In this section, "Of the Character of Virtue", Smith outlines his views on what constitutes the proper conduct of a wise and virtuous person. He divides the constitution of virtue into two major categories: the ways in which one's character affects the happiness of others, and the ways in which one's character affects the happiness of oneself.
The virtue of character which affects the character of oneself is termed "prudence" by Smith. Prudence consists of acting so as to secure one's health, happiness, reputation, and rank in society. Smith reiterates here that it is far more damaging to fall in status than it is uplifting to rise in status, which is why a chief concern of prudence is security. This is also why it is prudent to be satisfied with one's rank, and thereby achieve both security in life and contentment with what one has.
In his discussion of one's character in relation to other people, Smith designates tiers by which one feels warmth of affection for different people and nations. Regarding people, we are obviously most sensitive to and understanding of ourselves; beyond that, we are closest to people in terms of the sentiment, affection, and understanding we cultivate based on the time we spend with them. We are naturally closest to our children, then to our parents, then to other blood relations and earliest friends, and with decreasing sentiment move outwards from those relations.
Smith notes that we are more attached to our children than to our parents, probably because we intuit that our children depend on us for protection, whereas that dynamic is not present in relation to our parents. He also emphasizes that we are most disposed to be beneficent towards those who have shown us kindness in the past. This is because mutual kindness and sympathy are conducive to security and mutual well-being.
Regarding warmth towards nations, our strongest sentiment is by far directed toward our own nation. Smith says that it is often the case with less-enlightened men that they resent nations surrounding theirs, a feeling motivated by insecurity and rival sentiments. This is not the case with wiser men, who are more secure and less paranoid. People are generally more impartial when considering nations which are distant from their own, because those nations are not directly relevant to their lives.
Within a country, people are most loyal to whatever form of government or organization their society follows. Love of country is divided between respect for the established system of government and a desire to make the government and general state as secure and satisfying as possible. A lack of propriety can cause the latter of these desires to overpower the former, causing corrupt factions to form and to distort the political and moral landscape with extreme agendas. When factions come into conflict, whichever is victorious has the luxury of regarding its beliefs as morally justified, and of labeling the losers as heretics. In such an environment, true wise men are isolated from factions and become outcasts.
Smith notes that concern for universal prosperity is the domain of God, and that we therefore ought only to concern ourselves with acting with propriety in our appropriate spheres, rather than wringing our hands over universal suffering. The perfection of one's nature comes from self-command. We must master and temper anger without overcompensating with its opposite emotion, fear. We must also form proper estimations of our self-worth, without slipping into the vices of pride, vanity, or self-deprecation. Of those three deficiencies, vanity is the least harmful because, while one wishes people to think more of one than one is in fact worth, one may well be working to raise oneself to the status to which one aspires. Pride, on the other hand, only incites anger and resentment, because it is upsetting to deal with the upset feelings of of someone who falsely believes that he or she is worthy of better treatment. Self-deprecation is generally shameful and usually leads people to treat you as poorly as you treat yourself.
After five sections that mostly treat morality as perceived by impartial observers, Smith here frames sentiments in relation to affections, both on personal and political levels. Although Smith stresses how crucial it is for a well-developed conscience that we interact with many impartial observers, we in fact spend more time with people with whom we have formed preexisting relationships.
It is inevitable, in a theory of morality grounded in the perspectives of impartial people, that extended periods of time with partial people can pose problems. In particular, as Smith indicates, spending time with a homogenous faction can greatly warp one's worldview, often to the point where one will enter into furious arguments with anyone who is not a member of one's faction.
With regard to nations, Smith was writing in a time far before technology connected the far reaches of the world. Given the interconnectedness we now experience, virtually all nations other than our own can justifiably be treated as Smith treated neighboring nations: that is to say, those who are insecure about their patriotism will fear or resent virtually any other nation across the world which is in any position to pose a threat. Similarly, the internet allows factions to span national boarders -- a problem, by Smith's logic, because even though such solidarity can help to start movements, it can also promote homogeny of thought, thus exacerbating the problems of factions.
A passing consideration is that, even though the idea of a parent being extremely attached to his or her children is biologically tenable, there are many cultures in which it is expected that children will live with and take care of their parents in old age. As Smith himself says, virtues other than justice as rather loosely defined, so that certain concepts in this section cannot be held up to the standards of jurisprudence. This example of family habits underscores how susceptible to culture and custom the virtues which Smith describes can be.