In contrast to the first two parts of the treatise, which primarily deal with how we relate to and judge other people, Part III, "Of the Foundation of Our Judgments Concerning Our Own Sentiments and Conduct, and of the Sense of Duty", addresses how we relate to and judge ourselves. Smith posits that the functioning principles are essentially the same, except directed inward as opposed to directed at other people.
One of the most provocative claims made by Smith is that if you were to grow up on an island without any companions, completely apart from society, you would not be able to effectively judge your own actions. This is because morality and judgment are derived from sympathy. In order to judge our own actions, we observe and judge the actions of others, while at the same time observing their judgments of us. In this way, we are able to gain perspective on how we appear to impartial observers.
This ability to perceive ourselves as impartial observers might, and to imagine how our potential actions might look to such observers, is called "conscience" (127). Smith refers to conscience as the "man within the breast" in order to underscore the fact that the conscience effectively allows us to take on two perspectives at once: one perspective is our own, dictated by self-interest, and the other is that of an imaginary observer who judges us from the perspective of a stranger (ibid).
Because our conscience is always with us, judging our actions, we have two distinct sets of goals when it comes to morality: we wish to be praised and not blamed by society, and we also wish to be worthy of praise and not worthy of blame. Though society may sometimes unjustly praise or unjustly blame us, our conscience, the final and fairest judge, will always know the truth of whether or not we deserve praise or blame. We will always be obligated to live with that knowledge.
There are, of course, ways in which things can go wrong as far as the judgment of the self is concerned. As mentioned above, we may be unjustly praised or blamed -- and blame where blame is not due, Smith believes, is one of the most painful, upsetting, and shameful elements of the human condition. We may also engage in self-deception, may be overcome by our passions and go against morality even though we know better. Later, when our passions are tempered, our conscience will ensure that we feel guilt over such self-deception. Finally, because the conscience is developed based on our interactions with society, conscience runs the risk of being weak, misguided, or ill-formed if we do not associate regularly with impartial people. If we were to only interact with our family and to never be judged impartially, we would surely be terrible judges of our own behavior.
The methods by which the conscience learns how to govern us are the observation and the judgment of individual moral situations and dilemmas; from such activities, the conscience extrapolates general rules concerning what is and is not moral. These general rules, taken as a whole, constitute what is called "duty" -- a word which fits its modern meaning, for Smith sees duty as encompassing the full range of our moral obligations (156). He argues that duty was clearly imparted by God, because moral obligations have the force of internal laws that govern propriety, and because such laws would be handed down by a creator who has the ultimate good of the universe in mind.
Lastly, Smith adds that duty should not always be our sole motive for action: after all, our behavior was crafted by God for the goodness of the universe and of society. Rather, where we would act beneficently for the sake of something we care about, duty serves to amplify this goodness; where we would be inclined to act purely in self-interest, duty draws us back and keeps us from doing so. Additionally, Smith says, we cannot always rely entirely on duty because the general rules of which duty consists are sometimes too loose and vague to be adhered to strictly. The only case in which moral rules are strict and must always be followed is in the domain of justice, as described in Part II.
It is important to understand that in this description of the conscience, Smith is using some of the same methods of analysis that he applied to justice in the previous section: though he proposes that the conscience functions like an impartial observer, he does not presume that we consciously put ourselves in such a position. This process, according to Smith, happens naturally and without much thought on our part. Understanding Smith in this light can make his theory significantly more plausible.
This section is where Smith's religious angle becomes more integral to his argument, and also somewhat more problematic. For example, Smith says that God designed human nature to tend towards societal harmony and goodness in accordance with the rest of the universe. Yet he also says that a human living alone would never be able to develop a moral perspective. Smith does not explain why this state of affairs does not entail a contradiction.
One could, of course, make an argument from charity to save Smith's reasoning here. One could say that humankind is meant to establish harmony both within and between different social groups, and so was created without a preexisting moral code. Thus, human morality could grow with human behavior in the most culturally harmonious way (even though some fundamental notion of right and wrong is still constant to all humanity). This would explain why different cultures can all sustain themselves with similar-yet-different moral standards, and would also justify the person on an island having no sense of morality.
An interesting inquiry here would involve the comparison of Smith's theory of conscience to the psychoanalytical model of the ego, the id, and the superego. According to the latter model, we inherit instinctive, societally-inappropriate desires from the id, which are censored by the superego, or our sense of what is socially appropriate. The ego, our interface with reality, is left to strike a balance between these two forces. It is worth noting that that these two models, though very different, yield similar results. Though the old psychoanalytical school of thought saw basic human nature in terms of the id, full of destructive and violent urges, and though Smith's model construes people as inherently moral, both models posit that humanity's basic nature is censored and policed by an internal force -- the conscience, or the superego -- which is formed by an individual's interactions with the rest of society.