rothschild [37] (pp. 379–383) describes this synthesis as Smith’s theory of “economic sentiments”—the integration of affective moral development with structural reform.

Further, Hill [20] (pp. 119–120), in contrast to Hanley, investigates how Smith’s understanding of the corruption of moral sentiments is directly related to the structural corruption found in governments and, likely, in business today, which uses compliance structures to control workers and maximise the company’s profit. Therefore, corruption is not judged from the perspective of moral deficiency in society, but rather from the structures that are implemented, which do not support the natural liberty of people [20] (p. 130). This can be seen in the codes of ethics and managerial structures that support neoliberal values through the control of workers with a means-to-an-end logic [38] (pp. 53–71)

Corruption of moral sentiments, therefore, is not only a failure of personal moral judgement but also a structural failure that enables corruption. The failure of the impartial spectator is not only the lure of wealth that can interrupt moral education. It also requires just and open structures that advance transparency and accountability. This is a critical aspect explored by Smith in WN for moral education that is overlooked in Hill’s assessment of This reading is supported by John Salter [39] (pp. 615–643), who traces Smith’s critique of corruption back to his analysis of feudalism. In Adam Smith on Feudalism, Salter argues that Smith saw the hierarchical and militarised structure of feudal society as fundamentally corrupt, rooted in arbitrary power and political servility. The shift to commercial society marked a liberation of individuals from structural dependency—but only if commercial institutions were regulated in the public interest. Salter shows that Smith’s historical method reveals a transition from personal dependence (feudal lordship) to structural independence (commercial liberty), but that this very progress is always at risk of new forms of domination through modern political corruption.

Yet, as scholars such as Tegos [40] (2020) and Salter [39] demonstrate, Smith’s theory of corruption emerges during a historical transition from feudalism to commercial society, encompassing both the personal erosion of virtue and the systemic distortions of governance. Tegos [40] (2020) adds a powerful elaboration here by describing Smith as a theorist of corruption who recognised how the social need for recognition both animates moral behaviour and produces moral compromise. The impartial spectator is a mediating figure that helps individuals negotiate the tension between social dependence and moral autonomy. Vanity, in this sense, is not just a personal weakness but a byproduct of social norms shaped by commercial interaction. Tegos [40] (2020) expands this critique by arguing that Smith understood corruption not simply as a breach of moral conduct or constitutional rules, but as a deformation of the norms that structure moral recognition and legitimacy. Structural corruption, in this view, emerges when institutions reward vanity and ambition over virtue and justice. Thus, corruption in Smith is not only the abuse of power, but also the systemic production of social values that subvert moral development.

Governance of business today must address the reality that Smith already identified during the 18th century. The challenge is to address corruption in business and strive for business ethics that support moral development through enabling structures that do not seek to reward vanity by limiting the liberty of workers through instrumentalism and functionalism [38] (pp. 53–55). This suggests that ethical decision-making should not be determined solely by market logic, but rather by what one can justify to a fair-minded and morally sensitive observer. It invites self-regulation based not on profit maximisation but on praiseworthiness. This is reinforced by Hanley [21] and Tegos [40], who both interpret this as a crucial mechanism for resisting the corrupting effects of vanity and instrumental rationality in commercial life.

In conclusion, Smith’s [18] (WN V.i.2.32) analysis of corruption in public office underscores the risks posed by institutional arrangements that facilitate corrupt practices and constrain natural liberty as a vehicle for moral development, a dynamic that remains central to contemporary debates in business ethics and political economy. As Hill [20] and Salter [39] demonstrate, Smith advocates for the establishment of transparent institutional frameworks that prioritise the public interest over the rent-seeking and enrichment of elites. This stance closely aligns with current normative expectations for ethical governance, corporate accountability, and effective market regulation.

Smith thereby articulates a dual ethical framework that, on the one hand, stresses the moral formation of the individual economic agent within commercial life and, on the other, emphasises the institutional architectures that uphold systemic freedom beyond the confines of state governance and managerial control, thereby supporting autonomous moral decision-making, advocated by Arendt [8]. His work problematises any strict dichotomy between economics and ethics by asserting that neither moral virtue nor structural integrity can be maintained in isolation from the other.

Within the field of business ethics, this integrated perspective is particularly salient. It legitimises self-interest as a motivating force in market activity, but only when it is regulated by ethical structures that enable agents to exercise both collective and individual forms of agency. Smith’s framework thus directs leaders to cultivate robust internal moral standards while also designing organisational forms that sustain, rather than erode, the ethical infrastructure of commercial society, also suggested by Bandura [16]. In this view, Smithian enabling structures are not merely negatively oriented toward the removal of coercive constraints; they are also positively configured to render praiseworthy conduct visible, intelligible, and systematically rewarded in routine commercial interactions. Mechanisms such as reputation, reciprocal dependence, and the ongoing requirement of persuasion operate as continuous feedback processes that strengthen moral judgement and engagement, rather than fostering ethical detachment.

6. Conclusions

The analysis of Smith’s moral development in this article highlights the importance of supporting structures and systems that foster human nature and liberty, thereby enhancing moral development in the business context. It was found that moral decline is related to the corruption of moral sentiments that can occur due to excessive passion, material wealth, power, or any means not rooted in nature’s guidance, such as the love of praise and praiseworthiness. In other words, nature is not the reason for moral decay, as proposed by moralistic arguments; rather, it is a correction that resists moral decline. In cases where this mechanism does lead to change, nature instils regard for sympathetic sentiments. The argument underscored that Smith’s view of human nature is important for contemporary business ethics and governance.

Smith’s institutional vision aligns closely with Bandura’s insights. Where compliance systems activate moral disengagement through displacement and diffusion of responsibility, enabling structures counteract these tendencies by anchoring responsibility in the agent, maintaining visibility of consequences, and ensuring that moral evaluation cannot be outsourced to procedure alone. Social learning is not denied; it is redirected. The environment teaches—but what it teaches depends on how it is structured.

Moral development arises through the guidance of nature, which requires individuals to cultivate their moral decision-making by reflecting from the standpoint of an impartial spectator. This natural process, however, must be institutionally supported by robust, transparent structures that secure individuals’ freedom to exercise their innate moral capacities across all domains of social life, including commerce, government, and politics. As Arendt cautions, the absence of such enabling conditions can lead to profound moral impairment. Within the sphere of business, this implies that organisational governance models that are exclusively functional and instrumental, prioritising profit maximisation through control over or prescription of workers’ conduct, do not foster the autonomous moral development of employees, but instead risk inhibiting it. From Smith’s perspective, legalistic and moralistic compliance strategies aimed at advancing morality are doomed to failure and will have the opposite effect. Consequently, Smith’s advanced structure, which enhances liberty, supports an enabling environment for moral development.