Corruption, fraud, and greed continue to dominate
media here in the United States and around the world. As high unemployment and wage stagnation
plague the middle class…and growing income inequality has caused millions to wonder:
is the system rigged? Is the free market, in its very nature, corrupt? What is the relationship
between morality and markets? Amazingly-a Scottish philosopher and economist explored
that very relationship nearly 250 years ago in the 18th century. His
name was Adam Smith. Adam Smith was first and foremost a moral
philosopher. His great gift was observation.
But perhaps he is best known for his groundbreaking work in economics.
Some people say that he is really the father of modern economics.
He’s a synthetic thinker that crosses these disciplinary boundaries.
Adam Smith was born in a small Scottish town and learned early in life about morality and
economics at the local merchants’ market. He went on to study at Glasgow University,
became its top administrator, and then a pillar of the most unlikely intellectual revolution
the world had ever known… the Scottish Enlightenment. He lived, lectured and socialized in Scotland’s
capitol city of Edinburgh, created the unique economic concept of an “invisible hand” to
describe what happens when we act in our own “self interest”; and invented the idea of
the “impartial spectator” in his surprising analysis of the evolution of morality.
And I’m fascinated by Adam Smith, a man who would turn the notion of how societies and
economics work on its head, and make way for the modern age.
He recorded his ideas in two comprehensive books, The Theory of Moral Sentiments, and
The Wealth of Nations. Was he a revolutionary moralist, an uncompromising
advocate of self-interest and free markets, or something altogether different? Who was
the real Adam Smith? Funding for this program has been provided
by John Templeton Foundation, and Templeton Religion Trust.
Historic Edinburgh still reflects the energy and cultural vitality for which it was known
in the 1700s. A dramatic castle still dominates the landscape above the old town. Below stretches
the “Royal Mile” and the hustle and bustle of modern city life. Edinburgh today is a
haven for the arts, full of open, warm and welcoming people.
In 1707, Scotland had joined with Ireland and Wales, to become the United Kingdom. It
would be Europe’s largest free trade zone. And the great cultural and intellectual revolution,
to be known as “The Scottish Enlightenment,” would soon transform Scotland and much of
the world. Adam Smith was destined to be part of that change.
He was born in 1723, in the town of Kirkcaldy, just across the bay from Edinburgh. His father,
also named Adam Smith, was a lawyer and customs inspector, who spent many of his working days
chasing whisky smugglers, and who died several months before his son was born. The young
boy’s widowed mother, Margaret, would devote the rest of her life to raising her son, and
would become his lifelong companion. Adam Smith loved growing up on the shores of the
river estuary known as the Firth of Forth. This small town of Kirkcaldy would remain
his spiritual home for most of his life. I’m Johan Norberg, a writer and an analyst,
born and raised in Sweden. For many years, I’ve studied markets and global trade. And
no one thinker has been more important to the development of today’s widespread prosperity
than the revolutionary 18th century philosopher, Adam Smith.
Most people today remember only half of what makes him important: his economic principles.
They associate Adam Smith with free markets, but few think of him as the great moral philosopher
that he was. We need to put both sides of the man together to find The Real Adam Smith.
Smith’s primary concern as a political economist and a moral philosopher is the well-being
of the poor. Ryan Hanley is associate professor of political
philosophy at Marquette University. His work concerns the moral aspects of Adam Smith’s
worldview. So in many ways, Smith subverts our conventional
distinction between left and right by sharing with the contemporary left a deep concern
for the goods and the well-being of the poor and with the contemporary right a belief that
the proper means for achieving this, the most efficient means are, in fact, free markets.
These steps lead up to the church that Smith’s mother, and sometimes he himself attended.
Hi George! Hi Johan… let me show you around.
Thanks. George Proudfoot is a local historian, college professor and trustee of the Adam
Smith Global Foundation. Can you tell me a little bit about the church?
Well, this was the church that Adam Smith was baptized in, on the 5th of June 1723.
Adam Smith and his mother would have attended the church on a Sunday, and these are the
very steps that they would have climbed from the house, up to the church.
So Smith walked on these steps. On these very steps, that’s correct.
And he went to school somewhere around here? Yes, the Barrow School was just across the
way there; it was a very good school and its headmaster, David Miller was exceptionally
good. Apparently, all of the students received a
good grounding in classical education, and Smith was instilled with a life-long appreciation
of learning. His mother’s house stood right there and across
there was where the outdoor market was; and of course, he would be able to see the market
from one of his windows. Imagine him waking up early in the morning
and seeing the market through his window… and on his way home from school, watching
the buyers and sellers in action. From an early age, he was a keen observer. And the
economics and morality in the marketplace of his youth inspired his written word.
“The propensity to truck, barter and exchange one thing for another is common to all man.”
They were exchanging ideas. They were exchanging gossip. They were exchanging goods. They were
exchanging money. Nick Phillipson is an honorary fellow at the
University of Edinburgh and the author of the award-winning biography, Adam Smith: An
Enlightened Life. And that notion of exchange and watching people
exchanging things… that’s something which I’m pretty sure was with Adam Smith right
from the word “go”. Exchange… and through exchange, trust. He
sees trust and the morality underpinning it as the key to any successful society.
And this rather curious, withdrawn, observant chap simply spent his life observing the peculiarities
of human behavior. Cataloging them, turning them into systems, theorizing about them,
building up this portrait of what human behavior tells us about human beings in general.
He will return to Kirkcaldy again and again, to think and to write, and to take long walks
along this beach. And Smith was quite a walker. There is a story that one morning Smith walked
along the beach in his bathrobe, and got so caught up in his own train of thought, that
he went 12 miles before he knew it. It’s in this small seaside town where he would be
most productive. At the very young age of fourteen, Smith leaves
home and travels to Glasgow, the seat of one of Scotland’s four ancient universities. The
University of Glasgow was founded in 1451. Here he begins his studies and almost immediately
is immersed in the revolutionary thinking of the Scottish Enlightenment.
The University of Glasgow is fast becoming one of the best universities in Europe. Here
he will build the intellectual foundation of his life’s work- one constructed on the
firm base of Enlightenment values. Scottish Enlightenment thinkers are deeply
rooted in reality. They value reason, debates, evidence, and reject any authority that facts
cannot justify; but it also enables them to develop an astonishingly powerful tool: the
Scientific Method. His favorite professor is Francis Hutcheson,
a respected father of the Scottish Enlightenment and the first to teach in English and not
the traditional Latin. Hutcheson’s thoughts will guide Smith’s early education and influence
his later writings. This is Adam Smith’s personal copy of Hutcheson’s book, Illustrations on
the Moral Sense with Smith’s notations in the margins.
He was marked out as a star, as a university student. He got a special fellowship to take
him to Oxford for six years for study. Something happens in Oxford that will change
the direction of Smith’s life forever. He reads the work of David Hume, one of the most
prominent philosophers of the Enlightenment. Reading Hume introduces the young student
to an entirely new set of ideas. Hume explains how human beings can grow and develop, survive
and prosper, without once drawing an assumption about God. It is dangerous thinking.
The authorities at Oxford are not fans of Hume and they punish Smith for his self-education.
In protest, Adam leaves Oxford and England. It’s the Scottish thinkers, like David Hume,
who appeal to Smith’s intellect and he is eager to share his ideas with them.
When he arrives back in Scotland, he settles here, in Edinburgh, just across the Firth
of Forth from his hometown of Kirkcaldy. And when he gets here the Scottish Enlightenment
is in full swing. If you had wondered in the 17th century or
the 16th century what country would be a likely place for an enlightenment, Scotland would
not have probably been on the list. James Otteson is an Adam Smith scholar and
professor of political economy at Wake Forest University.
For that magical period in the 18th century, Edinburgh had a lot of things come together.
A country, with no apparent warning at all, suddenly developed a small but extraordinarily
sophisticated and creative group of philosophers, scientists, men of letters.
The central figures of the Scottish Enlightenment were not just interested in material prosperity.
They were also interested in the character of people.
Are human beings naturally selfish? Are they naturally benevolent? The Scots decided that
you couldn’t really answer these questions. They’re all speculative. All you could do
is observe the world around you. And that’s exactly what the Enlightenment
thinkers did: Observe. For example, it was common knowledge in the
1700s that the earth was less than 6,000 years old. It was the Irish Bishop, James Ussher,
who had carefully researched the issue. “And Adam begat Seth, and Seth lived 105 years
and begat Enos…” By adding up each and every one of the “begats”-
or generations- in the Bible’s Old Testament, Bishop Ussher declared that the earth was
created on Sunday, October 26th, 4004 B.C. The issue was “settled.”
Until James Hutton, a medical doctor from Edinburgh and a keen observer of the world
around him, takes a walk in the British countryside and comes upon a section of Hadrian’s Wall.
The wall is most certainly old. The Emperor Hadrian built it during the Roman occupation
of Britain in about 120 A.D. Hutton sees almost no signs of erosion.
Yet these nearby volcanic mountains have been almost completely eroded by the same processes.
To Hutton the conclusion is obvious: the earth is much older than 6,000 years. The bishop
must be wrong. But challenging the Church on any issue without
suffering reprisals was something new. Even now there were hardliners in the Church opposed
to the ideas of the Enlightenment thinkers. It’s this combination of keenly observing
the world and bravely challenging conventional thought that is at the heart of the Scottish
Enlightenment, just as critical thinking is at the heart of the scientific method today…
and that inspires Smith. Oh and today’s best estimate of the age of
the earth… is about four and a half billion years.
Finished with Oxford and his formal education, Smith finds himself out of work. He is now
an educated young man looking for a job, and by a stroke of good luck, he’s invited to
give two series of public lectures to Edinburgh’s movers and shakers.
He will focus on human behavior and morality, in what will be known as his lectures on jurisprudence
and rhetoric. He begins by wondering how humans acquired
the gift of language. These college students have just met and are getting to know something
of each other through their conversation. Traditionalists considered language a special
gift from God. Smith thought otherwise. The earliest human beings, he thought, lived
in a dangerous world, and had to communicate to survive. And that meant using signs and
sounds. From these first signs and sounds and under the pressure of life, language developed.
Smith argues that society and civilization were born as people, like these students,
traded information through language, and built a common understanding of the world around
them through this exchange. But Smith considers other forms of “trading.”
“The offering of a shilling, which to us appears to have so plain and simple a meaning, is
in reality offering an argument to persuade… And in this manner everyone is practicing
oratory on others through the whole of his life.”
What Smith sees from a very early stage is that this business of exchange can actually
lead us into investigating how we acquire values, not just information, but values,
how we acquire ideas of what’s good and evil. Good and evil fascinate Smith and in his lectures
he asks, “How do human beings develop a sense of morality?”
Before Smith, people thought that morality was somehow out there. It was objective.
Eamonn Butler is co-founder and director of the Adam Smith Institute in London.
And then Smith came along and said no, morality is not something that’s objective and that
it is out there… it is inside ourselves. The “sine qua non” of Smith’s moral theory is
what he called “sympathy,” what we might today call empathy. It was not feeling sorry for
other people. What it was ,instead, was this idea that we desire to see our sentiments
echoed in other people. By “echoed in other people” Smith means that
we all want to be liked, and will do things to gain approval. He thinks that in ordinary,
everyday interactions with people, we come to learn when others like us and when they
don’t. Kind of like the Rockefeller Center in New
York, that really Christmassy vibe… This fellow is a bore and he’s insensitive.
His friends are getting tired of him… and their expressions and body language reveal
their disapproval. We ourselves, we’re approved of when we do
certain things; we’re disapproved of when we do other things. We watch other people
in society, we see the way in which they’re approved of and they’re disapproved of, when
they say certain things, when they do certain things.
Smith took a kind of evolutionary view 100 years before Darwin.
He knew that there was something in us as social creatures that made us follow a moral
path, because if we didn’t, if we went around robbing, and stealing, and killing each other,
then we wouldn’t get very far as a species. How do we move from knowing how to act in
social settings, of how to be approved of and disapproved of, to knowing the difference
between right and wrong? How do we solve the moral dilemmas that we
all face each and every day? This man is in danger of losing his wallet. It’s full of
cash. What do you do? Keep it all? Keep the cash but return the wallet? Or do you just
give the wallet back, untouched? What do we do?
We all know what we do. We turn in on ourselves, and we start to have conversations with ourselves,
internal, private conversations. And the funny thing about these internal conversations is
that they are with a fictitious person, and he calls it an “impartial spectator.”
Smith says that the impartial spectator is the sum total of everything that we’ve ever
learned about what’s polite and rude, what’s right and wrong. Built up over time, it’s
our moral compass. “We endeavor to examine our own conduct as
we imagine any other fair and impartial spectator would examine it.”
Putting ourselves in the position of a spectator of ourselves, imagining a third figure outside
of us. What does he or she see when she’s looking at us?
Sir, you left your wallet. Thank you. Thank you so much.
The impartial spectator will become one of Smith’s most important concepts and the centerpiece
of his first book, The Theory of Moral Sentiments. He will spend the rest of his life refining
these ideas. But for now, he’s caught the public’s attention and established himself
as an innovative member of the Scottish Enlightenment. He’s moving from rhetoric, from questions
of religion, to questions of morality and moral philosophy, to questions of political
economy. You can’t have ideas of fairness without getting-
having ideas of justice. I think what is happening to that man over there, I might say, is just
unfair, and someone ought to do something about it. And so, it leads me to thinking
about what governments ought to do. And so, there’s a natural progression from Smith’s
new “science of man,” which studies exchange in terms of language, to studying how we acquire
moral ideas, ideas of justice, even ideas and thoughts about what governments ought to do.
Smith is on a big trajectory, and he knows it. In 1751, at age 27, he’s appointed professor
of logic and metaphysics here at his alma mater, the University of Glasgow. He will
be a teacher, a researcher and an administrator, all at the same time.
“By far the most useful, and therefore by far the happiest and most honorable period
of my life.” Smith throws himself into day-to-day operations,
even the minutiae of managing the University’s Roman artifacts, currently on display here
at the Hunterian Museum. He takes charge of the university library
and creates space on campus for the workshop of a young inventor, James Watt, who will
refine the steam engine for practical use. It is a hectic schedule dominated by teaching.
Every weekday, from October tenth to June tenth, with just a single day’s break for
Christmas he teaches moral philosophy and continues to refine his ideas.
And this, of course, is a perfect opportunity for him to develop his thinking about exchange
on an enormous scale. In fact, we know exactly how his thinking
developed during these years, thanks to a fascinating discovery.
So what have you got here? Well, these are two volumes of student notes
from Adam Smith’s time here at Glasgow University as a professor.
Robert MacLean is an assistant librarian of Special Collections.
On the left, we’ve got a volume of notes that describe his lectures on jurisprudence, and
on the right from his lectures on rhetoric. And why are these relevant… what do they
tell us? Well, they can tell us all sorts of different
things about the subjects that were taught. Very little is known, other than from lecture
notes, about what he taught in his classes. He taught about ethics and morality, economic
concepts like the mechanism of the price system, the shortcomings of protectionism, and the
development of governmental and economic institutions. What it shows is that his thinking about economics
is embedded in his thinking about justice, and about the duties of government.
Years later, these ideas will become the cornerstones of his works on morality and economics.
His teaching has transformed him into something of a cult figure, an academic rock star whose
portrait bust can be bought by the students in the local bookshop. If he were teaching
today, they’d probably buy a T-shirt with his face on it.
No one can have worked harder than Smith as a professor. It’s- by any standards- ancient
or modern, it’s an absolute killer regime that he goes through.
After years of research, and writing, his first great book is ready. At its core are
the ideas that trust and empathy are the root, the essence of any successful society.
Today, first editions of Smith’s breakthrough book are very rare and can sell for hundreds
of thousands of dollars. By special arrangement, Nick Phillipson and I are going to be able
to see one, close up. Johan, what we have here is a first edition
of Adam Smith’s Theory of Moral Sentiments. Bill Zachs is a distinguished Scottish Enlightenment
scholar. It was published in London in April of 1759;
one thousand copies were printed for distribution there, in Edinburgh and in other places across
Britain, at a cost of six shillings per copy. And who got this first edition?
Lucky people got presentation copies. And the lucky people tended to be powerful people
in London, members of the literary elite. But the books sold like hotcakes and two thirds
of the first edition were sold out in a couple of months.
One of the most profound things about Adam Smith is his view of social evolution. That
many of the institutions that we have, language, markets, you name it, these are indeed the
results of human action, but they’re not the results of human design. We never planned
these things. So, note that phrasing, individual human action-
but not individual human design. Smith thought that those people who believed
they knew what was best for others were represented by a figure he called: the “man of system.”
The man of system is the man who is entranced, enthralled by his own idea of the ideal, tries
to make that ideal a reality. And decides that he’s going to impose it from
the top down, whether people want it or not. And as Smith said, the man of system makes
the mistake of thinking that he can move people around the way a hand moves chess pieces around
on a chess board. And Smith thinks that this is dangerous for
two reasons. First, he thinks he knows more than he can
actually know. He thinks he knows what’s good for all individuals and then tries to force
them into his particular boxes. But of course the mistake, Smith says, is
that human beings are not like chess pieces. They have principles of motion all their own.
They have their own ideas about what they’d like to do in life. They have free will.
Far better for the well-being of the economy as a whole, far better for actual individuals
to be free to pursue their own self-interest as they see fit.
Smith had clearly made his mark with The Theory of Moral Sentiments, but the pressure of writing,
teaching and management had been extraordinary. He was exhausted, nearing a breakdown.
The Theory of Moral Sentiments saved him. It was well read in influential quarters in
London, and in fact, by the guardian of the young Duke of Buccleuch.
…who then promptly hired him at a salary of 300 pounds a year for life, which was a
fabulous amount of money, to become the tutor to the young Duke of Buccleuch…
…who was an 18-year-old, just about to become into his legal majority, to take him on a
grand tour of Europe. And so, Smith found himself, going through
France and Switzerland with the young Duke of Buccleuch.
It was an offer you don’t refuse… and Smith had always wanted to go to Paris.
It is the first time and will be the only time he leaves Great Britain. It will be a
life-changing experience. Still a destination for writers and thinkers
from all over the world, Paris today is even more glorious than when Smith arrived in 1764.
Its wide and airy boulevards showcase a stunning ceremonial architecture, yet Paris remains
an accessible city, as it was when Smith came here to walk in the parks with the great French
thinkers of the day. Smith, along with Henry Scott, the young Duke
of Buccleuch, and his entourage, settled into this neighborhood… St. Germain-des-Pres.
As now, it was a cosmopolitan mixture of shops and restaurants.
You have to imagine Smith going to Paris with one of the richest, grandest young men in Britain
whose estates were gigantic in Scotland and in England.
You also have to remember that Smith went to Paris as a man who had written The Theory
of Moral Sentiments, and was enjoying an enormous success in the salons, and in the clubs of
Paris. Paris was ready for Smith- and Smith was ready
for Paris. The Theory of Moral Sentiments was a smash
hit here. It was twice translated into French during Smith’s lifetime.
He was taken up by the ladies in Paris; his bad French became a talking point. He started
to dress rather well. His social life is suddenly full. There are
frequent gatherings in grand salons like this, where intelligent men and women meet to discuss
literature, ethics… and Smith’s own works. One of the things that’s funny about Smith
is that, awkward eccentric though he is, very few people have a bad word to say about him.
And, rather improbably, Paris loved him. Adam Smith probably dined here, with some
of his new friends. This is Le Procope, founded in 1686. It’s one of the oldest restaurants
in Paris. This establishment was a gathering place for
many of the great thinkers of the age. Voltaire was here so often that he actually had his
own desk here. And he was often joined by likes of Thomas Jefferson, Benjamin Franklin,
Diderot, Rousseau, and many, many others. Smith now changes his focus from the perfection
of private nature to the improvement of public systems. These are the ideas that will take
final form in his second book, The Wealth of Nations.
In France, Smith met many of the very early economists of his time, so-called Physiocrats…
… who were theorizing interestingly on what he took to be the central problem of economics.
How do you extend the wealth and power of a nation?
In Paris, Smith meets the leader of the Physiocrats, Francois Quesnay. They take long walks and
discuss novel ideas with other French intellectuals and economists.
They thought, like Smith, that the key to doing this in a modern world was liberalizing the
market. Both Smith and Quesnay are radical critics
of the old mercantilist system of tariffs and monopolies. They both believe in free
trade and they both think that wealth is created by individuals and businesses… not by the
government. Like Smith, the Physiocrats apply the scientific
method to the study of economics. They coupled liberalizing the market with
absolutely massive state intervention. Quesnay believes that the French economy can
only be rebuilt after radical changes in land ownership and inheritance law are imposed
in a revolutionary manner, from the top down. And this is where they part ways, because
Smith thinks that revolutionary changes like that are politically disastrous. He is convinced
that economic growth is dependent on progressive improvements and freeing up change at the
bottom. Smith thinks that markets, governed by civil
society are much better than a revolution to improve the lot of the common man. Years
later, the terror of the French Revolution will bear him out. For now, he finds a perfect
example of progressive improvement in a method of industrial production that has fascinated
many French Enlightenment thinkers. Ah… there it is… Diderot’s famous print
of a pin factory. “One man draws out the wire, another straightens
it, a third cuts it…” There are dozens of stages involved in making
pins from straightening out the iron, to flattening it, to sharpening it, and so forth and so
on, and so on… The pin factory becomes Smith’s most famous
example of how division of labor can create large-scale voluntary cooperation between
people specializing in different tasks. What Adam Smith suggested was when you divide
the labor of a particular task among many people; the overall productivity goes up.
If you want to know the state of a nation’s economy, look at the stage of its division
of labor. The more division of labor, the more productivity
and the more prosperity. That means that the larger the market, the more prosperity.
Smith doesn’t conceive of division of labor. His great contribution is to show how necessary
it is for widespread prosperity, and that the roles we play in that division must constantly
change according to our skills, the demand for them and the competition we face.
From the hustle and bustle and glamor of Paris, Smith returns home to the quiet of Kirkcaldy
to settle down and develop ideas for his next book.
The deal with the Duke of Buccleuch means that he doesn’t need to worry about paid labor
anymore. He is his own man financially. This gives him the opportunity to finish The
Wealth of Nations and to define many of the economic principles that will stand the test
of time and usher in the modern world. He is reading voraciously. It’s intense writing,
rewriting over a three, four-year period. We know that after a hard day’s work, Smith
occasionally visited The Path Tavern to exchange stories and raise a glass or two. Established
in 1750, it was just a few blocks from his home.
Hi, how are you doing? Not bad, how are you today?
Great… thanks. Good, that’s lovely.
Can I have a glass of claret, please? Yes, of course you can.
His drink of choice is claret and even in a simple glass of wine he sees an economic
principle. “It is the maxim of every prudent master of
a family, never to attempt to make at home what it will cost him more to make than to
buy…” Never to make at home what is cheaper to buy
elsewhere – and that was certainly true of wine in Smith’s day.
In Scotland, the land lacks the chalky limestone and gravelly soils that lend so many flavors
to the wines of France. Even more, it’s too cold and wet to grow good wine grapes here.
In Smith’s day, like today, most good wine drunk in Scotland is imported from France.
It’s reasonably priced, readily available, and tasty.
So when it comes to wine, France has a competitive advantage. It’s nearly impossible to produce
fine wines in Scotland. But the Scottish soil is perfect for something else.
Could I have a Balvenie please? Certainly.
Although the Scottish soil or “terroir” is inhospitable for the growing of grapes for
wine, it’s perfect for growing barley – and malted barley is the major ingredient in single
malt scotch whiskey. The moral of the story? Do what you do best-
and trade for the rest. Sure, the best wines from France cost a fortune. But so do the
best single malts. The essential thing about the free market
is that it is voluntary trade between different people, voluntary exchange.
What we’re doing is looking at each other as potential partners, as peers, not as enemies.
You are my opportunity, not my enemy. So Smith saw the market economy as extending the frontiers
of opportunity for everyone, including and especially the least among us.
Smith knew that moving products to supply people with what they needed and wanted from
around the world is a complicated process, too complicated even for the most powerful
government to manage. But he saw it as a natural function of a free market.
If you make that into a system, whereby it’s not just you and me, but it’s millions and
millions of people all trading with each other and exchanging things that they produce, then
that is an extremely efficient system. It’s all highly organized, not from the top,
but from below. It’s the result of millions of people acting in their individual interests.
Have you ever noticed that, when it’s raining, there’s someone there selling umbrellas and
when you’re at the beach, it’s easy to find sunglasses and suntan lotion? Adam Smith told
us why. “It is not from the benevolence of the butcher,
the brewer, or the baker that we expect our dinner, but from their regard to their own
interest. We address ourselves, not to their humanity but to their self-love.”
By self-love, Smith means that sellers want to earn a living in order to support their
families. To do that, they make the products that they think you and I will want to buy.
Not because anyone tells them to, but because it’s in their best interests.
So, for Smith, what he saw was not mutual selfishness. What he saw was mutual respect,
which is an entirely different moral paradigm. Here’s how it works: the prices we’re willing
to pay send key signals and Smith used a baker as an example.
Hi, this all looks delicious… Could I have a cup of coffee?
Yeah, of course. And a scone, please?
But let’s say we all want scones, and the baker keeps running out, well then, she can
charge a bit more. Seeing the demand and money to be made, other
bakers will start offering scones. All throughout the supply line, people spring into action.
Farmers see that bakers are buying wheat so they plant their fields, and up production.
Truckers see money to be made in delivering wheat to bakers, so they buy trucks and hire
drivers. Thank you.
So…we vote with our wallets, and all around the world, people spring into action, to satisfy
our demands. No one orders them to do this, but every purchase sends a message.
As the supply increases, competition forces prices down. Fewer bakers bake scones and
things stabilize as supply meets demand dynamically and automatically.
This all happens without government intervention, without any trade commissar, “man of systems”
dictating quotas. This is Smith’s “invisible hand” at work; it guides large businesses
and even a small baker. Just as “the impartial spectator” summarizes
much of The Theory of Moral Sentiments, the “invisible hand” summarizes much of The Wealth
of Nations. “He is in this, as in many other cases, led
by an invisible hand to promote an end, which was no part of his intention.”
When the baker sees that we want to buy bread, she makes the bread so she can make a living;
and the other side of the coin is that we get bread.
And it’s a beautiful place, welcoming, friendly. There’s more to competition than price alone.
One of Smith’s great contributions to humanity is his realization that things didn’t have
to be planned in order to be orderly. He believed that many complex systems can
be generated by local behavior. They don’t have to be, and actually can’t be created from
the top down. If you just left people to their own devices
in what he called the “system of natural liberty,” that people will find ways of working with
each other, and cooperating with each other, and collaborating with each other.
Smith thought that entrepreneurs and businesses create wealth, but don’t get the idea that
he was an apologist for all business. On the contrary, he saw how many businessmen were
drawn to create monopolies and deceive the public interest for their own benefit and
that is precisely why he argued for free competition and free trade.
Greedy businessmen who try to rob consumers by raising prices or lowering quality would
be ruined if the consumers were allowed to turn to another competitor. And that is why
Smith thought that the government shouldn’t be pro-business; it should be “pro-market.”
I think probably the biggest misperception people have about Smith is that he advocated
some kind of extreme selfishness or greed. Smith recognized selfishness for what it is;
something that’s unattractive when we see it, and something that’s unhealthy when we
experience it. Smith sees the “invisible hand” working in
small market places, but in the wider countryside, kings and queens had long sold monopolies
and lavished gifts of land upon their favorites. In Adam Smith’s day, castles like this dotted
the Scottish landscape. Their owners were nobles devoted to a life of ease and pleasure,
and the legal system was structured and enforced to keep it that way.
Of course, those people had enormous power, not just economic power, but also political
power as well. Inheritance laws forced family estates into
the hands of eldest surviving male, and that kept them intact, instead of being divided
among the siblings. Among tradesmen you had the guilds, who were
deliberately trying to get regulations in their favor to- to keep out competition. So,
the ordinary working person really was very much left out by this system.
“Laws and government may be considered in this and indeed in every case as a combination
of the rich to oppress the poor and to preserve to themselves the inequality of the goods.”
People used to think that wealth is the treasure you keep safely locked up behind thick walls.
In the 18th century, many people thought that what wealth was- was gold.
…That what we needed to do is to export a lot and then we would get money from other
people, and import as little as we could. It was a zero-sum worldview: where one country’s
gain had to be another’s loss. So they created a legal framework that was a lot like their
castles: high walls all around, and a drawbridge to keep competition and imports out.
Of course, Smith said that was all wrong, that both sides benefit from a transaction,
both the buyer and the seller, and that if you really want to increase prosperity, what
you should do is to increase trade as much as possible, rather than try to prevent one
side of it coming into you. Smith’s detailed study of markets leads him
to realize that it’s the labor of a nation’s inhabitants that is the major source of wealth.
If you read The Wealth of Nations, the very first sentence he says, “The wealth of a nation
is fundamentally the productive labor of its people.” In other words, it’s gross national
product, as we would call it these days, absolutely breathtaking.
And in the second sentence he talks about gross national product per capita. In the
third sentence he talks about productivity. These are completely new concepts.
That is how you grow; that is how you acquire wealth. It isn’t the amount of silver that
you can get into the- into your vaults. It is the productive capacity of your citizens.
Before Smith, almost every school of thought taught people that one’s own interest is always
contrary to someone else’s. But Smith changes everything. If trade increases
our wealth, then other people, other groups and other nations are not by nature our enemies.
Tying the progress of modern society to productive people and open markets is a revolutionary
idea, but he also speaks to the role of government in a free society.
“Little else is requisite to carry a state to the highest degree of opulence… but peace,
easy taxes, and a tolerable administration of justice; all the rest being brought about
by the natural course of things.” This displays a striking faith in the average
human being. If we just give you some space and protect your basic rights, you can figure
out how to improve your own life. We don’t have to do things for you; we just have to
stop doing bad things to you. In 1773, Smith is here in Kirkcaldy working
on The Wealth of Nations but the material he needs is miles away in London. So, he sets
out to visit Parliament, to investigate taxes, a potential war with the American Colonies
and the government’s support of monopolistic companies.
Because “peace, easy taxes and a tolerable administration of justice,” does not describe
what goes on in the British Parliament. 18th century London didn’t have cars or buses,
but it was a huge, vibrant metropolis; and the center of the most important political
debates. Smith followed them closely and he wrote about them in detail.
As you read Smith it becomes very clear that the problems of his day are very much similar
to ours: poverty and unemployment, failure in the educational system, political pork,
foreign conflict, runaway spending, and a burgeoning national debt.
Some of that debt can be blamed on what was perhaps, the greatest state supported monopolistic
company in history. Here along the Thames, in the southeast corner of London, lay the
docklands, home to those mighty fleets of sailing ships in the days when Britannia truly
“ruled the waves.” This place doesn’t look like much today, but
in the early 19th century; this was a bustling, wide expanse of docks and port facilities
owned by the East India Company. This used to be the homeport of one of the
most powerful organizations on earth. Now it’s just filled with mud.
Smith saw the East India Company as the epitome of monopolistic evil. Britain’s National Maritime
Museum in Greenwich has the story. Here within the galleries of this World Heritage
Site is an amazing repository of the seafaring heritage of the British Empire… filled with
treasures large and small, including a superb exhibit of the East India Company.
I think what surprises people when they come into this gallery is just A, how large the
Company was, and B, how long it lasted. I mean this is something that’s dominating Asian
trade for more — almost 250 years essentially. Robert Blyth is the senior curator of world
history here at the museum. The East India Company actually becomes an
Asian power. It has its own army, its own navy, and of course, its own merchant ships
are armed as well. In fact, it was one of the most powerful organizations
on earth. In Smith’s day, the company accounted for much of the world’s trade and had its
own army of almost 70,000 soldiers. It ruled all of India.
So, the company is actually minting its own coinage in India in order to strike some of
its deals. So an official coat of arms and minting your
own coins, it seems like they’re almost spontaneously, without intention, moving from being a company
to becoming a government. Absolutely, this is monopoly. The company
has real power. So, this is company as government. The story of the East India Company highlights
how easy it is to divert public resources for private gain.
If you think of Adam Smith’s ideas of a free market, of free trade- the company is the
absolute antithesis of that. Smith denounced the company as a bloodstained
monopoly: “burdensome,” “useless” and responsible for “grotesque massacres” in Bengal.
Its managers and officers became incredibly wealthy, but the company itself was never
very profitable. When it’s not making a profit, when military
conquests in India really is a drain on its finances, the British government has to step
in to prop up the East India Company. Essentially, the company becomes too big to
fail. In order to bail out the company, Parliament
passed the Tea Act of 1773, allowing the company to sell its tea to the American colonies,
on privileged terms, at a tax rate lower than the local tea merchants. This, of course,
led to the Boston Tea Party. So, it is East India Company tea that is thrown
into the harbor at Boston. Now, it might be too much of an exaggeration to say that the
East India Company’s monopoly caused the American Revolution, but definitely a factor in it.
Smith finds himself having to think about, how do you manage empire in the modern age?
But even worse, there is the problem of America. What to do about those discontented, troublesome,
American colonies who have begun to demand more influence or even independence?
Smith thought that the Americans were victims of the mercantilist system. That Britain was
trying to extract wealth from America and make sure that no wealth went from Britain
to America. Smith gets caught up in this debate, and becomes
closely involved. “The Parliament of Great Britain insists upon
taxing the colonies; and they refuse to be taxed by a Parliament in which they are not
represented.” Smith is widely respected, very well connected,
and feels that the way Britain deals with the American colonies is very important not
just for the colonies, but for Britain as well.
Is a commonwealth, a free trade zone with America, is that possible?
Because he believed that the best for both sides would be open and free trade.
This is one of the most hotly debated and difficult problems that any British government
has ever had to face. Smith listens to debates on the American issue
in the British Parliament. He even lobbies politicians, urging them to let go of their
mercantilist thinking and keep Americans on friendly terms with open trade and migration.
In fact, he speculates that America could one day be the seat of the capitol of Great
Britain. Yet war is clearly on the horizon – in which
thousands of British troops will be sent to die on a faraway shore. It will be a very
unpopular and costly war. In Smith’s day, the military is the government’s
single largest expense. And this is one reason why. This is the HMS Victory, on which Admiral
Lord Nelson defeated the French Navy, and lost his own life, at the Battle of Trafalgar
in 1805. It’s been beautifully restored and rests here in Portsmouth, England.
Built at a cost in excess of what would be 75 million U.S. dollars today, the Victory
was a deadly floating gun platform with 100 bronze cannons on three decks. She carried
four acres of canvas and made battle speeds of eight knots.
Launched in 1765, this ship had a crew of 821 men. The Royal Navy in those days had
more than 500 active ships, and 140,000 seamen, plus huge homeport facilities in England
to maintain and repair all those ships. Smith has run the numbers in detail-as he
always did-and he really couldn’t see any way in which the colonies would ever be profitable
to Britain. Controlling colonies, just to monopolize trade, would never pay.
As we all know, the British government didn’t adopt Adam Smith’s views on the colonies.
But he felt so passionately about it that he concludes The Wealth of Nations with them
as an example. In 1776, just months before America’s seething
discontent bursts into outright rebellion, the Wealth of Nations is published.
It’s a beautiful book. It’s expensive. If you walk through the great libraries of
the world, you will find the Bible. You will find Newton. You will find Darwin’s Origin
of the Species. That collection is not complete without The Wealth of Nations. It is one of
the path-breaking books of all time. And it’s written to be understood and taken
seriously by governments, as well as by philosophers. And governments do take it seriously. Almost
immediately, Smith’s ideas catch fire around the globe. The founders of the American Republic,
the kings, queens and parliaments across Europe from Great Britain to Russia, become convinced
that Smith has conceived of a revolutionary blueprint for prosperity. And they start reforming
their countries, with the result of unleashing growth and speeding up the Industrial Revolution.
Smith is now wealthy, famous, and influential. He and his aging mother move to Edinburgh.
Here in this building on High Street, he will follow in his father’s footsteps as a commissioner
of customs. He will live out the last 12 years of his life, in his new home just a
few blocks away. He chooses the Canongate neighborhood, known
for its large and fashionable homes and gardens. And he settles into this home, the Panmure
House, named after its original owner, the Earl of Panmure.
Big ugly house next, however, to a church. And his mother is a deeply religious woman.
But it’s near the center of things, and in a sort of way it’s a friendly house.
Here in this large and friendly house, he convenes weekly dinner parties that soon become
major intellectual and social events. All of the minds that were there in Edinburgh
at the time, the great minds could come around to his house and talk about life, and politics,
and art, and literature and economics. And so, the end of his life, it’s a sociable
life. The only snag is that it doesn’t give him much time for writing.
And yet something he does write shines a critical light on the real “Adam Smith.”
He returns back to The Theory of Moral Sentiments, and he revises it very comprehensively. He
adds a very significant section… and it’s a study of the virtue and indeed, the virtues
that he believes to be necessary for modern commercial society.
“To feel much for others and little for ourselves; to restrain our selfishness and exercise our
benevolent affections, constitute the perfection of human nature.”
Smith mattered to his contemporaries, and the fascinating thing is he’s gone on mattering
to posterity. He was deeply concerned for the plight of
the working poor that he felt were really kept out of opportunities by the kind of cartel
and the crony capitalism of his day. So, laws and institutions shouldn’t only be
set up to favor the already entrenched interests; people at the bottom of the economic spectrum
matter, too. Every generation has to cope with the problem
of how far should governments intervene in the business of trying to maximize the wealth
of their own country. These are eternal questions, which every single government, in every single
generation, in every single country has to address.
Perhaps the greatest gift that Adam Smith has given to us is a set of institutions,
political economic institutions that have enabled the greatest increase in productivity
and prosperity that the world has ever known. To an impressive degree, the world now runs
according to Smith’s vision. In fact, his ideas are so universal that it’s difficult
to tell where they begin or end. He died in 1790, six years after his mother.
He’s buried here, in a cemetery just a few houses from his beloved Panmure House and
next to the church where his mother used to worship. Together with Newton, Voltaire, Jefferson,
Darwin and other great thinkers, his was one of the greatest minds of his era.
Through persistent observation and astonishing insight, he showed how society and human interaction
really worked…and how much happier and more prosperous the citizens could all be.
Who was the real Adam Smith? Surely he was both free market advocate and moral philosopher.
I was intrigued to learn that in the twilight years of his life and in secret, he gave the
bulk of his wealth to charity. In the end, and true to his principles, he
left his considerable estate to the poor and his ideas…to us.
Funding for this program has been provided by John Templeton Foundation, and Templeton