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The Ideas of Adam Smith

Paul D. Mueller joins us for a discussion on the life and ideas of the Scottish Enlightenment philosopher and pioneer of economic theory, Adam Smith.

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What kind of person was Adam Smith? How does Smith’s theory of morality compare to other philosophers’ theories? What did economics look like before Smith?

Paul Mueller discusses Adam Smith’s life and ideas, explains Smith’s “invisible hand” and “impartial spectator” analogies, and talks about the marginal revolution that occured in economics 100 years after Smith’s death.

Show Notes and Further Reading

Adam Smith’s Wealth of Nations and Theory of Moral Sentiments are great places to start reading Smith in his own words.

Listeners may also want to check out our Free Thoughts episode with Russ Roberts on his book, How Adam Smith Can Change Your Life.

Transcript

Aaron Ross Powell: Welcome to Free Thoughts from Libertarianism.org and the Cato Institute. I’m Aaron Powell.

Trevor Burrus: And I’m Trevor Burrus.

Aaron Ross Powell: And joining us today is Paul Mueller. He’s an Assistant Professor of Economics at The King’s College in Manhattan and 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? What’s his background?

Paul Mueller: Sure. Adam Smith was a Scotsman. He lived in Scotland in the 1700s. He was born in a small town called Kirkcaldy 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 a 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.

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 a young nobleman, the Duke of Buccleuch, and travels all over France, meets a number of French economists while he’s over there and continues working on his largest book, which 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.

Trevor Burrus: Do we have any sense of what kind of personality he had or what kind of person he was?

Paul Mueller: 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 has been going. He recounts the time when he was out walking and thinking about something and realize all of a sudden he was four, 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 having – 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 a bit eclectic but also a really faithful friend to the people that he knew best.

Trevor Burrus: 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 the Enlightenment Era. 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 like university engagement type of situations?

Paul Mueller: More of the former. Scotland over this time – we might touch on this later is – this is kind of during on what’s called the Scottish Enlightenment and it’s really a fascinating time of intellectual history and commercial history. There was a lot of growth and change going on. 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 other 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 coffeehouse style conversation.

The public lectures in particular were sponsored by a friend of Smith’s, the – Lord Kames 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 Ross Powell: So this friendship of his with Hume, which was – I mean is it fair to say that they were – I mean they were really good friends.

Paul Mueller: Absolutely.

Aaron Ross Powell: So how did that influence work? Because Hume was a bit older than Smith, right?

Paul Mueller: Yes.

Aaron Ross Powell: So did Hume influence Smith’s thoughts on the issues that he then went on to write about?

Paul Mueller: 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. At the same time, there was a lot of friendly banter back and forth between them in letters. You can see that they’re mostly on the same page in how they’re approaching the world. But Smith also – in The Theory of Moral Sentiments he calls this 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.

Smith says that may be true that we get some 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. So he – the passage in The Theory of Moral Sentiments, he’s clearly referring to Hume but also trying to take a slightly different approach on that topic.

Trevor Burrus: Now you mentioned one of these people in terms of the other influence of Adam Smith’s thought around the Scottish Enlightenment and you mentioned Adam Ferguson for example. Another one is Francis Hutcheson. What were those two – the thinking, the kind of thinking that they did and how did that lead into Adam Smith’s thought?

Paul Mueller: Sure. So Francis Hutcheson was Smith’s 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 Hutcheson. He was very fond of him and Hutcheson’s work is a lot about moral theory, about where morals come from and Hutcheson 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 conscience. 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 Hutcheson as a professor, as a mentor, as a person was very much admired by Smith. I think Smith wanted to imitate him in some ways. He ended up taking Hutcheson’s chair years down the road. There were one or two people in between. But he ended up taking this in one position at the University of Glasgow. In terms of Adam Ferguson, the relationship is a little more complicated. There are more contemporaries and there’s not a lot of letters between them.

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.

Trevor Burrus: This is maybe a broader question which we can get into in a variety of different ways. But in terms of the Scottish Enlightenment in general and Hutcheson 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?

Paul Mueller: Yes, very much so. I mean this is – 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 than 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.

The Scotts 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 was good. You could work with them, work with the existing church institutions. So they had less of a revolutionary event you might say. The French Enlightenment was sort of – we have reason and we’re going to start over and there are a lot of ideas and ideals that led to the French Revolution.

Scotts were much more – well, wait a second. Let’s not overturn everything. Let’s think about how to change things more slowly. But to go 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 the 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. 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 social norms work and the Scotts 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 are people doing to 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.

Aaron Ross Powell: Let’s turn then to The Theory of Moral Sentiments which of Smith’s two big books, it’s the one that our audience probably is less familiar with. What is Smith doing in that book?

Paul Mueller: 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, promotes social cooperation and so on. But there were few – 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 will 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 our – the views of an impartial spectator which we might get into a little bit later.

So people don’t behave morally for those reasons. But on the whole observation, this is how people behave and form 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.

Aaron Ross Powell: So what does this process of forming moral judgment to making moral decisions look like compared to – so when we talk about moral philosophy on Free Thoughts, there’s – you talk about how at least in the current era, it tends to break down into two major schools. Your 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 deontologist who say if I’m – you know, 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 how – what does the process of making a moral decision look like in the sentiments approach?

Paul Mueller: 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.

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 it 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 thing, his main point is that human beings naturally have sympathy for one another. 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 themselves in our shoes and what Smith says is that what really moderates and guides people’s behaviors is that we are concerned about how impartial spectators would view us and judge our behaviors.

Someone who’s not partial to us looking on to whatever situation or circumstance we’re in, would they look at that – 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.

So we moderate – 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. Then the step to move, 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.

Aaron Ross Powell: So this sounds – as you’re describing it, it strikes me. 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?

Trevor Burrus: 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. 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 goes through a broad – a group of theorists and compares and contrasts himself with them.

So Aristotle he certainly draws on. He also draws on the stoics a lot. So he – the short answer to your question is that yes, I think there are certainly Aristotelian elements to this.

Trevor Burrus: Well, it seems like the other interesting thing in addition to the Aristotle element which was very about – again, like man, how 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 they’re – 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 in any good moral system. It would have to work with how people actually behave and less giving moral truths from on high, whether it’s a moral book. It says the way to do morality is to ask what God wants or what some sort of – command his needs. This is far more anthropological and from the bottom up, which is – seems to fit into the rest of the Scottish Enlightenment and also his future work.

Paul Mueller: Yes. Yeah, I think that’s right. I think that 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 wherein – 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.

Trevor Burrus: Well, that’s kind of interesting though because a lot of moral theorists would not give any room to vary with cultural context whatsoever. 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 on to people that they’re not going to do or don’t have an election to do in the first place.

Paul Mueller: Yes, absolutely. I don’t know if you’re familiar with Jim Otteson’s work.

Trevor Burrus: Yeah. Jim has been a guest on Free Thoughts.

Paul Mueller: He makes that comparison very strongly where he says just as in economics, you have exchange of physical goods and services. In morals, you have exchange of approval, disapproval, approbation and so forth. So there certainly – there are some strong similarities.

Aaron Ross Powell: So the way that you’ve described The Theory of Moral Sentiments, it sounds like a book that says here’s how human morality works. But does it have a – 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?

Paul Mueller: 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. He says – why are people happier? How do people become happy? And he doesn’t take a normal economist 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, more consumption they have, the happier they will be.

Smith says, look, consumption is 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 going to be fulfilling. They’re not going to make you happy. They’re not going to be approved of. They’re not going to be good and maybe in Aristotelian sense good lives.

He’s not – 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, you know, people with great – a great deal of self-control and magnanimity, that’s something that’s admirable. 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.

So he speaks to 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.

Trevor Burrus: So he writes this book in 1759 when – Theory of Moral Sentiments, correct?

Paul Mueller: Correct.

Trevor Burrus: 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 looking to economic – the money and economies and spent – and sort of clearly 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 the 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?

Aaron Ross Powell: It sounded like a leading question.

Trevor Burrus: You think so?

Paul Mueller: So I don’t think that really describes what was going on at all because first of all, economics was not a discipline back then. It was just moral philosophy and remember that the Scotts are really concerned with the science of man and understanding people and all the different aspects and ways that they relate to each other.

What you do highlight is there has been a lot written about this. In the 1800s, there was what’s called the “Das 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.

They say these two books are very different can’t be reconciled. A lot has been written – reconciling though. I think the consensus today is that there’s not a deep problem. But here’s why. One way to reconcile and it’s to say first that Smith is addressing people in different context. 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.

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 are seeking their self-interest and I’m seeing my self-interest but we’re engaging in a mutually-beneficial exchange.

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 in that situation versus if 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 an exchange. It doesn’t seem quite right versus in the marketplace, the impartial spectator would say that’s totally appropriate and good.

Also one other thing I want to say about this as well is that yes, there’s a 16 or 17-year gap or 18-year gap I guess between – when Theory of Moral 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 – OK, I’m just thinking about moral philosophy. I’ve written my book. Now, I’m going to turn to this other thing. We have evidence that he was already thinking through and talking about a lot of these ideas even before I went to France. Some people say he took a lot of his ideas from the French economist but we have evidence that even before he left, he had been writing and talking about these issues and then the Wealth of the Nations is a big book. He took his time to get the details and to really put it all together.

Aaron Ross Powell: 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 contribution to economics, what did economics look like before Smith?

Paul Mueller: That’s a good question. I think the answer is it was a kind of a hodgepodge. So people dispute this a number of ways. But when I teach students about sort of the history of economic though, 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 whether this exchange is justified or not. 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 talking about – relatively sophisticated way talking about various kinds of supply and demand issues, effective value issues.

But it’s relatively disconnected. It’s a – 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.

Trevor Burrus: Now was the word “economics” even being used in that fashion at the time? I actually don’t know the answer. I’ve only read large sections from Wealth of Nations but it has been a while. Is the word “economics” in the Wealth of Nations or like prominently or often at least?

Paul Mueller: 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 the household and like – so when Aristotle talks about economic ideas, it’s like within household production. How do households produce things?

The 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 have written about it but in more of a household management mercantilist public policy sort of perspective, not applying what we think of as like microeconomics studying individual behavior in a really detailed, thorough way.

Trevor Burrus: 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.

Paul Mueller: That’s right. Yeah. So it’s actually An Inquiry into the Nature and Causes of the Wealth of Nations.

Trevor Burrus: What does that tell us?

Paul Mueller: 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 – it’s definitely the minor core. 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.

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 the sort of the – 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.

He’s responding very strongly to – what I 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 – 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.

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 going to eat gold and silver. They’re not going to wear gold and silver and put it in their guns, right? You actually need stuff that you can produce. So it’s the productive capacities of a country whether in warfare or in peace time that are really of concern.

That’s what Smith spends his time analyzing and talking about in the Wealth of Nations.

Aaron Ross Powell: Early on in the book, he gives this rather famous example of the pin factory to illustrate how specialization works. So can you tell us about the pin factory and what point he’s making there?

Paul Mueller: Yes. Actually it’s beautiful in its simplicity and I think Smith was really on to something in terms of we’re still asking the question today. How is it that countries could become wealthy? Why are some countries wealthy and others are not? Acemoğlu 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.

Smith’s description where the wealth – 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.

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 of 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.

He says a single person who is doing all of that by himself would have to move from task to 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 is just pulling the wire, one person who’s just cutting it, one person who’s just sharpening.

He says what you discover, 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 at doing whatever simple task or tasks that they have, doing it better and more efficiently and you specialize within the pin factory but you can also specialize across an entire economy and you get all these gains and real productivity through this process of specialization.

Trevor Burrus: So this was really – again it’s difficult for us to often remember what it was like to think before with certain revolutionary thinkers, created new concepts or discovered them. But this had really never been hit upon before Smith or at least not in any popular way. It seems so obvious. If anyone has ever done a thankless job like stuffing envelopes or something like that. First hour, you’re slow. The second hour, you’re a little bit faster. The third hour you figure out sort of a different way of doing it, that shaves off a little bit of time. It seems so obvious.

Aaron Ross Powell: Make the interns …

[Crosstalk]

Trevor Burrus: But I mean it seems crazy that at least no one had ever popularized that. Maybe it was just him saying that this was actually the source of the Wealth of Nations that was the kind of new observation he was making.

Paul Mueller: 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 maybe 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, they 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.

Another example that Smith gives in the first part of the Wealth of Nations is he talks about a wool and 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 factor across countries, across many individuals and many different occupations and that is generating unbelievable amounts of wealth and production at lower and lower costs.

No one had really talked about it that much in sort of that grand scale. They saw individual examples of course people experience every day. If I spend a lot of time doing something, I 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.”

We can see particularly with – 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.

Aaron Ross Powell: 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 – 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?

Paul Mueller: Right. That’s a good question. I think he is doing empirics.

Trevor Burrus: Well, I also think it’s important to remember that brevity was not a huge goal of 18th century writers.

Paul Mueller: 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. But 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 1000, 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. So if the demand is only for 1000 pins a day, then it doesn’t pay, it doesn’t make sense to specialize that much. You’re going to reduce your specialization. You’re going to have fewer people working on it.

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 the 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 mercantilist for a whole book about why a lot of their theories are really destructive and no one makes sense.

Trevor Burrus: Can I just interrupt you for a second there? Can you give a summary of what the mercantilist vision was? Because I think it gets used a lot but what exactly was that? You kind of mentioned a little bit about countries and armies. But was it pretty much that? That was the predominant view when he wrote this, correct? Was that correct, would you say?

Paul Mueller: It was a very popular view certainly. I don’t know how predominant exactly but it was very popular particularly among people who are trying to get the attention of politicians because the mercantilist wanted certain policies to be put in place and so they were constantly lobbying parliament to put these laws into place. The mercantilists varied in terms of how scholarly they were. A lot of merchants signed on the mercantilist policies because it helped 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. That is going to hurt our country relative to others.

So if England is importing wine from France and cloth from France and all those 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 asking to reduce employment. I mean I’m sure you can already hear a lot of echoes of this in modern …

Trevor Burrus: Yeah, there’s a certain guy with tiny fingers that you’re kind of sounding like that now. It’s a 300-year-old myth that he’s still perpetuating.

Paul Mueller: 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. 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 that we import less and we take some of the money that would go to France and we put it in our treasuries. 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.

There are 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.

Aaron Ross Powell: So when people think of Adam Smith today though, the thing – we haven’t mentioned this yet and so it’s a conspicuous absence. It’s this idea of the invisible hand. In fact probably most people think the invisible hand is what the Wealth of Nations is about. So I guess is that accurate? What is the invisible hand?

Paul Mueller: 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? What effects do those decisions 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 want to 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 it they should do and when and who gets what? It has actually become a very, very difficult question.

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 was telling them what to do. But they’re 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 going to do things that are beneficial for others.

Trevor Burrus: And now people use the invisible hand as a – almost like a 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, no, this guy over here doing – is Adam Smith, me, me, me, greed first, economy stuff. He’s mean to me.

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. It’s a greed is good – you know, Ayn Rand kind of thing and the markets always work. Is that an accurate characterization of Adam Smith?

Paul Mueller: 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 the self-interest as a natural and a good thing in market context but maybe not in other contexts.

The self-interest is always constrained by morality and virtues. OK? If your self-interest, if your 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 that would be a more – 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.

So that self-interest that has run amok and the great thing about markets though is that usually that gets corrected. 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. They used 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 interest of their family and their friends and includes benevolent motives as well.

By operating within markets in a rule of law framework, their self-interest is going to be a really good guide towards making the world a better place.

Aaron Ross Powell: We’ve had 240 years since the publication of the Wealth of Nations.

Trevor Burrus: Yeah, 1776.

Aaron Ross Powell: It has been an incredibly influential book. But in that time, economics has developed. So what did Smith, if anything, get wrong?

Trevor Burrus: Or important things he gets wrong. He may have described weird things, but at least important concepts.

Paul Mueller: 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 and 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 equilibrium framework where people move to what’s most valuable and they have a certain amount of labor. But you 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 apply 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 going to make it more or less valuable in the consumer side unless there’s something that they do that make it more valuable for the consumer.

Smith did not have a very clear conception of that at all. It shows. 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.

Trevor Burrus: I want to actually use the word “marginal revolution”. 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?

Paul Mueller: 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 – I really want to 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 want to just ask how much do they like pizza. But you want to think why would they buy two slices of pizza instead of six or one slice instead of five? How do they decide when to stop buying pizza? If they decide they want to 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.

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.” The first slice of pizza is going to be more valuable than the second or the third or certainly than the fifth.

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. So the marginal revolution is what we referred to as this brief period of time in the early 1870s where three different prominent economists, Leon Walras in France, Carl Menger 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 the 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.

Aaron Ross Powell: 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.

Trevor Burrus: They’re written well but not in the snappiest modern prose.

Aaron Ross Powell: So 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?

Paul Mueller: 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, where money comes form in 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 is dense and it is long. But if you really are interested in like tax policy or education, those sorts of things, you can kind of see what Smith says there.

Again for the non-specialist, but really those first couple chapters, you can find them online on Econ Library. Definitely worth reading the first several chapter and then you kind of pick and choose if you see things that interest you.

For Theory of Moral Sentiments, it’s a hard book. It’s worth going through. For those who are daunted by a 400-page book, Russ Roberts’ book How Adam Smith Can Change Your Life is a really good introduction.

Trevor Burrus: Which we did an episode with Russ, which we will put in the show notes.

Paul Mueller: Right. Yes. So 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. You can kind of see how Smith writes and gets some of the beauty of his language.

But for those who are really interested in moral theory, The Theory of Moral Sentiments 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? How do we make – what kinds of moral judgments can we make about other people’s freely chosen lifestyle or consumption choices like – can we say anything? Can we say nothing? 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 the idea that there are certain virtues and principles that are important and enduring.

Aaron Ross Powell: 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.