In The Theory of Moral Sentiments, Smith argues that much economic activity is the product of a forecasting error—people’s illusion that acquiring wealth, possesions and status will make them permanently happy. Smith further believed that the primary purpose of wealth-accumulation beyond a minimal level was not for consumption, but for the social attention. “What are the advantages which we propose by that great purpose of human life which we call bettering our condition?” Smith asked (I, iii, ii, 70–71). “To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease, or the pleasure, which interests us.”

Smith devotes numerous pages of The Moral Sentiments to describing ways in which the anticipation of status gained was much better than the realization, since pursuit of status can backfire. Indeed, he argues (1759, IV, i, 260–261), even the wealthy and great eventually recognize, albeit long after they can remedy the situation, how little utility the goods they struggled so hard to procure have actually provided.

Because the rich pursue ends that fail to make them happy, Smith (1759, IV, i, 265) believed that they end up being no more happy than the poor: “In ease of body and peace of mind, all the different ranks of life are really upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for” and “in what constitutes the real happiness of human life, [the poor] are in no respect inferior to those who would seem so much above them.” Indeed, a large body of modern research on the determinants of happiness has quite consistently found surprisingly weak connections between happiness and wealth or income, especially over time or across countries (Easterlin, 1974; Diener, and Biswas-Diener, 2002; Frey and Stutzer, 2002).

Yet while believing that consumption of goods, as well as wealth and greatness, all provide only “frivolous utility,” Smith believed that the productivity of market economy is driven by this “deception”—the misguided belief that wealth brings happiness. As Smith (1759, IV, i, 263–264) notes, “[I]t is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe.”

Indeed, Adam Smith even invokes the “invisible hand”—a term that may be the the most prominent legacy of his work, although it occurs only once in The Wealth of Nations and only once in The Theory of Moral Sentiments—to argue that as the wealthy seek out goods and status that ultimately bring them little pleasure, they inadvertently end up promoting the good of the poor. Here is Smith’s invisible hand (1759, IV, i, 264) in The Theory of Moral Sentiments:

“In spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessities of life which would have been made had the earth been divided into equal portions among all inhabitants; and thus, without intending it, without knowing it, advance the interest of the society.”

Adam Smith’s Theory of Moral Sentiments is not only packed with insights that presage developments in contemporary behavioral economics, but also with promising leads that have yet to be pursued. Here we enumerate four of them: the desire to be well-regarded by posterity; negative reactions to being misjudged; mistaken belief in the objectivity of tastes; and sympathy for the great and rich.