An Analysis of Adam Smith's Theory of Charity and the Problems of the Poor

This paper analyzes Adam Smith's theory of charity toward the poor. Two sources of private charity market failure are identified which lend support to the view that Smith's writings justify government intervention on behalf of the poor. First, the poor tend to conceal their condition out of shame which violates the perfect information requirement for market allocative efficiency. Second, charity generates positive externalities since others naturally sympathize with benevolent actions. This provisional case for public charity is then analyzed using Smith's moral concepts of propriety and merit. Smith's view of economic altruism in a commercial society is also considered.