 I'm very happy to be at the invitation of the Mises Institute and the Instituto Juan de Mariana, both of which do excellent work today are some of the main beacons of freedom. And as far as I'm concerned, the main beacons of freedom in the world. So it's a great pleasure to be associated with them. The timeliness of Adam Smith, the full title of my lecture is the Pyrranity of the School of Salamanca and the timeliness of Adam Smith. But I'm always in favor of short titles, so I just put the timeliness of Adam Smith and I'm very glad that Professor Smith Klein talked before me and so introduced you to the intellectual background of my talk, which is the very critical Austrian view of Adam Smith in rejection of what Murray Rothbard calls the wick theory of science. And his predecessor in this respect was Joseph Schumpeter, who was writing some 40 years before Rothbard on the same subject and also characterizing Adam Smith's appearance as a drawback in very important respects of economic science. So talking now about the timeliness of Adam Smith in Salamanca at a conference dedicated to the cradle of economic theory is probably something like praising the wicked theory at the wedding banquet of Sleeping Beauty. But nevertheless, it's a very old scholastic tradition to have an advocato's Diaboli, a devil's advocate. We were talking about a subject in which well-thinking people agreed on certain things, such as the inacceptability of Adam Smith. So there should be some devil's advocate stating that we shouldn't overstate our case and hear the defendant's claims. So that's what I will try to do today. Render justice to Adam Smith, because Adam Smith in very important respects continues a tradition that has been continued in its own way in Salamanca, in particular the very old scholastic rejection of meddling with money. Father Unfero has mentioned Juan de Mariana's book on the mutation of money, the alteration of money, a book about which we will speak more during this conference. I know that Gabriel Casada will talk to us, I believe, at the end of this day in the last conference on what Ben Bernanke should learn or could learn from Juan de Mariana, and he will certainly talk about this book. Juan de Mariana himself continued a tradition that started in the 13th century. It reached the first high point in the 14th century with Nicolas de Oresmi's treatise on the alteration of money, which was the first treatise on inflation and the first treatise of scholastic ever dedicated to a completely economic subject. And because, as we have heard this morning already, most treatises that the scholars of the School of Salamanca authored in the 16th and 17th century were at the intersection, what we would call today, ethics, theology, Catholic morality, and juridical signs and economics. So we didn't have a clear economic treatise, but a first clear economic treatise the first one was in the 14th century, Nicolas de Oresmi, the confessor of Charles VII Bishop of Lisieux, and a strong advocate of sound money, as we would call him today. He rejected any interference of government in the creation of money, the money supply, and this tradition was upheld by the School of Salamanca in the 16th and 17th century. And as I was stressed in my talk, it was upheld and extended by Adam Smith in the 18th century. Now, here we have, therefore, Adam Smith as a continuity with the scholastic tradition, Adam Smith was not on a wall path with the notion established by the School of Salamanca that the free economy, the free market, was by and large a self-regulating system. Didn't need the government to keep in balance, didn't need government intervention to be constantly fixed. So this is something on which Adam Smith could build, but he added something more, namely a theory of growth which we could not find in the previous authors. So Adam Smith, I'm not the first Austrian to stress the importance of Adam Smith. For the Austrian school, major Australians such as Carl Manger and Ludwig von Mises have stressed this importance. Carl Manger wrote actually an article on Adam Smith in which he added a few critical remarks, but by and large acknowledged in Adam Smith the founding father of economic thought and the starting point for his own work. So Manger did not refer to Kantillon, he did not refer to the scholastics, he explicitly referred to Adam Smith as the starting point of his own work and of modern economics. So it's not just an Anglo-Saxon version of the history of economic science, it is a version that might be wrong but definitely was held by Manger himself. And as we have learned about 15 years ago through the work of Erich Streisler, who is a professor at the University of Vienna, Carl Manger used Adam Smith's wealth of nations as a textbook in his instruction of the Crown Prince of Austria, Rudolph. Carl Manger in the 1870s was for two years the tutor, the economics tutor of the Crown Prince Rudolph, so he taught him lessons on a weekly basis and he also accompanied him on his travels throughout Europe where they would meet famous scholars and diplomats and other members of government. Manger used Adam Smith's wealth of nations as a book of instruction, he did not use his own book as principles of economics, nor did he use any other more recent contemporary work, he did use Adam Smith's wealth of nations and definitely would not have done this if he had thought that the book was completely unacceptable as a manual to learn economics and to teach students. We find in Mises the same explicit endorsement of the work of Adam Smith. I was struck by in reading the Mises correspondence from the 1920s and 1930s, the frequent appearance of statements of his correspondence in particular students who characterized him as an advocate of the classical school. Now this sounds weird for us today, why would they call Mises a representative of the classical school? But definitely it is because Mises endorsed classical economics, the economics of Adam Smith and his disciples in important respects, that is in particular when it came to explaining growth and the promotion of growth. In articles that Mises published in the US, so once he had emigrated to the United States in 1940, articles he published in the late 1940s and the 1950s, they are frequent references to the economics of Adam Smith and of classical economics, in particular in the discussion of subjects that were at the time approached from a Keynesian point of view. And so when Mises criticizes Keynes, you all, there's always a reference to Adam Smith and they're all to John Battista say, a major disciple of Adam Smith. And when Mises rejects the Keynesian explanation of growth and the importance of expansionary economic policies to promote growth, there's always a reference to the classical school and to the notion established by Adam Smith that growth ultimately depends on the amount of capital per head, capital per capita. So Austrians have all interest in not neglecting Adam Smith who continues the economic thought developing as from the Middle Ages and then promoted and expanded by the school of Salamanca. And we therefore will now I will characterize briefly the main contributions of Adam Smith, explain how they relate to our present situation and how far Adam Smith is timely and then say a few things about the shortcomings of Adam Smith. So Adam Smith's main contributions are as well, I mean to understand Adam Smith's main contributions, we have to understand that he was reacting with his doctrine against the dominant thought of his time about the promotion of economic growth. And the dominant thought of the time, he called mercantilism. The word mercantilism is actually a creation of Adam Smith's, nobody was using this word before him. He created this common denominator to give a name to this dominant thought. And the characteristic feature of the doctrine that he was attacking was that aggregate spending was the main motor of economic growth. Aggregate monetary spending was the main motor of economic growth. Now, of course, this is very interesting therefore I always stress this at this point because it shows that he was not reacting to a very old doctrine that had no relevance for our own day. He was in fact reacting against the doctrine that is very present in our own day. And we had, starting in the 1930s, a comeback of mercantilism, a comeback that was newly noted by scholars at the time, not only Austrians, but mainstream economists as well, as a comeback of the notion that in order to promote economic growth, you have to increase the amount of money that is being spent in the economy. And if we look at Keynesian policies, Keynesian policy recommendations, that's exactly what they are all about, increase the level of aggregate spending, either through government spending, if the government is under the obligation to substitute itself at the place of market participants, right, the market participants are sitting on their money that they don't want to spend, they're hoarding money. And so the government, the official agent in the economy now does what it reluctantly does, namely spend money, or it encourages spending by private persons by decreasing the interest rate, therefore encouraging spending by companies. All the major arguments in fact, even the allegedly more subtle arguments related to what Keynes calls involuntary unemployment, right, the eradication of involuntary unemployment, bringing more people to be ready to work by offering them higher wage rates, all these arguments were already present in the 18th century. Adam Smith knew these arguments and knowing these arguments, he rejected them. So his main thesis were the following. The level of aggregate spending is irrelevant for economic growth. The level of the money supply is irrelevant for economic growth. The price level is irrelevant for economic growth. All these monetary aspects are irrelevant. The true causes of economic growth are twofold. The main two causes are twofold. The first one is the division of labor. Adam Smith starts with a discussion of the division of labor. He starts his book, The Wealth of Nations, with a discussion of this aspect. And the second one, and this, of course, is an aspect that has completely been neglected in our days, is the accumulation of capital, savings. You can promote growth by leading a frugal life. You can promote aggregate growth. And he argued, thirdly, that the policies recommended by the mercantilists simply do not work. The mercantilists had advocated a policy of promoting exports and discouraging imports. The objective, the ultimate objective, was to promote aggregate spending. If you export goods and services, you increase the amount of money that flows into the country. If you discourage imports, you diminish the amount of money that flows out of the country. So the ultimate effect would be that the amount of money, the money supply within the borders of the nations, increases, and therefore aggregate spending will increase. So these were the mercantilist policies. So Adam Smith says, well, that's not true. The level of spending has nothing to do with economic growth. And actually what the mercantilist policy boils down to is to make the use of capital less efficient. By artificially stimulating exports, we artificially stimulate the international division of labor at the expense of national division of labor. Now because it's being done artificially, it means that capital is diverted from the uses where it would have realized the greatest return because that's where entrepreneurs would have spontaneously invested their capital if they had been free. And now it's being invested in venues where it is less, it creates less of a return from an aggregate point of view. Similarly, by discouraging imports, you do the opposite thing. You discourage the international division of labor to the benefit of the national division of labor. But the point is that this use of capital then is again inefficient. If entrepreneurs had been free to choose the use of their capital, they would apparently have used it more for international cooperation, this creating the highest returns. But now the government discourages cooperation with foreigners, therefore capital is used differently. And this different use is necessarily less efficient, brings less of a return than the one that would have been chosen spontaneously by entrepreneurs. That is Adam Smith's argument. It's all about the uses of capital. The relative returns created by capital based on the hypothesis, and that's a realistic hypothesis, that if you let entrepreneurs choose freely the use of their capital, they will tend to use those uses that are most beneficial for themselves and therefore also create their highest aggregate return. The significance of Adam Smith in the history of economic thought is not that maybe that he was particularly original in each single thesis that he advocated. In fact, as Schumpeter and Murray Rothbard have argued correctly, every single major idea advocated by Adam Smith had already been present in the literature before him. Therefore one of the frequent charges against Adam Smith is that he was a plagiarist because often he didn't quote his sources. But there is certainly merit in bringing together disparate ideas, separate ideas that had been scattered throughout the literature into a systematic treatise. And that is exactly the main contribution of Adam Smith. He created the first systematic treatise on economic growth. And in that respect, he delivered the same contribution as Nicholas Oresme, whom I already mentioned four centuries earlier. Nicholas Oresme, too, was not original in most of the points that he made. He brought together a literature that was scattered throughout many articles and books and showed how all these different ideas could be integrated, could be synthesized into a systematic analysis of the problem at stake. And that's the great contribution of Adam Smith. There were all elements ready for a theory of growth. Adam Smith brought them together and showed what the main causes of growth were. And he was especially the first economist to clearly formulate the crucial question that we still face today, namely the question, which role money and monetary expenditure plays within the economic system? What is the role of aggregate demand, of aggregate revenue, monetary revenue for the working of the market economy? So Adam Smith was the first one to clearly formulate this crucial question and to answer it, and in his answer, refuting the main errors prevalent at his time. And of course, his answers were imperfect and he did deviate economics in important respect. So we mentioned the theory of prices. Adam Smith endorsed a cost of production explanation of prices and in that respect created a regress in economic analysis. But this does not diminish his merits on these other fronts. We can compare him with another great Austrian scholar, well, Adam Smith is another Austrian scholar, but with another scholar that is important for the Austrian school, namely Eugen von Böhm-Barwerk. Böhm-Barwerk was the first economist to clearly formulate the question at stake in the theory of interest, namely the question, why the spread between sales revenues and cost expenditure of firms tends not to get eradicated completely on the market. And he was the first then to systematically answer this question, proposing his own solution. His own solution, his own answer was that there was time preference and as a consequence of time preference, sales revenues are never entirely equal to the cost expenditure of firms. And also to refute the main errors in the field, refuting various productivity theory, productivity explanations of interest, and so on. And as in the case of Smith, Böhm-Barwerk's answers were not perfect. So later economists, in particular, economists of the Austrian schools did correct Böhm-Barwerk in important respects. For example, Frank Vetter and Ludwig von Mises reformulated the theory of time preference and created a pure theory of time preference, whereas Böhm-Barwerk had integrated time preference along with other elements. But again, this does not diminish the importance of his contribution. The contribution of Adam Smith is highly timely because again, the debate that we are leading today again in confronting a world economic crisis is the same that Adam Smith confronted in his day. It's a debate at the center of which is the question, which role does money play and which role does aggregate expenditure play for the operation of a market economy? Can we confront the economy by increasing or stabilizing, at least, aggregate expenditure? Can we promote growth by promoting an increase of aggregate expenditure or at least stabilize aggregate expenditure? And even if we reason today, completely in the terms proposed by Adam Smith, we would still get convincing answers. How would Adam Smith analyze our present situation? Well, he would still say, well, we have a stock of capital, real capital, not money, tickets and so on. Stock of real capital, that is consumer goods, factors of production that we can use in production. These physical supplies are limited and on the free market, they would be used to the most efficient extent if the government comes into play and saves companies that have made wrong investments, that are using factors by creating value that is inferior to the value that they consume. Well, we are impoverishing the nation as a whole. We are impoverishing the whole world as a whole. So it's not a suitable way to confront the present situation to get us out of the crisis. It is a way of stabilizing the situation of some market participants at the expense of all others and in the aggregate, it's not a zero sum game. It's not that just some gain and others lose but it's a negative sum game because we are losing in the aggregate because we are consuming our capital. So I think we can give convincing and correct answers analysis of the present situation even if we didn't know anything about modern Austrian capital theory and Austrian price theory and so on and reason entirely in terms proposed by Adam Smith. Now this does not mean that we should not rely on those more sophisticated arguments developed by the Austrians. Adam Smith did have shortcomings. What are the main shortcomings in his doctrine? The main shortcomings are lacking analysis of money, lacking analysis of the prices, the price system and his neglect of the time factor. I may say a few words about each of them. The main shortcoming from an Austrian point of view is of course Adam Smith's price theory. He didn't have a convincing price theory but this did not vitiate his entire economic thought because if you read the wealth of nations you will find that market prices play virtually no role in his all argument. The argument is based on the scarcity of capital and uses that we can make of capital. The question how capital is used concretely and which role do prices play in using capital and investing capital is not answered by Adam Smith, simply not addressed. The argument is always capital is scarce. If government intervenes it disrupts the uses of capital that would have been made on the free market. These market uses would a priori have brought, ex ante would have brought the highest returns from the point of view of the investors. So government by intervening always disrupts this equilibrium and always brings about a less efficient use of capital. So he didn't have a good price theory, he didn't vitiate his doctrine but of course you can reinforce the analysis proposed by Adam Smith by doing precisely this by basing it on a more sophisticated view of the role that prices play in the market process and this is exactly what the Austrian school has allowed us to do. The Austrian school has created a realistic explanation of market prices starting with Kaumenga then of money prices in particular and as a consequence, Austrians are able to explain how the different investment projects relate to one another. Adam Smith was unable to do this and Austrians in particular, following Bumbavak have brought the time factor into play. It's another crucial aspect that Adam Smith neglected and which is especially important to understand the business cycle. The last point, I said the neglect of money is might be surprising giving that this was at the center of Adam Smith's thought. Well the fact is that Adam Smith in rejecting the notion that monetary spending and money prices have anything to do with economic growth went a little bit over the top in asserting that money has no influence on the economy at all. The one who has most clearly formulated this idea that money has no influence on the economy at all was a mid-19th century disciple of Adam Smith's namely John Stuart Mill. John Stuart Mill formulated the doctrine of the veil of money. Money is just a veil. So money prices are just superimposed over real prices, price ratios, just like a veil is superimposed over the face of a bride. And as the bridegroom hopes that the veil will not affect the underlying face of the bride, so John Stuart Mill and the other classical economists were convinced that the price system did not affect the real economy underlying. Now this is of course a notion that Austrians following Ludwig von Mises have rejected arguing that money profoundly affects the structure of production and particularly our money production affects the structure of production but also the demand for money affects the structure of production. But it does not, Austrians have always stressed that it does not follow from this that you can create an overall aggregate increase of production by manipulating the demand and supply for money. So in conclusion, let me stress that well, Adam Smith in important respects is not outside of the tradition that starts in the Middle Ages, the scholastic tradition of economic analysis which starts in the Middle Ages with the School of Paris Aquinas then extends to Nicholas's Arrestment in the 14th century was continued with the Neoscholastics, the School of Salamanca in the 16th and the 17th century but it was well embedded in this tradition and complimented it by adding a systematic analysis of the factors making for economic growth. The contributions Adam Smith are particularly timely in our own situation. Adam Smith was ultimately confronting the same questions that we are again asking ourself today and therefore we might say that the road from Salamanca to Vienna and to Auburn is a roundabout road that leads through Glasgow. Thank you. Thank you.