Chapter 1: What is the significance of Adam Smith in modern economics?
Hey there, it's Stephen Dubner. If you've been keeping up with your Freakonomics Radio feed, you've already heard an episode we made about a new oratorio by David Lang called Wealth of Nations, which was inspired by the book Wealth of Nations by Adam Smith. Smith was a Scottish philosopher who today is thought of as the first modern economist.
Wealth of Nations was published in 1776, and it's never really left the scene. A few years ago, we made a three-part series called In Search of the Real Adam Smith. Today, we are replaying for you one of those episodes. It's called Was Adam Smith Really a Right Winger? Facts and figures have been updated. I hope you enjoy. What do you think Adam Smith would make of the UK economy today?
Oh, golly. He'd think it's in a great pickle. I think he'd actually think that it's one of the most tyrannical systems that he'd ever discovered. The idea that government should be taking 40% of the national income in taxes of one sort or another Not just direct taxes on income, but taxes on everything you spend, taxes on air travel, all sorts of hidden taxes, taxes on work, taxes on jobs.
He would think that this is the most oppressive regime in the whole world. That is Eamon Butler. I'm a director of the Adam Smith Institute, which is a free market think tank based in London.
And we are in London with him. Today on Freakonomics Radio, we are trying to figure out how Adam Smith, a moral philosopher from 18th century Scotland, became the patron saint of free market capitalism, even into the 21st century. Did Smith, for instance, really see governments as tyrannical?
He distrusts politicians, both their abilities and often even their intentions.
We'll find out when and where the modern view of Smith gained traction.
The Chicago School picked up a few aspects of Smith's thought and made it the whole of Smith's thought.
And we'll hear how this interpretation of Smith is often quite wrong. As much as that might have been efficient in terms of allocation, it was horrible from the perspective of human welfare.
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Chapter 2: How did Adam Smith's views on government influence economic thought?
This disposition to admire and almost to worship the rich and the powerful is and to despise or at least to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is at the same time the great and most universal cause of the corruption of our moral sentiments.
The book brought Smith a sterling reputation as a writer, philosopher and public intellectual, which is why some of his friends thought it odd that he accepted a position as a tutor to a 17-year-old Duke, the stepson of a future chancellor of the Exchequer. This assignment included travel around continental Europe.
Smith grew bored with the tutelage itself, but he did get to spend time with Voltaire, with the economist François Canet, and with Benjamin Franklin. He also had the chance to observe how other nations were dealing with the massive economic changes being produced by the rise in global trade and the onset of the Industrial Revolution. In a word, he thought they were dealing poorly.
Governments, he noted, often had protectionist instincts, where Smith thought they ought to be more open to free trade. After a couple of years, he returned to Scotland and threw himself into his next book.
Smith had never been accused of being a fast writer, and it turned out to be 17 years between the publication of The Theory of Moral Sentiments and the release of his second and final book, The Wealth of Nations. The publication of The Wealth of Nations coincided with two major events. The first was the death of the philosopher David Hume, Smith's best friend and most significant mentor.
Yes. Yeah. Adam Smith and David Hume are best friends. It's very cute.
And the second major event. Well, this was the year that Britain lost control of its colonies in America. Eamon Butler again.
The Wealth of Nations, his big book published in 1776. What a great year that was. It really is a polemic. It's a polemic against economic centralism and restrictions on trade. So who, in your mind, did he write The Wealth of Nations for?
Oh, for the politicians of the day, because the politicians of the day were stuck in this idea that you had to resist foreigners bringing goods into your country. And similarly, you want to export as much as possible.
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Chapter 3: What are the main arguments for and against the interpretation of Smith by modern scholars?
The rulers of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been not an empire, but the project of an empire.
not a gold mine, but the project of a gold mine, a project which has cost, which continues to cost, and which, if pursued in the same way as it has been hitherto, is likely to cost immense expense without being likely to bring any profit.
It's clear that he thinks that the colonial projects, both in the Americas as well as other parts of the British Empire, in Bengal, are a loss. They are a huge financial drain.
Glory Liu is the author of a book called Adam Smith's America, how a Scottish philosopher became an icon of American capitalism. You write in your book that the wealth of nations became the origin point of the science of political economy in the United States and that Smith was both revered and criticized. Sketch that out for me, both the reverence and the criticism.
What I'm really trying to get a sense of is how concretely or prominently did Adam Smith's ideas shape the U.S. political economy early on?
So the important thing in the founding era is that Smith is important as like a very technical resource, but he hasn't quite obtained that halo around him yet. He's not like Adam Smith-like. the father of all gifts and the markets and people like genuflect when they hear his name. He's well known, but he hasn't acquired that intellectual authority yet.
So his writing wasn't treated like a religious text, more like a blueprint, perhaps.
Absolutely. That's a great way of describing it. You have people like James Madison who will say things like, oh, you know, I own this great text on political economy and I'm a friend to commerce. The implication or the kind of subtext is like, this was a smart man who wrote
900 plus pages about different ways to think about commerce, the relationship between agriculture and manufacturing, the conditions under which liberalized trade made sense versus prioritizing national defense. This is the most sophisticated, most up-to-date analysis of what it means to be at the helm of a nation that cares about national wealth.
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Chapter 4: How have different political ideologies shaped the perception of Adam Smith?
was powerful. Smith continued to be cited by politicians and others throughout the 19th and early 20th centuries. Some used Smith to argue in favor of unbridled commerce and to rail against regulation. Others went the opposite direction.
As the organized labor movement grew, for instance, the progressive economist Richard Ely argued that Adam Smith would have been firmly on the side of the unions. If you know even a little bit about Adam Smith's reputation today, it may surprise you to learn this, that Smith was used in service of such progressive causes because Smith's reputation today runs conservative or at least libertarian.
So where did that reputation come from? In her book, Glory Liu says it mostly came from the University of Chicago.
That's accurate according to my view of things.
So you write, Glory, that the University of Chicago Economics Department not only embraced Smith around the middle of the 20th century, but also, to quote you to yourself, smoothed over or altogether obscured the complexities, tensions, and other problematic aspects characteristic of earlier readings of Smith. Okay, so that's a lot to unpack. Unpack that for me, please.
One place to start is to ask, okay, well, what were the problems and complexities in the earlier versions of Smith? So this brings us to kind of early Chicago school. The figures that I look at are people like Jacob Viner and Frank Knight, and they are these like heavyweights.
The University of Chicago doesn't have the reputation that it does today when Jacob Viner and Frank Knight were around in like the 1930s. They teach Smith as an early theorist of price.
So teaching Smith as an early theorist of price and somebody who gives scientific value and a kind of objectivity to economics is really important for building intellectual credibility, let's call it, of Chicago's way of doing economics.
But then Viner and Knight go away. They leave.
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Chapter 5: What impact did the Chicago School have on Adam Smith's legacy?
A fanboy who's just cherry picking. But I do think that it was this symbiotic relationship where Stigler loved reading Smith, and he also happened to find the perfect mascot that coincided with his own views of what economics should be and how to think about economics in relation to the politics of deregulation.
In Glory Liu's book, there is a photograph of a grinning George Stigler wearing a T-shirt that says Adam Smith's best friend. Where did that come from? As the story goes, Stigler liked to play a game with the very young children in his family where he would offer a million dollars if they could answer a tough question. One day he asked, who is Adam Smith's best friend?
The answer Stigler was looking for was David Hume. The answer he got was, you are Uncle George. It was a pretty good answer. Good enough to go on a T-shirt, at least. Stigler and a few other Chicago economists had had a tremendous impact on the reputation of a man who by then had been dead nearly 200 years.
OK, so the Chicago School picked up a few aspects of Smith's thought and made it the whole of Smith's thought.
That is Dennis Rasmussen, another Smith scholar. He is a political scientist at Syracuse University.
They picked out the phrase the invisible hand, which he uses just two or three times in his writings, and made that the central feature of who Smith was. To me, that's unfortunate.
The phrase the invisible hand appears exactly once in The Wealth of Nations. It is in a section about whether local businessmen would be tempted to use foreign trade to enrich themselves at the expense of their nation. Smith's argument was that no, they wouldn't. Why not?
Here is Smith's reasoning. By preferring the support of domestic to that of foreign industry he intends only his own security. And by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain. And 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.
Whether Smith was actually right in this regard and whether his reasoning holds up today is That is a matter of debate. During the past few decades of economic globalization, there's plenty of evidence to the contrary. In any case, Smith's phrase, the invisible hand, has come to mean something different.
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Chapter 6: What role did Adam Smith play in the context of British privatization?
And it just so happens that the invisible hand as a nice phrase has become associated with positive cases of unintended consequences. And that's led to it then becoming associated with a whole range of different arguments.
What Craig Smith is saying here is that the phrase the invisible hand today is used to imply that economic markets will operate perfectly well if you just let them be. Even though that's not what Adam Smith was saying. Here is Dennis Rasmussen again.
I think one of the most valuable and interesting aspects of Smith's thought is precisely that he recognized the real potential drawbacks and dangers of commercial society, the ways that commerce can produce great inequalities, the ways that wealthy merchants and manufacturers collude against the public interest, and above all, the way that the desire for wealth often leads people to submit to
endless toil and anxiety in the pursuit of just frivolous material goods that will produce only fleeting satisfaction. And so I think too many of the Chicago school thinkers, even today's self-proclaimed Smithians, read him as a mere apologist for commercial society, whereas I think he was anything but. It's not that Smith didn't ultimately defend commercial society. He absolutely did.
He's absolutely convinced that commercial societies... faults, though real and important, are not nearly as numerous or as great as those of other forms of society. That the security and liberty and prosperity that commercial societies make possible constitutes a real improvement over the alternatives.
Do you think economists, including the Chicago School, knowingly exploited Smith's teachings, knowingly cherry-picked for their purposes? Or were they true believers and focused on what resonated most and just didn't really engage too much with the rest?
My sense is the latter. Smith isn't a particularly easy thinker to read or to understand. I mean, he writes in English and it's modern English, so it can sometimes have the appearance of being very familiar and easy. But to understand the nuance of his thought, you really have to spend some time with it.
But the fact is that the Chicago economists, George Stigler and especially Milton Friedman, did promote Adam Smith as a sort of superhero of economic thought. Glory Liu again.
Friedman was a rhetorical genius. Like he was so charismatic and he was so good at speaking to the public.
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Chapter 7: How do contemporary economists reconcile Smith's ideas with modern capitalism?
In her agenda, cutting taxes and trimming government itself, this held considerable appeal for the Thatcherite wing of the Conservative Party. Everyone else was much less enthusiastic, especially the markets. As soon as Truss announced her plans, interest rates spiked, the pound tanked.
And after just 44 days in office, the shortest term ever for a British prime minister, Liz Truss announced she would resign.
Given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party.
By the time we arrived in London in search of the real Adam Smith, Truss's successor had just taken office, Rishi Sunak, a former chancellor of the Exchequer, and he made clear that his economic plan wouldn't be quite so bold.
Some mistakes were made. Not born of ill will or bad intentions. Quite the opposite, in fact. But mistakes nonetheless.
Sunak lasted only until 2024 when he was replaced by Keir Starmer. The doors in Westminster continue to revolve rapidly. But the man we have come to visit has been here for nearly half a century. Hello there. Oh, hello, Eamon, hi. That, again, is Eamon Butler, director of the Adam Smith Institute. The Institute's walls are adorned with Smith portraits.
One of them was on the £20 note for a while.
Now, I got a call from the Bank of England, their library, and they said, do you have any good images of Adam Smith? And I said, well, there's plenty, you know, what would you like? And they said, well, I'm not really supposed to tell you this, but we're thinking of putting him on a bank note.
And I thought, well, yes!
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Chapter 8: What lessons can be learned from Adam Smith's philosophy today?
Thatcher sided with shopkeepers.
There is no such thing as public money. There is only taxpayers' money.
And what did all this mean for Eamon Butler and his new Adam Smith Institute?
It's the most exciting time of my life. When Mrs. Thatcher took office, what you had was an ideological administration. Before then, politicians had all been managerialists. They were just trying to keep the show on the road. Whereas Mrs. Thatcher, daughter of a shopkeeper, she was determined to run the economy like you would run a shop very prudently.
and to experiment with all sorts of new ideas that had been off the agenda for such a long time because there was this sort of centrist, left of center consensus. So that was quite thrilling that it was an administration which was genuinely interested in ideas.
Thatcher cut taxes, slashed government spending, and curbed the trade unions. She also set out to privatize a great many state assets and industries. It seemed as if Thatcher was giving a great bear hug to Adam Smith and, by association, to the Adam Smith Institute.
Well, one of our first publications was on what we call quangos, quasi-autonomous non-government organizations. They're sort of boards and committees around Whitehall that ministers appoint people to, but there's some very weird ones like the Hadrian's Wall Advisory Committee, which and the Detergents and Allied Products Voluntary Notification Scheme Scrutiny Group.
And we discovered in the UK there were 3,068 of these. And we said, that's far too many. This is just bureaucracy. Let's get rid of it. And we published that in a book, but it was a strange book because it only had one page, but that page was 12 feet long. which was a list of all of these quangos. So Mrs. Thatcher saw that and she got the head of the civil service to meet up with us.
And he said, well, the prime minister's told me I've got to cut quangos. Which ones should I start with? So there was that. And then a second thing that we sort of came up with was contracting out local government services, repairing the roads and collecting the garbage and things like that. We looked around the world for practical examples of where this had happened. And we discovered that
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