Smith’s Idea of Economic Karma

Post Summary meant for readers with no background on dharma and karma:

  • Anything that exists exists to experience existence
  • How it is meant to exist (or experience existence) is its dharma or invisible hand
  • The process of existing creates action called karma
  • Every action has a reaction (also called karma) since it naturally invites actions from other things in existence
  • The Action Karma manifests in Physics as Newtown’s 1st and 2nd laws. The Reaction Karma is in the Third Law
  • In Economics, the Action Karma manifests as economic policies and the Reaction Karma is in the results of those policies (e.g. Boom-Bust, Trade War, Financial Crisis, etc)
  • In ordinary life, karma usually manifests as ‘good luck’ or ‘bad luck’ which in reality are good or bad reactions resulting from past actions



In my previous papers, I pointed out that Smith was the first and probably the only Western intellectual to hint at the concept of dharma, or the natural and sustainable activities of humans, and apply it both for moral and economic purporses. Instead of the word dharma, however, he named his concept the invisible hand, which in The Wealth of Nations, had economic applications and, in The Theory of Moral Sentiments, had moral applications.

The main difference between Smith’s invisible hand and Eastern dharma is that the former has moral, spiritual, and practical uses, while the latter emphasizes only its moral and spiritual use. Eastern philosophers did not dare teach the practical use of dharma because they knew that it would merely lead to the bondage of existence, as it leads directly to utility or pleasure.

Smith, however, emphasized its practical use in economics by encouraging people to know their own interests. But he tried to put safeguards by first warning against the bad effects of utility, lest people fall deep into its deception and their interests become selfish-interests. Unfortunately, his warning against pursuing utility was left unheeded or ignored. Later economists such as John Stuart Mill and Jean Baptiste Say even built economic theories around it. Unlike Smith and the Eastern philosophers who emphasized morality, Say totally skipped morality, while Mill based his morality on utility:

  • “The doctrine that the basis of morals is utility, or the greatest happiness principle, holds that actions are right in proportion as they tend to promote happiness, wrong in proportion as they tend to produce the reverse of happiness. By ‘happiness’ is meant pleasure and the absence of pain; by ‘unhappiness’ is meant pain and the lack of pleasure.” (Mill, Utilitarianism)

Of course, the flaw in Mill’s philosophy is that personal happiness is subjective. If pursued without thinking of others, then it becomes arbitrary. It might bring happiness to a rich country to invade a poorer country for oil as the former would think that it would bring happiness and progress to both countries. Or it might bring happiness to terrorists to attack a rich, extravagant country thinking that it would bring both closer to simplicity and austerity which are foundations for religious happiness (For example, Jesus himself said it will be difficult for the rich to enter the Kingdom of God).

Utilitarianism is useful only when one is alone, but creates problems when one comes into society, as people have diverse experiences, opinions, and moral standards. Smith’s invisible hand, on the contrary, works both personally by tapping into one’s conscience, or “the man within the breast”, and socially by knowing one’s interests. Why did later economists miss out on the invisible hand or dharma?

The first reason is because Say and Mill lived during the start and the height of the Industrial Revolution which lasted from 1760 to 1840. The increase in productivity increased the number and variety of products available for use or utility and for satisfying the senses which were not available before. Thus, utility and all its shallow and short-term benefits came to dominate the field of morality.

Another more important reason is because both dharma and the invisible hand are naturally invisible or not obvious to shallow observation. Both can only be seen by highly-penetrating and highly-evolved minds that can look far beyond the obvious. In Hinduism, the concept of dharma naturally leads to the concept of karma. This is because everything in existence has dharma or its own nature to sustain its very existence. Anything without dharma, or without the propensity to sustain its own existence, will immediately cease to exist. Thus, every existing thing must have its own dharma.

The purpose of existence is to gain the experience of existence, and this denotes action, which is called karma in Sanskrit. As all action in existence produces a reaction, the word karma actually combines both action and reaction in one concept. However, karma when used nowadays, commonly refers only to reaction, usually a bad one. In English, karma is loosely translated as “What goes around, comes around,” or when viewed from a purely physical perspective, it solidifies as Newton’s Third Law, which automatically combines both action and reaction into one idea or concept.

Smith on Economic Karma karma Since karma is universal and timeless, it works the same way regardless of time and location, whether in the distant past, distant future, or in a very distant place. Selfish actions always and everywhere bring about something hurtful, or opposite of what was intended, in the long-run or even short-run:

  • “At first sight, no doubt, the monopoly of the great commerce of America naturally seems to be an acquisition of the highest value. To the undiscerning eye of giddy ambition, it naturally presents itself amidst the confused scramble of politics and war as a very dazzling object to fight for. The dazzling splendour of the object, however, the immense greatness of the commerce, is the very quality which renders the monopoly of it hurtful..”
  • “Even the regulations by which each nation endeavours to secure to itself the exclusive trade of its own colonies are frequently more hurtful to the countries in favour of which they are established than to those against which they are established. The unjust oppression of the industry of other countries falls back, if I may say so, upon the heads of the oppressors, and crushes their industry more than it does that of those other countries.”
  • (Because of the monopoly of the home market) “The industry of the country, therefore, is thus turned away from a more to a less advantageous employment; and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation.”

History is full of examples of narrow-minded economic policies going back to hurt the intended beneficiaries or producing opposite effects. The best modern examples are the tariffs of the 1930’s contributing to the Great Depression and the credit derivatives of the 90’s leading to the Great Recession. Another more recent example is the Greek debt crisis where massive government spending, which was thought to draw in future investors, actually plunged Greece into a crisis. Those policies were created to increase wealth rapidly, but ended up destroying it. The more people study Smith and his ideas, the better will be humanity’s chances in avoiding bad economic karma from selfish motives.




Update Jan 2017, added summary


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