The Many Myths About Adam Smith (with Jesse Norman)

Jesse Norman leads our discussion of Adam Smith as the the father of both economics and social psychology.

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Jesse Norman believes that many books about Adam Smith miss two key parts of his work. The first being some technical consequences associated with Smiths’ work on economics. The second is that he was part of the Scottish Enlightenment, which was not a result of questioning religion, as the Enlightenment in other parts of the world was. Norman explains how Adam Smith’s life progressed to the point of where he produced The Wealth of Nations. Norman thinks of Smith as not only the father of economics, but also the father of social psychology.

What is Smith’s policy impact today? What was the intellectual environment was Smith in? When was the Scottish Enlightenment? How was the Scottish Enlightenment different than the French Enlightenment? What was the relationship between David Hume and Adam Smith? Why is the Theory of Moral Sentiments often ignored? What is an “impartial spectator” according to Smith?

Further Reading:

Adam Smith: Father of Economics, written by Jesse Norman

The Condensed Wealth of Nations and The Incredibly Condensed Theory of Moral Sentiments, written by Eamonn Butler

Adam Smith Institute

Related Content:

Was Adam Smith a Libertarian?, written by Paul Mueller

The Ideas of Adam Smith, Free Thoughts Episode

How Adam Smith Can Change Your Life, Free Thoughts Episode

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00:06 Trevor Burrus: Welcome to Free Thoughts, I’m Trevor Burrus.

00:08 Aaron Ross Powell: And I’m Aaron Powell.

00:09 Trevor Burrus: Joining us today is Jesse Norman, a member of British Parliament, current Minister of Transport, and you hold a masters and doctorate of philosophy from University College London. He is the author of many books, his new book is, “Adam Smith, Father of Economics.” Welcome to Free Thoughts Jesse.

00:23 Jesse Norman: Hello.

00:25 Trevor Burrus: Why a book? Or let’s say another book on Adam Smith? It’s not as… A lot of books on Adam Smith have been written.

00:33 Jesse Norman: Yes. Smith isn’t quite up there with Abraham Lincoln or Winston Churchill, but there certainly have been a lot of books, and there have been some very distinguished books recently. If one goes back there was, A Life by Ian Simpson Ross in the 1990s, that was pretty definitive as to the facts of Smith’s life. And there was a lovely book by Nick Phillipson, who has just died, alas, on Adam Smith about 15 years ago, which is, I think, still absolutely… Well, less in fact, over a decade ago, which is absolutely still worth reading for his intellectual context. And there have been other ones, Otteson has written a book and other folks as well, James Buchan. I would say this, that all of those books are really interesting but all too often they, in my judgement at least, have omitted two things that I think are really important and interesting. One is they don’t really talk about Smith’s current impact or potential impact on policy making. So what is it that’s alive and breathing in Smith’s ideas that make him so worth studying today.

01:44 Jesse Norman: And my book has entire half of the book, second half of the book, is dedicated to exploring those issues. And they range, well, we can discuss them but they are technical issues in economics, but also very fundamental features of the way capitalism has panned out and how it could be improved that come out of Smith. But the second reason also is that I think that relatively few of those books give the reader a really… A feel for how the ideas fit together and how the philosophy and the economics and Smith’s astonishing ideas about social psychology; how all those things mold into one integrated body of thought. And I think it’s really important to have that if you want to go and understand the true depth and power of what Smith is saying.

02:35 Aaron Ross Powell: Tell us a bit about the intellectual climate that he grew up in, because the Scotland of Adam Smith is… It seems like it’s this environment second only to like classical Athens in terms of just all of these amazing thinkers having these amazing ideas and talking to each other.

02:52 Jesse Norman: Yes, you have an astonishing moment in the 18th century where there are almost two parallel enlightenments interlocking going on. You have this astonishing group of people in London, Dr. Johnson, Edmund Burke, Joshua Reynolds, David Garrick, Oliver Goldsmith, and the like, many, if not all of them, members of Dr. Johnson’s Club. And they are leading revolutions of different kinds in different areas English literature, or it maybe of politics, or it maybe of the theatre, in different ways. That’s all fascinating. In Scotland, you have the genius of the Scottish Enlightenment. And the Scottish Enlightenment is a remarkable phenomenon, because it brings… It’s suddenly out of nowhere as it appears, you get this amazing dazzling array of thinkers, notably David Hume and Adam Smith, but also William Robertson, historian Adam Ferguson, Lord Kames, Hutton, Black, these are all foundational figures in different areas ranging from history to English literature, Hugh Blair, chemistry, geology, all coming together. Why does that happen? And I think it comes out of a whole series of things.

04:12 Jesse Norman: One is that Scotland has the world’s best educational system at the time, it’s got Burgh Schools, which are committed to educating a relatively large segment of the better off part of population, if you like. It’s got a strong educational system at the local level. It has five universities. So, the idea that… It may sound astonishing now, but the city of Aberdeen in Northern part of Scotland, had as many universities as England in the 18th Century. England has Oxford, Cambridge and Aberdeen has King’s College and Marischal College, and, of course, there’s also Glasgow, St. Andrews and Edinburgh. And so, this Scottish Enlightenment is a very intellectual and academic enlightenment, it doesn’t come out of the salon as it does in France, it comes out of the universities. And also it’s not conditioned by a thorough going revolt against religion.

05:05 Jesse Norman: So, the French Enlightenment, much more rationalistic in that sense, but actually many of the feature figures of the Scottish Enlightenment are themselves senior members of the Church of Scotland. So, what you have is a point to which Scotland’s evolving economic and social strength suddenly requires explanation and a group of highly motivated, thoughtful figures emerges from the universities and from the church to interrogate these things and to think about them. And that is an astonishing moment. And of course, it’s very small, small number of people, they all know each other, they’re all interacting with each other, they’ve a intense conversation, intellectual debate. And that again pours fuel on the flames.

05:54 Trevor Burrus: It seems to me that there’s a commonality to some of the members of the Scottish Enlightenment, obviously Hume and Smith, who were very good friends. But overall, if you had people like Adam Ferguson and Hutchinson, even someone like Thomas Reed, there’s a focus on the sort of emergent systems and human behavior and actually studying the way people are if you compare it to, say, Descartes or anyone in that sort of rationalistic tradition, you have a much more focused on the growth and evolution of systems, of knowledge of things coming from the bottom up. And how does, if you agree with me on that, how does Adam Smith fit into that?

06:32 Jesse Norman: Well, I think that’s true. There is a Scottish focus on the here and now. You get as it were the origins of what used to be referred to as the common sense philosophy. In Thomas Reed, you get the very naturalistic focus of a Hume and a Smith in building what they think called as the science of man without resort to external authority of the church or of the aristocracy, or the like. And you have this very interesting phenomenon where by Scotland itself is growing so fast that it’s generating facts that have to be explained, economic facts, social facts, what you call national developmental facts, trade facts. And so there’s an enormous array of things that are happening so fast that those intellectuals are engaged in explaining not mainly the deep ideas, but the current phenomenon. And I think that gives it a different feeling to many of those other places.

07:41 Trevor Burrus: What year was Smith born?

07:44 Jesse Norman: Smith was born in 1723.

07:45 Trevor Burrus: So that we have in the historical, economic, social situation at the time, where was Scotland at that point and what kind of changes did he see? You mentioned them a little bit, but also they had just unified with England, correct?

08:00 Jesse Norman: Yes, of course. So, Scotland had had famines in the 1690s. It was a very heavily rural, and in some cases, peasant economy. It was very divided religiously between Presbyterianism and Catholicism to a degree and Episcopalianism. There was a strong divide between the lowland areas and the highland areas, the Gaelic speaking parts. So you have a country that’s very divided, and of course you have the Jacobite Rebellion, 1715, and then Jacobitism which is the support for the Stuart monarchs in Scotland and therefore a rejection of the Hanoverian dynasty which had come to England. And so, all of those things are bubbling up. Now in 1707, Scotland and England come together in what is called an incorporating union. The Scottish Parliament is abolished and although Scotland gets to keep its law courts and its educational system and the system of law, it becomes part of Great Britain, with England. And crucially, Scottish merchants are open to the full force of competition with English merchants, but ultimately protected by the Navigation Acts.

09:32 Jesse Norman: And the effect is predictable. The Scottish economy goes downhill in the face of the extra competition. And then in due course, it starts to benefit. And by the time of Smith’s birth in 1723, it’s starting to benefit. By the time Smith’s grown up in 1750s, he would be 27 or thereabouts, the Scottish economy is really starting to motor. And it then begins a process of economic development over the next 150 years which makes it the Asian tiger of the world and astonishing changes and levels of industrialization and urbanization and income growth and development and that early, those early stages of that process or what Smith is seeking to explain and to understand, through the Wealth of Nations.

10:20 Aaron Ross Powell: When we look at his works, he comes on to the map with The Theory Of Moral Sentiments and then obviously Wealth of Nations is a big thing. But how did he get to there? Like what is his career look like before he starts writing these classic texts?

10:34 Jesse Norman: So, Smith’s life is very much that of an academic. He goes to school locally. He then goes to Glasgow University as a young man. He then goes on to Balliol College Oxford on a scholarship. He spends most the 1740s in Oxford. He has a horrible time. He really dislikes Balliol which is a very high church Tory institution, very uninterested in the life of the mind at the time, very expensive to live in, very anti-Scottish. It’s not a good fit for Smith. And he then comes back to home, spends a few years working, living at home, trying to break through, and then eventually gives some lectures through the patronage of Lord Kames in 1750-51. And out of that then comes [11:29] ____ with Glasgow. And that, Glasgow becomes his base until 1763. While he’s there, he writes The Theory of Moral Sentiments. He does a lot of the early thinking on the Wealth of Nations. While in the 1750s, people misunderstand that. They think that the Wealth of Nations is a completely different book and only comes in the 1770s, but actually he’s thinking about it 20 years earlier. We can tell that from work that is reported at the time.

11:53 Jesse Norman: And then in 1763, he goes on a grand tour with France to Toulouse and to Paris with his great patron the Duke of Buccleuch, who was a young man at the time, and who’s been put in his care in order to understand the world. What a marvelous idea, probably Scotland’s biggest land owner is given Scotland’s greatest philosopher and economic thinker as a tutor. And then, he comes back. And then, very broadly speaking, he spends the rest of his life either at home in Kirkcaldy or Latili in Edinburgh. So it’s a very quiet life, but it’s a life that’s very conducive to the life of the mind and the development of his ideas.

12:37 Aaron Ross Powell: When did he meet Hume?

12:39 Jesse Norman: Well, we don’t exactly know, but we think it’s in the early 1750s. There’s an apocryphal story of him being discovered in his rooms at Balliol reading Hume’s; I think it’s The Treatise of Human Nature, or it may be the Essays. And these are regarded as wildly seditious and ultimately atheistical texts. And so, he gets into some trouble with the senior common room at Balliol. But shortly after that, they meet each other and they form a very strong relationship that lasts until Hume’s death in 1776.

13:11 Trevor Burrus: The Theory of Moral Sentiments is often ignored, at least it wouldn’t be the first answer to the trivia question that people would say, “Who’s Adam Smith?” They would say, “Wealth of Nations before The Theory of Moral Sentiments”, which, I think, is unfortunate. And in your book, you discuss how these are connected, but roughly speaking, what is the Theory of Moral Sentiments about?

13:31 Jesse Norman: So The Theory of Moral Sentiments is a work of social psychology. It’s often thought of as being work of moral philosophy, it’s just not true. It’s a work of psychology. The question is, in a society and as human beings interact with each other, where do their moral values and social norms come from? And Smith tries to give an account of that, that’s naturalistic in the sense that doesn’t rely on these external sources of authority that I described. And Smith’s idea is startlingly simple and clever, and it is that, essentially, we get them through exchange of regard. So he thinks, “Man”, it’s always man, of course, at that time, that’s the way they write. But he says, “Man naturally desires, not merely to love, but to be lovely, that is, to be worthy of love”. And so, human beings essentially act in such a way as to elicit the regard or the esteem of others.

14:31 Jesse Norman: Now, that would make moral behavior really a function of the conventional wisdom, if it wasn’t corrected by something. And so, Smith has the idea of an impartial spectator. And that idea is one that corrects for the purely parochially idiosyncratic aspects of a judgment. And both of those ideas, the idea that you can bootstrap your way into social and moral values just through the mere fact of social interaction, that’s proved to be an astonishingly influential idea, if you look at all of the way in which game theories of human behavior and norm formation now, have played out. And the idea of an impartial spectator has an incredibly important effect on Kant, when he comes to write about the universalizability of moral values through the idea of duty in his second Critique and also in his other moral writings.

15:36 Aaron Ross Powell: So if morality is, for Smith, is part of this bootstrapping process of trying to become increasingly lovely, where does the impartial spectator come from? By what standard is it the impartial spectator and where do the moral standards that it uses to judge has come from, if it has to be judging the bootstrap system that we’re stuck in the middle of?

16:00 Jesse Norman: Yes. So it’s a great question. So the idea is not that the impartial spectator brings a set of substantive values to the picture, because otherwise, he, as it were, will be helping himself to…

16:12 Trevor Burrus: Skyhook. Yeah.

16:12 Jesse Norman: That would be the classic deus ex machina type explanation. So that’s not it. It is that what the impartial spectator does is to force the judgment, not just to pay attention to what people at that time contingently want, but as it were, what anyone in that circumstances would want. And the reason why it’s a spectator is very interesting, because I think the thought is that, as, that the person is seen to be acting a certain way, that’s the expectation part, but is also aware of being seen to act that way. And therefore, you get a triadic idea of, as it were, their expectations being placed on them and their desire to satisfy those expectations. And that’s what creates the the norm of good behavior. And if you think now, today, about, for example, work that’s been done on littering or graffiti, and the kind of effects of social pressure and pro-social, antisocial, indeed, norm confirmation, that kind of… Those ideas often key off Adam Smith without realizing it. And in fact, I think of Smith as not just the father of economics, but also the father of social psychology.

17:33 Trevor Burrus: I’ve seen in some articles where people are critical of Adam Smith, calling him the father of market fundamentalism or whatever you want to say. They cite a line in The Theory of Moral Sentiments, which is pretty famous. I will paraphrase, basically that one morning you find out that thousands of people in China died and then you also get a paper cut on your finger, and you spend the whole day thinking about your paper cut more than the people in China who died. Why is that a bad characterization of what Smith is getting at in the theory of moral service through that story?

18:07 Jesse Norman: Yes, I understand. So Smith’s point… So Smith is, first of all, Smith is not a cosmopolitan. So Smith recognizes what sometimes been describe the circles of sympathy. So we have a sympathetic engagement, that is to say we have an ability to understand how something strikes someone else, and then to empathize with that in our own reflection, our own conduct. But he doesn’t think that that creates moral obligations that are indifferent to where they are. He thinks that people have a duty to care for those around them, their friends, their families. And those duties progressively erode as you go further away. And that seems to fit with the psychology that many have described.

18:46 Jesse Norman: Now his point in the famous China earthquake example, which is the one you’re describing, is that the sense of duty that people must have to overcome this natural psychological, as a way, instinct must be strong indeed, if it’s able to do that. And yet we do have a recognition that we owe duties even when we may not in fact have those tracked by our own psychological passions and experiences. And I think that in some respects, it can be quite a profound insight. And of course the net effect of thinking about this social embedding that is created by that mere fact of human interaction, is that it gives you a context for markets. So it’s a corrective against the idea, which you often find particularly in caricatures of Smith, both of the right and of the left that he’s somehow a contemporary economic theorist who only thinks in terms of mathematical models without reference to human beings. The exact opposite is true. For him a market is not something that’s justified in terms of a model, only that can be useful, while thinking about it, it’s something that’s defined in quite situated terms as a cultural artifact and therefore mediated by enormous practice, habits, traditions and moral values and norms. And that’s the connectivity. That relationship between exchange of esteem and exchange of goods and services. That’s the connectivity that links the two books.

20:12 Trevor Burrus: I’m really glad in your book that you as a lawyer, that you discuss lectures on jurisprudence a bit which comes out… Well, it never comes out. We can talk about that, but he seems to be working on it in between The Theory of Moral Sentiments and The Wealth of Nations in the 1760s. What do we see in that in the lectures on jurisprudence that’s valuable? And also why don’t we really have them in good form?

20:37 Jesse Norman: Well, it’s a fascinating question. The stories with lecture on jurisprudence is a really interesting story in its own right. So he gives the lectures in the 1750s. And they must; we hypothesize, have been included in the works that he instructed his executors to burn at the time of his death. And the only reason we have them is because three, really two and half sets of those notes as made by students of his lectures have now survived. Just by pure luck.

21:12 Trevor Burrus: That was some really good note takers.

21:13 Jesse Norman: And so as well. And these lectures… Well, let’s not forget, there was some value to taking Professor Smith’s notes. And then, if not selling them or letting others use them and stuff. So these are… They’re quite carefully taken notes, and therefore we get quite a good understanding of what their lectures were. And they don’t always agree, but there’s a lot of overlap. And the fascinating thing about that, so first point is, what are they about? Well they’re really about property. And the nature of property and rights and entries against property and entries against the person. In that sense they are very interesting from a legal jurisprudential perspective.

21:51 Jesse Norman: Property is the link that sits between sentiment and goods and services. Because property has rights, but it also has norms of treatment associated with it. And for Smith, property, the rights of property is dependent on the form of government. And therefore, there can never be in economics that’s independent of an understanding of government. Because government is intrinsically involved in guaranteeing the status of property. And as government evolves and is progressively able to defend new kinds of property, and to allow those cases to be juridically decided or otherwise arbitrated. So capitalism or market activity is it then, as capitalism doesn’t come to that essentially, can elaborate. So you get a progressively evolutionary view of markets and government together, that is co-proto Darwinian coming out of this astonishing insight. So then the questions are why did Smith with this incredibly interesting and still amazingly important and relevant analysis, why did he destroy those lectures? And the reason I think is because ultimately he couldn’t bring them within the full panoply of the exchange mediated architecture of his overall thought. So his thought is you get exchange of goods and services, big economy, you get exchange of morals and of esteem and regard in the creation of more of a social norms. And you get exchange of language and ideas in human communication.

23:29 Jesse Norman: That’s the architecture of the overall idea. Where you fit in his theory of government isn’t obvious. And I think that’s the reason why. And he was absolutely punctilious about not giving the world anything, but a fully finished theory. And that itself, if I may just very quickly, and rests on an idea about property. So he thinks that humans have a right to an unblemished reputation as a property right. And he’s determined to assert that property rights. He never says this, but I think it’s not just modesty, but his desire to maintain the integrity of his own property. That means he won’t allow that to be undercut by a premature publication.

24:07 Aaron Ross Powell: So I’m just curious. You mentioned that this looks, to some extent, there’s a proto-Darwinian elements. Do we know if Smith had an influence on Darwin at all?

24:15 Jesse Norman: Oh yes, we do. And there’s no doubt he did. Darwin was a very enthusiastic reader of Smith when he was at Cambridge. And I think it’s pretty obvious that he had understood the evolutionary nature of Smith’s account of human development, of our particular economy. And indeed I make the argument in the book that in some respects, that theory of cultural evolution isn’t merely anticipatory but is in some respects part of the theory of evolution more fully considered for Darwin.

24:47 Trevor Burrus: In the second half of the book, as you say, you go over Smith’s life and thought and the second half we talk about its relevance to today and some of the criticisms of it. You list five myths in particular that I think are relevant to the way people think, on both sides rather he could be a boogie man to the left or people on the right oversell him. So I wanna talk about some of those.

25:08 Jesse Norman: Yes, sure.

25:08 Trevor Burrus: One of them is, we kind of brushed on a little bit, but this idea that there’s a tension in the relationship between the Theory of Moral Sentiments which, and the rapaciousness of the market. I’m putting that in scare quotes of the Wealth of Nations. And you say that that is not true. There is no tension whatever.

25:25 Jesse Norman: No, I think that’s… I don’t think there’s no tension whatsoever because these are slightly different works. The focus… They’re written in slightly different ways. The focus is on different topics. And I didn’t wanna underplay the extent to which they are. I didn’t think Smith has just got one idea that he seamlessly works out across the two, but it’s pretty clear I think that they are part of the same picture. The Theory of Moral Sentiments, the trouble is that no one reaches them individually and attends to them in any depth, or very few people do. And especially a small number of people who quote them selectively actually read them. So it’s quite important to go back to what they actually say. The Theory of Moral Sentiments is an entirely general theory of how human morals and social values get formed and the norms that, as it were, arise from them.

26:17 Jesse Norman: Within the field of political economy, those norms and values have play in markets. So that in a way is a special example of a general moral psychological theory that’s already been advanced. When Smith comes to revise The Wealth of Nations, he’s revising The Theory of Moral Sentiments pari passu. So these can’t be works where there’s a deep contradiction between the two, indeed much of any contradiction. He sees them as an integrated body of thought and he writes them to the best of his abilities as hopefully finished works within that general overall conception. And of course, The Theory of Moral Sentiments is preceded by some very important work that he does and that he makes public at the time which is designed to protect his ideas to The Wealth of Nations.

27:05 Jesse Norman: So he says, “Peace, easy taxes, etcetera, are all that is necessary for an economy to flourish. That’s an attempt to lay down some of the principles for the economy so that they’re understood to be his before he comes to get to that stage of the theory 20 odd years later. So I don’t think there can really be much doubt that they are a single integrated whole. And when people see The Theory of Moral Sentiments as a work about altruism or sympathy in some sense of compassion, that’s because they just haven’t read the book. And when they read The Wealth of Nations as a hymn to greed and inequality and self-interest, that’s because they’ve ignored Smith’s radical egalitarianism in much of The Wealth of Nations. And, of course, his much richer conception of both of human well-being and of human psychology.

27:51 Trevor Burrus: Can you talk about that radical egalitarianism? You just mentioned the other myths that he was not an advocate for naked self-interest and he was not pro-rich in all these things. But when you said radical egalitarianism, I think that might surprise people.

28:04 Jesse Norman: No sure. So Smith is not a radical thinker in the proper sense. He is not a revolutionary. He didn’t support any of the radical causes, single annual parliament, a universal franchise. He just doesn’t… He’s much more small c conservative than that. He is positively rude about utopianism and the attempt to substitute theory for, as it were, a nuanced understanding of practice. He is extremely rude about the so called man of system who uses what Burke would call a geometrical reasoning as a substitute for solid experience and an understanding of tradition and the value of history. So in that sense, he’s very definitely a small c conservative. But if you look at his System of Natural Liberty, it has remarkably radical elements in it by modern years.

29:00 Jesse Norman: So it is a system in which, it’s not a full system, but it’s a set of ideas in which there is, for example, no primogeniture. He’s very opposed to that. So there can’t be passing down of large capital sums from one generation to a single individual in the next generation in order to protect them. They have to be dispersed. Markets inhibit the building up of large surplus because they’re so competitive that they can beat away all but the thinnest economically available profit. He is very much on the side of the workers in terms of the argument that they have with the masters in businesses because he thinks that masters have inbuilt advantages of power and information which make it an unequal struggle, and because he recognizes, I think it’s probably fair to say, the value of people getting paid an appropriate wage for the work they do. And of course, finally, he is prepared to contemplate potentially quite onerous taxes if they are levied fairly transparently at low cost and according to the four principles of taxation that he lays out, including a land tax, which is a very radical proposal. So when you put all that together, you can get a… Smith, and in general, he’s a very egalitarian thinker. So he talks about some… He says, “All for… ” What does say? “All for ourselves and none for others has always been the vile maxim of the masters of mankind.” These are not small statements.

30:31 Aaron Ross Powell: Wealth of Nations was published I believe the same year as the Declaration of Independence. Did he then… Did he have an opinion of what was going on in America?

30:40 Jesse Norman: Yes. He did. He was asked for, and he was specifically asked for his opinion in 1778. He gets invited to write a memorandum on what the government should do. The government’s costing around… It’s just had its head handed to it in the Battle of Saratoga. Things aren’t going very well. And so Smith is asked for his advice. And his advice is a little model of a good policy paper. He scouts various different options and then he says what his preferred one is. His preferred one is an incorporating union between Britain and America. So he responds to the idea that there is no, there should be no taxation without representation by saying, “Yes, the Americans should have representation in the British Parliament. And I don’t think anything is gonna happen, but that’s what should happen.” And then there’s an astonishing moment where he says, “Of course, this will mean that the seat of government transfers itself from Britain to the colonies over time.” And what is so interesting now is that that perfectly captures worries about sovereignty that many people in Britain have had with regard to the EU and the Brexit arguments.

31:53 Trevor Burrus: You also write about how it seems that not only do people who are not very friendly to capitalism, oversell how capitalistic, so to speak, Adam Smith was, but that people who are more on the libertarian side do the same, that Adam Smith was not a radical libertarian who wanted no government whatsoever. And you mentioned the taxes. What other types of government was he broadly in favor?

32:22 Jesse Norman: There’s a very wide range of interventions that Smith is prepared to contemplate, and he may be right or he may be wrong. But the point is he is prepared to contemplate them, and one can’t argue from that. So just to give some examples, he talks about a cap on interest rates to discourage speculation. He thinks about separation what he calls in the banking system in order to stop a general, a conflagration from becoming general by having as it were party walls in regulation. He, of course, supports the Navigation Act which was possibly the biggest intervention in commerce of any kind at that time. And so I don’t think it’s possible to hold that Smith is a laissez-faire economist in the modern sense. But what is interesting is if you think about, go back to his idea of natural liberty, markets in the middle of to late 18th century are thickets of state and church and guild regulation.

33:26 Jesse Norman: So any removal of regulation from the markets in that context is almost certainly going to be both welfare-enhancing and equalizing because these laws have largely been created by the insiders to benefit them at the expense of the outsiders. So you can see why that nuanced conception of the state might lead one in a different direction today where markets are in many cases freer. And what is so fascinating, just very quickly, is that we can pull out, and I do pull out in the book a quite an elaborate threefold theory of crony capitalism from Smith’s writing. So you have an account of rent extraction which we’ve seen everywhere in the financial industry over the last few years. You have an account of principal-agent problems. Well, that’s… We pay these people and they run off with our money at CEO pay.

34:19 Jesse Norman: And you have this idea of asymmetries of parity information. Well that’s the technology platforms. And if you think about one of the things that’s fascinating on the social psychological side of Smith, just to pick out one final point there, is of course he thinks that the driver of human competitiveness in part is the social demand for status as well as the competitive desire to better oneself economically. And that has negative effects in terms of stimulation materialism, which we recognize today, and it has demoralizing effects in stimulating social comparison of a kind that we see everywhere in many of the online platforms. So his criticism isn’t just an economic one of what you might call modern developments in technology, it’s also a social and psychological one.

35:08 Aaron Ross Powell: So it should be obvious to our listeners now that you think there’s a tremendous amount of value in his works, not just from an historical standpoint, but stuff we can still learn today. But then what does he get wrong?

35:20 Jesse Norman: Well, it’s a great question. I think he gets quite a lot of things. Well, I think he gets some things wrong and there’s a lot he misses out or doesn’t understand. So one thing he particularly gets wrong is he is an advocate of what’s come to be known as a labor theory of value, and I think it’s fair to say that most economists today would regard that as a quaint overhang from the past rather than an economically valuable piece of analysis. What’s interesting in terms of the stuff he leaves out, he doesn’t talk about technology, which of course is by any account, a great driver of value. He doesn’t really talk about innovation, which is an absolutely central feature of markets, on a modern analysis, and he doesn’t talk about industrialization.

36:10 Jesse Norman: And what is amazing is that if you take the facts, as he reflects on them and presents them. And you just spool a little bit forward, Smith dies in 1790, that’s just the moment where Alexander Hamilton is thinking about the materials that are gonna go into his report on manufacturers, 1791. And Hamilton is essentially an unlettered genius who is able to see, by reflecting on the Wealth of Nations, within the American agrarian agricultural economy, the seeds of a modern industrialized powerhouse. And then to ask the question, “How should that be financed and what should the public finances look like?” they go alongside that. And those are acts of imaginative genius which start from a platform that Smith has laid, but which Smith doesn’t take himself. And I think it reflects incredibly well on Hamilton, as well as on Smith, that they were able to have that intellectual exchange even after Smith’s death.

37:07 Trevor Burrus: The insights of the Wealth of Nations that we talk about, specialization, gains from trade and stuff like this, but one of the things that he writes about extensively, that is relevant today is, trade, international trade and what we call mercantilism. What would Adam Smith think of Mr. Trump’s trade policies or even maybe a better way of putting it, how familiar would what Trump says about trade, seem to Adam Smith? In the sense of eternal recurrence of these arguments.

37:37 Jesse Norman: Well, it’s a fantastic question. I can only thank American politics for generating these questions, just at the moment where my book goes on sale…

[chuckle]

37:44 Jesse Norman: So people can read up heavily on the basis for them, historical and intellectual. I think Smith would find this style of argument extremely familiar. And what is very interesting, well, one has to remember some facts about Britain and America and we’ll just put this into that context. So, Britain had had some form of tariffing or trade barriers since the end of the 15th century, so the 1490s, Henry, the seventh. So the idea that somehow these were a modern, first Smith invention, is nonsense. They’ve been embedded into British policy for hundreds of years by the time he comes to write the Wealth of Nations. And by the way, in many ways, they’ve been highly effective, the Navigation Acts are there for a purpose and he supports them, and they are an extremely effective way of transferring value from colonies towards some other country, that’s what they’re designed to do. So that’s the first thing. The second thing is, when Britain discovers free trade at the time of the repeal of the Corn Laws in the 1840s and Smith becomes a secular saint of free trade and is grabbed by those people who then erect a free trade conception of Smith, which makes him almost unrecognizable a 100 years later, so 1876.

39:07 Jesse Norman: That’s not really a world of free trade, that’s a world of imperial trade. Britain doesn’t really have free trade even in the end of the 19th century in the way that is somehow fondly imagined. And actually America, more or less, never has free trade. America doesn’t have it before the First World War. It doesn’t have it, sure as heck, doesn’t have it between the wars and after the Second World War, there were many reserved areas in the American economy where free trade does not apply and many tariffs are being applied and notably in the agricultural area, etcetera, etcetera, which still persist. So we can get a little excited about free trade as a kind of Elysium without realizing, that actually, in many ways, it never existed.

39:47 Jesse Norman: So then the second… The final thing I would just say about Smith is, the idea that, that you sometimes hear alongside the idea that Smith is a cosmopolitan, which is that, basically, trade is an area in which people can come together to reach a, higher degree of harmony, is absolutely not Smith’s view. Smith does not believe trade is zero-sum, in contrast to some folks today, but he does, but he absolutely does believe that nations have interests and energies that are gonna cause them to behave in ways that are jealously preserving, the phrase, “jealousy of trade,” is an 18th century phrase, jealously preserving that. Even though warfare may be being gradually supplanted by the bourgeois arts of economic exchange, they are still going to be and can be pretty brutal. And Smith, to an extent, is a realist about trade as he is about many other things.

40:48 Aaron Ross Powell: We are seeing, in the discussion we just had and certainly related to this, we’re seeing a softening of enthusiasm about capitalism and markets, not just in the US, but throughout much of the world. And obviously, that’s distressing for us at the Cato Institute and for people who understand economics and likely would have been distressing for Smith, but is there value in Smith, not just as he articulated that these basic principles of economics that we know to be true are largely true, and those principles, push back strongly against this trend, but in the way that he talks about these things or the way that he articulates these things, that Smith in particular, could be a force against this trend.

41:34 Jesse Norman: Yes, I think there is. Of course, as I’ve said, Capitalism is not something that Smith is familiar with, in the sense of, autonomous pools of capital. Smith is a theorist of open markets, that’s the key point. And that aspect of things, I think, continues to hold up remarkably well. If you look at what is driving the astonishing gains that have been made in the incomes, globally, of the least well off? Answer, trade, trade, trade, all the way. It’s trade that’s been rescuing the least well off in Africa, not potentially substantial amounts of aid. It’s the mobile phone above all, has made a huge difference. So trade and technology. So that’s the first thing, of course, one of the reasons why capitalism has got a bad name is because people are identifying aspects of it that Smith anticipates and understands. So, Smith doesn’t believe that as it were, markets don’t have negative effects as well as positive effects. He recognizes he thinks that people can be alienated by the work, the repetitive acts of the work they do. He thinks that they were losers as well as winners in markets.

42:41 Jesse Norman: One of the reasons why political economy is what he is then interested in, rather than what we would consider economics is because in political economy you always… You can’t be immune to the distributional consequences of what you’re doing as well as their total economic effects. And therefore, globalization or the uncritical view the people had of globalization in the 1990s is not something that’s compatible with the Smithian viewpoint. So the astonishing thing to me is that friends of open markets, and by extension friends of capitalism haven’t adopted Smith’s recognition of the downsides and sort to ameliorate them as well as Smith’s understanding of the pathology of crony capitalism in order to create a pressure for an economic system that does address some of these social concerns.

43:27 Jesse Norman: And I think if they did that, they would be much more effective politically as well as economically. And certainly, I’m looking for people who are interested in these subjects to start thinking for example, as we have in Britain about wages. One of the things that we’ve done recently in Britain as you may know, is to mandate a national living wage. Obviously I’m here. I’m not speaking as a government minister, I’m speaking as an independent minded academic, and writer, and scholar of Smith, but a national living wage is an attempt to push up wages, and that has not had any effect in terms of removing people from the labor roles or reducing unemployment. On the contrary, the effect of it appears to have been, in some respects, to be crowding in people.

44:18 Jesse Norman: So, there may be more in a dynamic economy to be gained from thinking about some of these things in ways that are outside the norm and rehabilitating this as well as thinking about some of the concerns that Smith identifies. If we’re going to defend the market system and defend what Smith cared about which is not capitalism, but commercial society. And commercial society, a society in which people are presumptively equal to each other. And in which it’s where the legitimacy of the system relies on everyone having a fair shake, and a chance to do well.

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44:55 Aaron Ross Powell: Thanks for listening. Free Thoughts is produced by Tess Terrible. If you enjoyed today’s show, please rate and review us on iTunes, and if you’d like to learn more about libertarianism, find us on the web at www.libertarianism.org.