 Welcome to Free Thoughts from Libertarianism.org and the Cato Institute. I'm Aaron Powell. And I'm Trevor Burrus. And joining us today is Paul Mueller. He's an assistant professor of economics at the King's College in Manhattan. He's also a columnist for Libertarianism.org. Today, we're going to be talking about Adam Smith. So maybe let's start with just some bio. Who was he with his background? Sure. Adam Smith was a Scotsman. He lived in Scotland in the 1700s. He was born in a small town called Kerkaldi in 1723, and he died in Edinburgh in 1790. During the course of his life, he did a number of things. He went to the University of Glasgow initially for sort of undergraduate, and then he went on to study at Oxford for a few years. After that, he returned to Scotland, gave a series of public lectures in Edinburgh, which were quite popular. And then he was offered a chair of logic at the University of Glasgow. And then within a year or two, he received the chair of moral philosophy at Glasgow, where he spent a decade or more, a little more than a decade teaching and writing at the University of Glasgow. He writes The Theory of Moral Sentiments, written and published in 1759. And then he leaves Glasgow University to be a private tutor for young nobleman, the Duke of Bucklow, and travels all over France, meets a number of French economists while he's over there, and continues working on his largest book, what he's most well known for, which is An Inquiry into the Nature and Causes of the Wealth of Nations. And then returns to Scotland, he continues to write and to be involved in various intellectual circles and returns back to Scotland and finishes out his time there. What, do we have any sense of what kind of personality he had or what kind of person he was? Sure, he was a bit eclectic. He's described in some of his correspondence and by some of his students as being a little bit odd. He would take long walks and forget what time it was or how far he'd been going. He recounts a time when he was out walking, thinking about something, and realized all of a sudden he was four or five miles away from where he had started and had to walk all the way back. He was also very passionate, there were a lot of accounts of him having discussions with students of really being interested in the ideas that he was thinking about and trying to help them understand. So he's a bit eclectic, but also a really faithful friend to the people that he knew best. Now you mentioned that one of the things that got him some amount of popularity were a series of public lectures, which I encounter in different books when they're talking about Enlightenment Era. And I'm trying to figure out if that means that it was the kind of situation where you would put up a flyer saying that someone was going to be lecturing about philosophy and a lot of people would come, or are we talking about university engagement type of situations? More of the former. In Scotland over this time, and we might touch on this later, this is kind of during what's called the Scottish Enlightenment, and it's really a fascinating time of intellectual history and commercial history. There's a lot of growth and change going on, and one of the most fascinating things about this period was sort of the circle or the network of intellectuals and scholars who were in Scotland at this time. Of course, there's David Hume, who most people know, and Adam Ferguson, but there were many others. There were inventors, there were writers, poets, artists, and Scotland itself was very small. So all of these thinkers and scholars knew each other, and there was a very tight network, a lot of different kinds of clubs, associations, public outlets for conversation. A lot of the businessmen were involved as well, the various kinds of commercial merchants and people who were involved in industry would also come and would engage in kind of coffee house style conversation. The public lectures in particular were sponsored by a friend of Smith's, the Lord Cames is his name. He's a little bit older, an eminent lawyer, and they're sponsored, which means he sort of advertised them. He paid Smith to give them, and it was in Edinburgh, which was sort of the intellectual center in Scotland. Aaron Powell So this friendship of his with Hume, which was, I mean, is it fair to say that they were really good friends? David Hume Absolutely. Aaron Powell Absolutely. Aaron Powell So how did that influence work? Because Hume was a bit older than Smith, right? David Hume Yes. Aaron Powell So did Hume influence Smith's thoughts on the issues that he then went on to write about? David Hume Yes. I think he did. In terms of specific influence, it's a little bit hard to tease out. I'm not, I haven't looked at that in particular. I think Smith thought very fondly of Hume and of his ideas, and at the same time there was a lot of friendly banter back and forth between them and letters. You can see that they're mostly on the same page and how they're approaching the world. But Smith also, in theory of moral sentiments, he calls us out a few times. He's also going to take a slightly different perspective on a number of issues than Hume does. So for example, Hume talks about morals sort of coming out of their usefulness, that it's actually useful for people to treat one another well and properly and to do that. And Smith says, that may be true, that we get sort of social benefits from being respectful, honoring contracts, keeping our word and so forth. But that's not actually what motivates people to do those things. And so he, in the passage in theory of moral sentiments, he's clearly referring to Hume but also trying to take a slightly different approach on that topic. Now you mentioned one of these people in terms of the other influences of Adam Smith's thought around the Scottish Enlightenment. You mentioned Adam Ferguson, for example, and another one is Francis Hutchison. What were those two, the thinking, the kind of thinking that they did and how did that lead into Adam Smith's thought? Sure. So Francis Hutchison was a Smith professor at the University of Glasgow. He was a professor of moral philosophy and was really the leading moral philosopher in Scotland at the time and had a huge impact on Smith. Smith writes in one of his letters about the never to be forgotten Hutchison. He was very fond of him. And Hutchison's work is a lot about moral theory, about where morals come from. And Hutchison in particular talked about something he called the moral sense, sort of like the sense of sight or the sense of smell. He says, people just have this sense of what's right and wrong, there's this moral sense that God put into people. And that's why we have a conscious, that's why we behave the way that we do and have this sort of sense of morality. And Smith actually rejects that particular idea very explicitly in the theory of moral sentiments. But it's clear that Hutchison as a professor, as a mentor, as a person was very much admired by Smith. And I think Smith wanted to imitate him in some ways. He ended up taking Hutchison's chair years down the road. There were one or two people in between, but he ended up taking a similar position at University of Glasgow. In terms of Adam Ferguson, the relationship's a little more complicated. They're more contemporaries and there's not a lot of letters between them. And so I don't know exactly the relationship back and forth. I think they certainly knew each other and interacted some, but there's not a lot in terms of personal correspondence to go off of. This is maybe a broader question, which we can get into in a variety of ways. But in terms of the Scottish Enlightenment in general and Hutchison and Ferguson and Hume and others, is there anything that we can sort of say that unifies the kind of thinking that they were doing in the sense of was it more bottom-up thinking than top-down thinking? Could we compare it to rationalists, for example, in France or Descartes and say it's different in some basic way that the Scottish were on to something thinking about things in a different way? Yes, very much so. I think this is an area that warrants a lot more study and work to talk about. But the Scottish Enlightenment was happening basically simultaneously with the French Enlightenment. And there was a lot of interaction back and forth. David Hume went over to France for a number of years, really hit it off with the philosophers over there. They thought really well of each other. And yet the Scottish Enlightenment in terms of its main ideas and contribution was really very different in many ways in the French Enlightenment. The French Enlightenment, one such difference is that the French Enlightenment, they were very antagonistic towards the church. They saw the church as holding down science, as holding down advances in knowledge, as being realms of superstition. And so the French philosophers like Voltaire and Diderot and so forth were pretty adamant that the church should really go in the modern world. And the Scots, the Scots were a little bit less so. They weren't necessarily huge fans of the church per se, but they thought that it was useful and that it was good and that you could work within, work with the existing church institutions. And so they had less of a revolutionary bent, you might say. The French Enlightenment was sort of, we have reason and Rachel, we're gonna start over and there are a lot of ideas and ideals that led to the French Revolution. The Scots were much more, well, wait a second, let's not overturn everything. Let's think about how to change things more slowly. But to get back to your earlier question about what specifically characterizes the Scottish Enlightenment, here are a few things. First, and anyone who knows Hume knows this quite well, there was this kind of skepticism of rationalism. There was this skepticism of just how much reason can tell us by itself. And both Hume and Smith are kind of skeptical of how far rationalism by itself can take us. And in place of rationalism, or maybe not in place of it, but in addition, they thought that it was important to understand sentiment and sense, that the emotions and the feelings that people have are important in understanding how they interact with each other, how society, how social norms work. The Scots in general also, even as they're less rationalistic, they're more empirical. They're more looking, going out and looking at what's going on. Smith, for example, in the theory of moral sentiments, one of the things the book is praised for is that he gives lots and lots of examples of what he's talking about. He says, you can imagine this situation, or we've all experienced this, or you see this here, the wealth of nations. He also gives lots of statistical data, lots of observation. It's not pure theory. It's not pure logic going on. It's sort of a mix of logic and sentiment and observation. What do people do in society in terms of their commercial relations, their moral relations, their intellectual pursuits? They were studying all these different facets of human culture. And that's part of what was so interesting about this period. You had philosophers, obviously, but also artists and inventors and engineers and all these different people in different branches of knowledge interacting very closely and interested in this whole project of understanding human beings better. Well, let's turn then to the theory of moral sentiments, which of Smith's two big books, it's the one that our audience is probably less familiar with. What is Smith doing in that book? Well, he's doing a number of things. I think he's doing two primary things. One is he's doing a little bit of psychology. He is going out and looking around and trying to understand where do people's morals come from? Why do people have moral beliefs or ethical beliefs in the first place? So in that regard, he's just kind of studying, observing society and saying, this is the way it seems that people behave. At the same time, at a deeper level, and towards the end of the book, he's very clearly throughout also comments on is it good or bad that people form moral sentiments this way? He's generally very optimistic that through a process of interaction and exchange that generally good moral norms develop over time. And you have all of these private social norms that check people's behavior, promote social cooperation, and so on. But there were a few dangers. He thought people admired the rich and the famous too much. He thought they might value riches too much in a way that they think it'll make them happy. But it ends up they find out that it's not that sometimes our passions are so great that they overrule our reason and the views of an impartial spectator, which we might get into a little bit later. And so people don't behave morally for those reasons. But on the whole, it's observation. This is how people behave and inform moral judgments and then also commentary on whether it's good, how it's good, how it's bad, how it can be better, and how in particular individual people can pursue virtue and thereby pursue happiness in a better way. So what is this process of forming moral judgments or making moral decisions look like compared to so when we talk about moral philosophy and free thoughts, we talk about how at least in the current era, it tends to break down into two major schools. You're consequentialists who, to make a moral decision is to weigh the various outcomes and pick the one that leads to the best circumstances at the end of the day. And then the deontologists who say, if I'm trying to do morality, it means having a set of rules and just applying following those rules. Does Smith fit into one of those or what is the process of making a moral decision look like in this sentiment's approach? Good question. I think he doesn't quite fit into either, in my opinion. And so the way that he thinks about morals and moral development is very social in many ways, which might kind of give you a moral relativism perspective. And at the same time, he also has maybe more of those deontological perspectives. He thinks that there are principles or virtues that are important and persist over time. And yet the way you carry out those virtues can vary a lot. What it means to be respectful, what it means to be generous, what it means to be brave versus foolhardy actually can vary a lot by circumstance and by culture over time. So it's a little bit of a mix of those things. But here's the process, a very abbreviated process of how it works. He says, first of all, his main point is that human beings naturally have sympathy for one another. And by sympathy, he really means empathy. That is to say, we can relate to and imagine how other people feel and respond and put ourselves in their shoes, so to speak. We can imagine how they feel if they've been wronged. We can imagine their thankfulness if someone has given them something out of generosity. We can put ourselves in their shoes. And similarly, they can put ourselves in our shoes. And what Smith says is that what really moderates and guides people, keep people's behaviors, is that we are concerned about how impartial spectators would view us and judge our behavior. Someone who is not partial to us, looking on to whatever situation or circumstance we're in, would they look at our response and say, yes, you have an appropriate amount of thankfulness, or maybe you have too much thankfulness. Maybe you're fawning, or you have an appropriate amount of anger, or maybe you're overreacting, you're way too angry. And so we moderate, we, the actor, moderate our passions and our responses to things that happen to us and our motives based upon either what literal people around us, impartial spectators around us, would say or think about our behavior. And then a step removed, which we can get into in a little more detail, is we can also create in our mind an imaginary impartial spectator. After we've experienced years and years of impartial people around us commenting on our behavior, our responses, our motives, we begin to form in our mind, even when there are people around, we have this sort of imaginary impartial spectator that still can check our actions, where we think, OK, how would other people view this, even if there aren't other people there? So this sounds, as you're describing it, it sounds very Aristotelian in a lot of ways. Is there any sense that Smith was influenced by that, or was part of that tradition? Yes, that's an excellent question. I think it's certainly fair to say he was influenced by it. The last book of the theory of moral sentiments goes through and looks at a number of philosophers or philosophies over time. And he kind of compares and contrasts his theories with those of Aristotle, Plato, the Stoics, the moral sense theorists, utilitarians. He talks about Mandeville. He looks, he goes through a broad group of theories and compares and contrasts himself with them. So Aristotle, he certainly draws on. He also draws on the Stoics a lot. So the short answer to your question is that, yes, I think there are certainly Aristotelian elements to this. Well, it seems like the other interesting thing, in addition to the Aristotle element, which was very about, again, like man, how a man can live a good life and the way you describe theory of moral sentiments and then the way you had described the themes of the Scottish Enlightenment that it was more empirical, it was more about looking at how people actually behave. So it seems like he's doing somewhat almost anthropology here. So partially he's saying here's how people actually behave and any good moral system would have to work with how people actually behave. And less giving moral truths from on high, whether it's a moral book that says the way to do morality is to ask what God wants or what some sort of command is needs. This is far more anthropological than from the bottom up, which seems to fit into the rest of the Scottish Enlightenment and also his future work. Yes, yeah, I think that's right. I think that's right. I think that Smith, in a way, if you want to compare him to Aristotle, I think you could say he has a much weaker sense of telos or ends. Not that there's no ends, that there's no telos, which many sort of social theorists might go if you go way down that path of complete kind of moral relativism, social and moral relativism. He does have a sense of human beings having some kind of nature and of there being certain principles that are going to endure over time and across cultures. But he gives a ton of room for that to vary by cultural context, by person, by time period, by circumstance. I think much more so probably than Aristotle would. Well, that's kind of interesting, though, because a lot of moral theories would not give any room to vary with cultural context whatsoever. And I just think it's interesting because there seems to be a connection between this and looking at economics as sort of an anthropological endeavor of how people actually behave and not trying to impose something onto people that they're not going to do or don't have a predilection to do in the first place. Yes, absolutely. And actually, I don't know if you're familiar with Jim Ottison's work. He's... Yeah, Jim's been a guest on that. Yeah, for thoughts. He makes that comparison very strongly where he says just as an economics, you have exchange of physical goods and services. In morals, you have exchange of approval, disapproval, approbation and so forth. And so there certainly is, there are some strong similarities. So the way that you've described theory of moral sentiments, it sounds like a book that says, here's how human morality works, but does it have a... So it's a descriptive account, but does it have a normative account of morality where he says, look, here's how you ought to act, here's how morality ought to work? Yeah, so people dispute this. I think there is some of that in there. And I think it's in there for a couple of reasons. First, Smith talks about happiness a little bit. He says, why are people happier? How do people become happy? And he doesn't take a normal economist's point of view that says, well, people are happy when they can increase their utility through consumption of some form or another. That the more opportunities or the more wealth they have, the more consumption they have, the happier they will be. Smith says, look, consumption's really important and we should have it, but there's also like virtue is really important and you can have lots of consumption. If you lack virtue, you won't really enjoy it. So he does comment on saying that some ways of pursuing wealth and some ways of living are not gonna be fulfilling, they're not gonna make you happy, they're not gonna be approved of, they're not gonna be good in maybe an Aristotelian sense, good lives. And he doesn't moralize in terms of he says, you the reader should do this, you the reader should do that, here are the three things you need to work on. But he's just very clear, like he says, people with a great deal of self-control and magnanimity, that's something that's admirable. Like he's very clear, that's admirable versus the other things are less admirable. What is the goal that we have? It's to, we have this impartial spectator in our minds. He says, our goal should actually be to take on the views of the impartial spectator in every way that we can of our own behavior so that we moderate our behavior to be perfectly proper and virtuous in the eyes of an impartial spectator. And so he speaks of that in very normative ways. I'm not just saying this is what people do, but like this is a good thing to do. And it's what we strive to do in general. So he writes this book in 1759 when three of Moral Son of Men's, correct? Correct. So he writes this book about moral philosophy. And then I think that a lot of people would say that what he did next seemingly would be decided to change subjects and study sort of proto-economics and look into economic money and economies and spent and sort of completely changed his focus academically to focus on exchange and proto-economics. And then 27 years later, or sorry, 17 years later writes the wealth of nations, which is just a totally different subject matter than the theory of moral sentiments. Because we say, oh, this is an economics book and this is a theory of moral philosophy. And people today would say, those are not at all the same thing. Is that an accurate, did he totally change his subject matter in those intervening years? Sounded like a leading question. You think so? No, so I don't think that really describes what was going on at all because, first of all, economics is not a discipline back then. He's just moral philosophy. And remember that the Scots are really concerned with the science of men and understanding people in all the different aspects and ways that they relate to each other. And what you do highlight is there has been a lot written about this in the 1800s. There was what's called the Doss Adam Smith problem where the German philosophers in particular came in and said, look, you've got the wealth of nations, which is all about self-interested exchange. And then you've got the theory of moral sentiments, which is all about virtue and benevolence and self-control and caring for other people. And they say these two books are very different and can't be reconciled. A lot's been written reconciling those. I think the consensus today is that there's not a deep problem, but here's why. One way to reconcile them is to say, first, that Smith is addressing people in different contexts. In the theory of moral sentiments, he's talking about personal relational interaction. How do you respond to individual people, family, friends on a day-to-day basis and all the different kinds of interactions you have over the course of the day versus the wealth of nations is talking about how do you interact with strangers? And in particular, how do you interact with strangers regarding commerce and trade and production and so forth. And I think you could apply the ideas of theory of moral sentiments to the types of transactions that go on in the wealth of nations and find a great deal of consistency between the two in terms of treating other people properly of understanding that they're seeking their self-interest and I'm seeking my self-interest but we're engaging in a mutually beneficial exchange. And that's quite all right. Like, we're both aware of that. We're both benefiting and that's a totally proper thing to do. An impartial spectator would look at that and say that is totally appropriate and like a good thing to be doing. And that situation versus if you know your five-year-old gets up and you're trying to trade his cereal with him for him to do something for you, an impartial spectator might look at that and say, you know, something seems off about that. That sort of social relationship, the way you're trying to make that exchange doesn't seem quite right. First in the marketplace, the impartial spectator would say, you know, that's totally appropriate and good. Also, sorry, one other thing I wanna say about this as well is that yes, there's a 16 or 17-year gap or 18-year gap, I guess, between when Theodermal Sentiments was published and The Wealth of Nations, but we have some records from student notes that he was talking about many of the themes in The Wealth of Nations while he was teaching at Glasgow. So the idea is it wasn't, okay, I've written, I'm just thinking about moral philosophy. I've written my book, I'm gonna turn to this other thing. We have evidence that he was already thinking through and talking about a lot of these ideas even before he went to France. Some people say he took a lot of his ideas from the French economists, but we have evidence that even before he left, he had been writing, talking about these issues. And then The Wealth of Nations is a big book. He took his time to get the details and to really put it all together. Well, The Wealth of Nations is big, not just in the page count sense, although it's, yeah, it's very big in that regard, but it's also, it's big in the sense that it's widely regarded as the foundational text of modern economics. So maybe before we get into the content of The Wealth of Nations specifically and Smith's contributions to economics, what did economics look like before Smith? That's a good question. I think the answer is it was a kind of a hodgepodge. So people dispute this in a number of ways, but, you know, when I teach students about sort of the history of economic thought, there's not a real strong theme of this economic ideas being developed in a consistent manner. It's more episodic, that is to say, you have a philosopher here who talks about prices and you have a philosopher here who talks about wealth and whether it's good or bad. You have this philosopher that talks about, you know, whether this exchange is justified or not. And so, what you find, I think, is that leading up to Smith, more and more people are talking about economic issues from Mandeville and Locke. You have the School of Salamanca, which is you're talking about, in a relatively sophisticated way, talking about various kinds of supply and demand issues, subjective value issues, but it's relatively disconnected. It's a philosopher. It's mostly philosophers or theologians or people who are doing other things who then will kind of comment on economic issues as opposed to people really tackling it as a subject area or as a comprehensive field, if you will, that explains and applies to a ton of different phenomena in society. Now, was the word economics even being used in that fashion at the time? I mean, I actually don't know the answer. I've only read large sections from Wealth of Nations, so it's been a while. Is the word economics in the Wealth of Nations? Or like prominently or often, at least? That is actually, that's a really good question. I think that economics or economy by itself is not so much, what most people talked about was political economy. And political economy, remember, is really, is this Aristotelian idea where Aristotle talks about ordering a household. And so when Aristotle talks about economic ideas, it's like within a household production, how do households produce things. Then political economy is the idea of, well, let's apply the household to the country. How does the country organize things, laws, rules, and so forth? So political economy was a term that was used by many people in Smith's Day and people had written about it. But in more of a household management, mercantilist public policy perspective, not applying what we think of as like microeconomics, studying individual behavior in a really detailed, thorough way. So getting into the book itself, let's start with the title, which as you mentioned earlier on, is not the Wealth of Nations. It's a little bit longer title than that. That's right. Yeah, so it's actually an inquiry into the nature and causes of the Wealth of Nations. And what does that tell us? Yeah, which is interesting. I mean, it tells us, so inquiry is just, talking about what it's studying, but it's two parts. It's the nature and the causes of wealth in countries in particular. And he certainly talks about the nature of wealth throughout the Wealth of Nations, but it's a little bit, definitely the minor chord. What he's really talking about is how wealth is generated over time. But he does spend time saying, look, wealth is not simply how much gold and silver you have. It's not even about how much money you have. Wealth, what we really care about is what material stuff do people have that they can enjoy? And he talks about the common laborer, being able to have coats or having access to food or shoes or beer. He talks about beer. He's like, it's sort of the things that we can consume and enjoy and have. Like the more of these sorts of material things that we can have, the more wealth we have as individuals or as a nation. And he's responding very strongly to, mentioned earlier, this mercantilist idea, which is that, well, for countries to be powerful, they need to collect a lot of gold and silver to pay their militaries. And Smith points out, and Hume has talked about this as well earlier, but that accumulating gold and silver is not going to feed people or clothe them any better. And in fact, it's going to lead to inflation if it's in circulation and it's not going to really make a country that much stronger. Because what do you need for armies? Soldiers aren't gonna eat gold and silver. They're not gonna wear gold and silver or put it in their guns, right? You actually need stuff that you can produce. And so it's the productive capacities of a country, whether in warfare or in peacetime, that are really of concern. And that's what Smith spends his time analyzing and talking about in the wealth of nations. Early on in the book, he gives this rather famous example of the pin factory to illustrate how specialization works. Can you tell us about the pin factory and what point he's making there? Yes, it's actually, it's beautiful in its simplicity. And I think Smith was really onto something in terms of we're still asking the question today, how is it that countries can become wealthy? Why are some countries wealthy and others are not? Asimoglu and Robinson, two prominent economists, wrote a book recently, Why Nations Fail? And they're asking the same question that Smith was asking 250 years ago. And Smith's description of what generates wealth, why countries become wealthy is relatively simple in terms of when people are free to exchange and there's a large market, there's this natural incentive to divide labor and specialize. And when you do that, you become far more productive. So, and this is what the pin factory is about. He says, imagine someone working in a pin factory, you're trying to create pins and there might be 15, 20 different operations to the pin, you have to pull out the wire, you have to cut it, you have to sharpen it, you have to put the head on it, you have to package it. There are all these different parts to doing it. He says a single person who is doing all of that by himself would have to move from task to task might have to move around the factory floor. He would be slow, he wouldn't be great at any of the tasks and maybe at the end of the day, he produces 20 pins. You can add more people, but if they all work independently, you're just adding 20 pins per person. Maybe you have 10 people all working independently. At the end of the day, they produce 200 pins. Not terribly impressive. But he says in the pin factory, if you divide the labor and you specialize, so you have one person who is just pulling the wire, one person who's just cutting it, one person who's just sharpening, he says what you discover or what you get is a huge, huge burst in productivity. You might go from 10 people producing 200 pins a day to 10 people producing 20,000 pins a day. Just because you save in terms of efficiency and wasted time moving around, as people specialize, they get much better at what they do. They get faster, they find ways to innovate doing whatever simple task or tasks that they have, doing it better and more efficiently. And you specialize within a pin factory, but you can also specialize across an entire economy, and you get all these gains in real productivity through this process of specialization. So this was really, again, it's difficult for us to often remember what it was like to think before certain revolutionary thinkers created new concepts or discovered them, but this had really never been hit upon before Smith, or at least in not any popular way. It seems so obvious. If anyone's ever done a thinkless job like stuffing envelopes or something like that, you first hour, you're slow, a second hour, you're a little bit faster, a third hour, you figure out a sort of a different way of doing it that shaves off a little bit of time. It seems so obvious. Or you make the interns split up. Some of the interns like the envelopes, and some put the stuff in. But I mean, it seems crazy that at least no one had ever popularized that. Was it just him saying that this was actually the source of the wealth of nations that was the kind of new observation he was making? Yeah, that's a great question. I think what Smith really brings to the table, as I said before, is he really brings a big picture perspective. So that example of the pin factory, actually, I don't think is original to Smith. I can't remember where he got it from, but I think it may have been like in an almanac where someone had kind of just talked about, hey, this pin factory produces more because people divide tasks. But the person who put that example together didn't really explain how that applies not just to a pin factory, but to every kind of factory, and not only within factories, but across factories. And another example that Smith gives in the first part of the wealth of nations is he talks about a woolen coat and how to put a coat together, you actually have dozens or hundreds of people in many different countries contributing to that process. And that is the division of labor extending beyond a single factory across countries, across many individuals in many different occupations. And that is generating unbelievable amounts of wealth and production at lower and lower costs. And no one had really talked about it that much in sort of that grand scale. They saw individual examples, of course, people experienced every day. You know, if I spent a lot of time doing something to get better at it, if we share our labor, we tend to get a little more done. But Smith, I think, really brought that big picture vision and said, you know what? This is happening not just here and there, but it's happening throughout the entire country, throughout the entire economy, and even across economies. And we can see, particularly on the cusp of the Industrial Revolution, you saw technology coming into play in a new way and all of this is really coming together and he kind of gives us the really big picture of like, this isn't just a one-off thing here or there, but this is actually happening throughout society and is really making a difference in how much stuff we can produce and have. This idea is fairly straightforward. The pin factory makes the point quite clearly and the argument that this wealth comes from specialization and trade and not propping up industries or hoarding gold. So I guess the question is, if that's what he's getting at and it's relatively straightforward, then what is he talking about for the thousand-plus pages of the book? Right, that's a good question. I think he is doing empirics. I also think it's important to remember that Brevity was not a huge goal of 18th century writers. This is true, they were not rewarded for that. But what he does is, one, he looks at a lot of different cases and issues, and he really just does a lot of empirical stuff. He looks at different industries, he looks a lot at laws, he looks at how laws affect this exchange. So you've got division of labor because people exchange, you get specialization, but very importantly, the division of labor is limited by the extent or the size of the market. You might be able to produce 20,000 pins a day, but if people are only willing to buy 1,000, then that's not terribly useful. Yes, you have a lot of pins, but people aren't paying you for them, you just have all these pins sitting around. And so if the demand is only for 1,000 pins a day, then it doesn't pay, it doesn't make sense to specialize that much. You're gonna reduce your specialization, you're gonna have fewer people working on it. And so you actually need large markets in order for specialization to make sense. And that's one reason why he was very, a big advocate of free trade is you're extending markets outside of a country. And certainly he advocated free trade within a country. So he talks about that, but he talks about a number of things. He talks a lot about supply and demand, about the skills that are brought to the table, how people develop skills. He talks about a lot of public policy, education, taxation, public works in the last book. He attacks the mercantilists for a whole book about why a lot of their theories are really destructive and don't make sense. Can I just interrupt you for a second there? Sure. Can you give a summary of what the mercantilist vision was because I think it used a lot, but like what exactly was that? You kind of mentioned a little bit about sort of countries and armies, but was it pretty much that? I mean, that was sort of, that was the predominant view when he wrote this, correct, was that correct, would you say? It was a very popular view, certainly. I don't know how predominant exactly, but it was very popular, particularly among people who were trying to get the attention of politicians because the mercantilists wanted certain policies to be put in place. And so they were constantly lobbying Parliament to put these laws into place. And the mercantilists varied in terms of how scholarly they were, a lot of merchants signed on to mercantilist policies because it helps them. So the mercantilist idea, it's basically early forms of protectionism where they argue a number of different things, but the main idea is that when we import goods from other countries, we are exporting gold and silver. We are not producing those goods ourselves that come in so we don't have as many jobs. And that is gonna hurt our country relative to others. So if England is importing wine from France and cloth from France and other sorts of things, that is making France stronger and it's making England weaker. Versus when we export goods from England to France, we're making England stronger and France weaker. So they see the money flows represent some kind of strength or influence. And when you import stuff, you're not producing it yourself and that's gonna reduce employment. I mean, I'm sure you can already hear a lot of echoes of this in modern political rhetoric. There's a certain guy with tiny fingers that you're kind of sounding like that now. The 300 year old myth that he's still perpetuating. That's right. I make a lot of hay with my students about how this is really amazing. There's always a role for economics and economic thinking because people never really get past it. But the mercantilists were arguing this and so what they proposed is they said, look, if imports are bad and exports are good, we should do two things. One, we should make it difficult to import. We should tax all the imports so that we import less and we take some of the money that would go to France and we put it in our treasuries. And we're also going to try to encourage exports where we might even provide subsidies or bounties is the word I think that Smith uses to some of our exporters to encourage our companies to produce more and then export it to France or Germany or other countries. And Smith, of course, highlights that this doesn't make any sense for all kinds of reasons. Justice reasons, efficiency reasons, that it's not really making countries stronger to have more gold and silver. He really takes them to task on this issue. So people think as Adam Smith today though, the thing that we haven't mentioned this yet and so it's a conspicuous absence is this idea of the invisible hand. In fact, probably most people think the invisible hand is what the wealth of nations is about. So is that accurate and what is the invisible hand? Sure, the invisible hand is an analogy in a sense. It's describing how we can think about market process. When we think about millions of people going about their days, making decisions about what to buy, what to sell, what to produce, the question we have is how do they decide that and what effects do those decisions have on the well-being of other people? We might think in sort of a utilitarian sense, well, what we want people to do, we want people to produce stuff that benefits others and we want them to work in areas that are in high demand. We want them to serve other people. I wanna make sure they get served as well. We can think about, we can describe a really prosperous society that there's a lot of human flourishing. But how do we get people to do that? How do we know what each individual person should do and how much of what they should do and when and who gets what? And it's actually become a very, very difficult question. And what Smith says is you know what? With markets and prices, people are led by an invisible hand. It would be as if we were telling them what to do or God were telling them what to do, but he's not literally telling them what to do. The hand is invisible, but it's as if they are being led by an invisible hand to do things that benefit themselves and other people naturally, automatically without any sort of human direction, particularly from governments, but even at more local levels without a lot of human direction, people by pursuing their own interests and following price signals and engaging and making themselves and their families better off are actually gonna do things that are beneficial for others. And now people use the invisible hand as it almost stand in for markets, but often people who use that are somewhat derisive about markets or about Adam Smith, I had a woman ask me a question about on a panel one time and she was like, now this guy over here doing his Adam Smith, me, me, me, greed first economy stuff, like I don't even wanna, she's actually mean to me. And I said to her, I was like, I think you really should read Adam Smith before you bring his name up again, but a lot of people think that that's what Adam Smith is. It's a greed is good, I ran kind of thing and the markets always work. Is that a accurate characterization of Adam Smith? No, no, it's not. I think self-interest is really important, no doubt, but the self-interest he talks about is sometimes people call it enlightened self-interest. I'm kind of ambivalent on that term myself, but I think he refers to self-interest as a natural and a good thing in market context, but maybe not in other contexts. And the self-interest is always constrained by morality and virtues, okay? If you're self-interest, if you're material, if you're trying to pursue your material self-interest by cheating your customer or creating shoddy products or cutting corners, Smith would say, you know, that would be an impartial spectator who saw you doing that and knew what you were doing would disapprove of that. They would say what you were doing was wrong and it would be wrong to do that. And so that self-interest that has run amok. And the great thing about markets though is that usually that gets corrected. You know, if you sell bad work, people discover it over time and you lose customers. And Smith was very aware that markets actually discipline self-interest that is at the expense of other people for the most part. That being said, it takes time and markets don't work perfectly. Smith makes some exceptions. He doesn't say that government should do nothing other than promote justice. He says, well, there are some areas where maybe people have trouble coordinating towards providing some public good or maybe there are externalities. He doesn't use the word externalities, but maybe there are costs that people might impose on others unintentionally that we should be concerned about. He has a few exceptions, but his general thrust is very much that people should be free to pursue their self-interest which includes the interests of their family and their friends and includes benevolent motives as well. And that by operating within markets in a rule of law framework, their self-interest is gonna be a really good guide towards making the world a better place. We've had 240 years since the publication of The Wealth of Nations. Yeah, 1776. It's been incredibly influential book, but in that time economics has developed. And so what does Smith, if anything, get wrong? Or important things he gets wrong. He may have described weird things but at least important concepts. Yeah, that's a great question. I think one of the biggest areas that he's criticized for is he doesn't have a very good theory of why things have value. So some people accuse him of having a labor theory of value which is partially true often when he talks about how valuable things are in terms of prices in the market. He describes it in terms of hours of labor that it took to produce that thing. There are different ways to interpret this. You might say, well, he's just thinking in an equilibrium framework where people move to what's most valuable and they have a certain amount of labor. But he can't get off the hook entirely here. Smith and his followers, Ricardo in particular, Mill to some extent, Malthus and others kind of pick up on this idea that, well, the value of things depends at least in part on how much effort people apply to it, how much work they applied to it, how much goes into it. Rather than today, economists would say, no, no, no, it's all subjective. Like the value of goods and services is purely on the side of the consumer and how much work goes into that, that's the supplier's problem. It's not gonna make it more or less valuable in the consumer's eye unless there's something that they do that makes it more valuable for the consumer. And Smith did not have a very clear conception of that at all. And it shows, like if you read later political economists or economists before the marginal revolution, they really have trouble with thinking about what value means and how value comes about and how to value different goods and what prices are actually telling us. Well, I wanna actually use the word marginal revolution and I think it's probably worth since we're kind of going in the thrust of this to fill that little gap in, what is that revolution? Sure, so this is another issue. Something that Smith didn't really see or talk about which is that when we try to analyze people's behavior, the choices that they make, we really wanna ask not how much do they value something in general but how much they value something specifically. So for example, if we're trying to understand how many pieces of pizza someone chooses to buy for lunch, we don't wanna just ask how much do they like pizza but you wanna think, why would they buy two slices of pizza instead of six or one slice instead of five or how do they decide when to stop buying pizza? All right, if they decide they wanna buy some, why don't they just keep buying it over and over and over again because it's not like they value pizza as a category less than they did before. And so marginal thinking is saying, well, you know what, how much they value an individual slice of pizza at that point in time actually depends on how many pieces of pizza they've had. That first slice of pizza is gonna be more valuable than the second or the third or certainly than the fifth. And so that's really important for understanding utility, understanding people's willingness to pay for goods and also it applies on the supply side as well. Anyway, Smith didn't really have much of a conception of that, Ricardo, John Stuart Mill, none of them really talked about marginalism at all. And so the marginal revolution is what we refer to as this brief period of time in the early 1870s where three different prominent economists, Leon Wall-Raw in France, Carl Manger in Austria and William Stanley Jevons in England, all within a couple of years published major works talking about the importance of looking at utility on the margin and also talking about how utility, in terms of utility of the consumer is subjective and that is where value comes from as opposed to how much work or resources or labor goes into producing something. For non-scholar listeners, non-economists, so The Wealth of Nations is a very big book. The theory of moral sentiments is not as big but it's still a rather large book. And they're not written, they're written well but not in the stampious modern prose. Yeah, but so if you, The Wealth of Nations is the big economic treatise, but if you've gone out and picked up economic treatises today, they're often rather opaque and not written for the non-specialists. So is there value, say for our listeners in reading The Wealth of Nations today? Yes, I think so. Even for non-economists, I think so. But I wouldn't suggest that they read the whole thing. What I would suggest is read the first three or four or five chapters of the first book of The Wealth of Nations. That's where he really unpacks the division of labor, the extent of the market. He talks about money and where money comes from and sort of an emergent institution sort of framework. And then I would also, for those who are interested, you could look at book five where he talks about a lot of policy issues. Some of it's dense and it is long but if you really are interested in like tax policy or education, all those sorts of things, you can kind of see what Smith says there. Again, for the non-specialists, but really those first couple chapters, you can find them online on Econ Library. Definitely worth reading the first several chapters. And then you kind of pick and choose as you see things that interest you. And for theory of moral sentiment, it's a hard book. It's worth going through. For those who are daunted by a 400-page book, Russ Roberts' book, How can Smith Can Change Your Life is a really good introduction. Which we did an episode with Russ which we'll put in the show notes so you can link to that. Yeah, so that, for those who have less time or want to just get a taste of it, that's a great introduction. And you get a lot of quotes from Smith. So you can kind of see how Smith writes and get some of the beauty of his language. But for those who are really interested in moral theory, the theory of moral sentiment is really a wonderful book, very interesting, provocative. And I think really helpful actually for particularly libertarians to think through when we believe in limited government and a lot of freedom and choice for individuals, what can we say about moral issues? What kinds of moral judgments can we make about other people's freely chosen lifestyles or consumption choices? Like can we say anything? Can we say nothing? And I think Smith gives us some nice tools and a framework for thinking about that in a socially and culturally sensitive way while still holding on to that little bit of telos or that idea that there are certain virtues and principles that are important and enduring. Thank you for listening. Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at www.libertarianism.org.