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Smith's Wealth of Nations — Transcript

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0:00[Music]
0:14so
0:26[Music]
0:28hey the last lecture for today is going
0:30to cover adam smith's
0:31wealth of nations and it's one of the
0:34great
0:34epoch making works in the history of
0:36social science
0:38it's usually thought of as the high
0:40point in the social scientific thought
0:41of the enlightenment
0:44now it should come as no surprise that
0:46adam smith
0:47is interested in the wealth of nations
0:50because in the middle of the 18th
0:51century
0:52wealth in england had grown to
0:53unprecedented proportions
0:55and it was a matter of both concern and
0:58amazement
0:59to contemporary englishmen where this
1:01wealth had come from
1:02and how they could get more of it like
1:04many of us wealth this was seen by adam
1:06smith and other englishmen as being
1:08attractive
1:09and the mystery of where wealth comes
1:10from and how we can get more of it
1:13is what the wealth of nations is all
1:14about
1:16now it's not surprising as well
1:20that science and that scientific
1:22approaches to the study of society
1:25are central to smith's concern he's in
1:27the tradition of enlightened social
1:29thought
1:30enlightened political thought and he
1:31wants to adapt the scientific method
1:33that's been so successful in physics
1:36and in other scientific realms other
1:38realms of physical inquiry
1:40to the inquiry into society
1:43now adam smith hit on something very
1:46important
1:47that there's something about industrial
1:48society there's something about society
1:50in which
1:51economic life has been rationalized and
1:52compartmentalized
1:54that's remarkably productive and this
1:56productivity is the source of
1:57source of unprecedented wealth and
1:59unprecedented and almost uncontrollable
2:02changes in the structure of society
2:05once the scientific revolution had begun
2:08when bacon
2:08and galileo and eventually newton
2:11formulate a new conception of nature
2:13it's only going to be a matter of time
2:15before someone takes it into their head
2:17to apply this conception of nature to
2:19manipulate the world around them
2:21in other words in the scientific
2:23revolution itself
2:24the age of machines the age of the
2:27industrial revolution
2:28is inside the development of modern
2:30natural science as a sort of embryo
2:32it's implicit in the rise and
2:34development of newtonian mechanics
2:36so it should come as no surprise that
2:38the society that develops
2:40boyle's law of gases a few generations
2:43later develops watts steam engine
2:46and should come as no surprise when we
2:48further find out
2:49that the same society that developed
2:51watts steam engine is going to be the
2:53same society that in a few generations
2:55after that
2:56will develop what william blake called
2:58the dark
2:59satanic mills of the industrial
3:02revolution
3:03in other words the age of machines the
3:05rise of technology
3:06is implicit in the development of modern
3:08natural science
3:09and the development of industrial
3:11society and the unprecedented wealth
3:13that comes along with it
3:14is built right into the structure of the
3:16scientific revolution
3:18of the enlightenment now
3:21adam smith's book the wealth of nations
3:23took him over 20 years to write
3:25it is an enormous deep complicated piece
3:28of work
3:29and unlike something like say
3:30montesquieu's spirit of the laws it's
3:32extremely well constructed
3:33extremely well thought out it reminds
3:36one almost of thomas hobbes leviathan in
3:38the sense that it's
3:39very nicely structured very carefully
3:41concerned with presenting the argument
3:43in a logical way
3:44and there are two books two basic chunks
3:47of the wealth of nations
3:48and the first book covers three themes
3:50the second book covers
3:52two additional extrapolations from those
3:54themes
3:55in the first book of the wealth of
3:56nations adam smith presents
3:58his most important discovery which is
4:01that the division of labor
4:03increases the productivity of labor what
4:05this means is that the division of labor
4:08increases the aggregate wealth of
4:10society
4:11when labor is divided we find that
4:13people are working
4:14both hard and they're also working smart
4:17and working smart makes them productive
4:19and working productively working
4:21efficiently increases the aggregate
4:23wealth of society
4:24in addition to that i mean that would be
4:26a fine first book by itself
4:29but in addition to that in the first
4:30book of the wealth of nations smith
4:32talks about the process of capital
4:33accumulation
4:34what capital is and where it comes from
4:37another
4:37central issue in economic theory and he
4:40finishes up that third book of the
4:41wealth of nations
4:42with a general economic history of the
4:45west
4:46since ancient times right up to the time
4:48that he was writing
4:49which is an amazing intellectual tour de
4:51force
4:53the history of human societies relates
4:56to the
4:56enlightened scientific approach to
4:59society that's characteristic of the
5:00enlightenment
5:02in the same way that the data that we
5:04get from laboratories
5:06relates to the actual scientific work
5:08done by a physicist
5:10in other words the data that one gets
5:11from a laboratory and the data that one
5:13derives from the history of human beings
5:15have analogous foundational
5:19roles in both modern natural science and
5:21in modern enlightened social science
5:24now not only does he come up with a
5:26theory of prices
5:28not only does he come up with a theory
5:29of capital accumulation not only does he
5:31offer us a general economic history of
5:33the west
5:34but in the second book adam smith goes
5:36beyond that he takes the theoretical
5:38gains that he's made
5:40and he applies them to contemporary
5:42political and economic issues
5:44and he offers a root and branch critique
5:47of
5:47mercantilism mercantilism was the
5:49dominant economic and political ideology
5:52of mid 19th
5:53of mid 18th century england and adam
5:55smith has gone beyond
5:57mercantilist uh theories of economy and
6:00society
6:01and offers on the basis of his for the
6:03first book of wealth of nations
6:04a general and profound criticism of the
6:07way in which
6:08economic policy is being made in 18th
6:11century england
6:12he finishes up the fifth book it's an
6:14amazing piece of work but he finishes up
6:16this second book with a fifth and final
6:18theme he analyzes the revenue and the
6:20expenditure of the sovereign which is to
6:22say
6:23he analyzes public spending and public
6:26revenue taxation and spending by the
6:29government
6:30and he asks what sense different kinds
6:32of expenditures make
6:34in what respects they can be justified
6:36and what the optimal
6:38mix of expenditures would be in order to
6:40create the maximum felicity
6:42he is a very important social scientist
6:44because he can directly take
6:46his new economic theory and apply it to
6:49the immediate
6:50practical questions of politics and
6:52economy
6:53this is a quantum leap in the
6:55development of social science
6:56there is really nothing in the 17th
6:59century
7:00and earlier centuries which is as
7:02directly and obviously applicable to
7:04immediate political concerns
7:06and since wealth is a great concern of
7:07almost everyone it was
7:09greeted with a considerable amount of
7:10intellectual interest
7:13now the big breakthrough in the wealth
7:16of nations is the fact
7:18that the division of labor increases the
7:20aggregate wealth of society
7:22how does it do that well it works like
7:25this dividing labor makes
7:27labor more efficient and thus more
7:28productive
7:30and that means that the problem in
7:32creating rational public policy
7:34or intelligent public policy is figuring
7:36out how we can foster
7:38and extend the division of labor so the
7:41real question then becomes
7:42what is it that impedes the division of
7:44labor and it turns out that for smith
7:47the division of labor is limited by the
7:49extent of the market
7:51in other words you will have a division
7:52of labor for
7:54the production of shoes or clothing or
7:57food
7:57or what have you insofar as you're able
8:00to get a market for the things you
8:02produce
8:03the division of labor entails the idea
8:04of mass production
8:06the division of labor involves the
8:08creation of enormous amounts of
8:10commodities
8:11and there's only an economic rationale
8:13in the creation of enormous
8:15vast volumes of a commodity if there's
8:17somebody that wants it
8:19there's no sense in producing a million
8:21pounds of food to feed one person
8:23the division of labor is limited by the
8:25extent of the market
8:27so now we have a further problem the
8:30only way that we can create
8:31more wealth is by increasing the
8:32division of labor and the only way we
8:34can
8:35increase the division of labor is by
8:36increasing the size of the market
8:38so we must inquire what is it that
8:40impedes
8:41the extension of the market and it turns
8:43out there are two kinds of things that
8:44prevent
8:45the extension of markets and thus the
8:47increased division of labor
8:48and thus the increase of human wealth
8:51what impedes the division of
8:52labor and the development of the market
8:56are natural causes and conventional
8:58causes
8:59natural causes are essentially space and
9:01time in other words
9:03it's hard to divide or it's hard to
9:06create a market
9:07for pins produced in england
9:10among say the australians because
9:13australia is a long way from england
9:15and in order to have a market for
9:17english pins
9:18we have to factor in all the labor
9:20that's involved in taking pins from
9:21england to australia
9:23so space and time the limitations
9:26on our transportation and the
9:28limitations on our communication
9:30form a sort of natural barrier to the
9:32extension of the market
9:34and these natural barriers to the
9:35extension of the market limit the degree
9:38to which we can divide labor
9:40as transportation improves and rivers
9:43are turned into canals
9:45or forests are turned into roads the
9:48result is
9:49an increasing market and as a
9:50consequence of that an increasing
9:52division of labor and as a consequence
9:54of that
9:54an increase in the amount of wealth that
9:56societies aggregate produce in aggregate
9:58it all fits together and dovetails very
10:00nicely
10:02there's a second and perhaps more
10:04sinister source
10:05in the limitation of markets
10:08and that's governmental interference
10:12adam smith argues that all unnecessary
10:16interference in the free economic
10:18activity
10:19of self-interested individuals limits
10:22the division of labor because it limits
10:24the markets for the things produced by
10:26the division of labor
10:27so what adam smith would mean by that is
10:29things like monopolies and protective
10:32tariffs
10:33and all other impediments to the
10:35extension of the market
10:37artificially limit the market thus
10:38artificially limit the division of labor
10:40thus artificially limit the amount of
10:42wealth that the society produces
10:44thus counterproductively decrease the
10:46amount of human happiness
10:48because smith assumes that there's some
10:50rough correlation between the amount of
10:52wealth available to people
10:53and human felicity if we think that
10:56human beings will be made happiest and
10:58will be best off
10:59in a condition where they get the
11:00maximum result
11:02of their labor by laboring in the most
11:04efficient fashion that it makes sense to
11:06make sure that the division of labor is
11:07carried out to its maximum possible
11:09and that means it makes sense to make
11:10sure to ensure that the markets are free
11:13and unrestricted and what that means is
11:15that the governments should leave
11:17the market alone if the governments
11:20follow what is called a laissez-faire
11:22economic policy
11:23the consequence will be a natural
11:25equilibrium
11:26which optimizes the production of goods
11:28and services
11:29this is called the invisible hand it's a
11:31famous line from adam smith it doesn't
11:33seem to be a
11:34matter of great concern this issue of
11:35the invisible hand the idea behind it
11:37the idea that there's a natural
11:38equilibrium in society is very important
11:41to smith the particular formulation of
11:42the invisible hand which seems to be a
11:44great favorite of economists
11:45appears very late in the book it's not a
11:47real central portion of it
11:48the key idea is that there's a natural
11:50equilibrium between supply and demand
11:53and that free unrestricted rational
11:56rationally self-interested people will
11:58maximize their productivity
12:00maximize their output and maximize their
12:03felicity
12:04so what adam smith offers us is an
12:06explanation
12:07for the enormous amount of wealth that
12:09is in england during his time
12:11recommendations for public policy which
12:14is a path-breaking
12:15attempt in social science and an
12:18analysis
12:19of actually how the mechanisms of price
12:22and markets
12:23fit together to form this natural
12:25equilibrium
12:27now let's take the example that adam
12:30smith gives us of the pin factory this
12:32is a famous
12:32example all of you who ever took
12:34economics in college
12:35doubtless were forced to encounter the
12:37pin factory but
12:38we have to go over it again it's it's
12:42really central to his argument
12:43what he says is something like this he
12:45compares rational
12:47fact rational production essentially in
12:49a factory where labor has been divided
12:51up
12:52so that minimal small tasks are done
12:54repeatedly by one person
12:56and he compares that to the artisanal
12:58craftsman-like production of pins
13:00back oh in the year 500 perhaps if you
13:03wanted pins in london
13:05you had to go out one assumes to the
13:06family pin maker or to the master pin
13:08maker actually had studied pin making
13:10all his life
13:11and a craftsman who makes pins makes
13:13doubtless very good pins a very high
13:15quality precisely the pins you might
13:17have ordered
13:18but he makes them very slowly and
13:20relatively inefficiently
13:22so although the pins are very high
13:23quality he produces very few pins in a
13:26given day's labor
13:27as a consequence of that the price of
13:29pins will be relatively high
13:31and as a consequence of that pins are
13:33going to be relatively scarce
13:35now that may not be the end of the world
13:36but we can extrapolate from the
13:38artisanal production of
13:40pins to the artisanal artisanal
13:41production of shoes
13:43and perhaps we'd find it more
13:44inconvenient if most of us had to go
13:45barefoot
13:47so the idea that the craftsman-like
13:50or the artisanal mode of production
13:54is intrinsically inefficient is central
13:56to smith
13:57but it's only inefficient compared to
13:59something that works better and what
14:00works better in this case is the pin
14:02factory or the rational systematic
14:05production of pins
14:06that comes to us through the division of
14:08labor smith talks about
14:10the alternative to having a pin
14:12craftsman make your pins
14:14what we'll do is we'll get five or six
14:15or ten unskilled laborers
14:17we'll pay them a more or less minimal
14:19daily wage and we'll give them one task
14:21to do again
14:22and again and again and again it'll be a
14:25small task like say
14:26drawing out the wire for the pins or
14:28putting a head on the pins
14:30or sharpening the pins or putting the
14:31pins into boxes
14:33or quality checking the pins to make
14:35sure they're straight or i know not what
14:36they'll do
14:37the principle is the key thing when we
14:39divide labor we increase
14:41efficiency the aggregate production of
14:4310
14:44unskilled laborers producing pins
14:47through the division of labor
14:48will be far greater than the aggregate
14:50production of 10 craftsmen
14:52who are making the pins from the very
14:54beginning to the very finished product
14:56so what this means is that paradoxically
14:59as
15:00the level of skill in our workers
15:02declines
15:03in the case of mass production in the
15:05case of the division of labor
15:06our total output grows it has to do with
15:09the fact that
15:10by adjusting the way in which we produce
15:13things not just pins but
15:14shoes and clothing and everything else
15:17it is possible to make enormous gains in
15:19efficiency
15:20and these enormous gains in efficiency
15:22were down to the benefit of society as a
15:24whole
15:24because they increase the aggregate
15:26wealth of the society so the pin factory
15:28is the great economic example adam smith
15:30is kind of
15:31the shakespeare of economists he seems
15:33to provide a quote for all occasions
15:35and the pin factory is a real is a real
15:37chestnut in the economic discipline
15:40it comes out all the time now in
15:43addition to the fact
15:44that the change from artisanal
15:46production
15:47to production through the division of
15:49labor
15:50involves certain social consequences
15:53which adam smith is very well aware of
15:55many of the critics of adam smith while
15:57accepting the fact that the division of
15:59labor does in fact increase productivity
16:01and
16:02is a very efficient way of producing
16:03things accused smith of neglecting the
16:05social and political consequences of the
16:07division of labor
16:09and i think that's basically false i
16:11think that smith is well aware
16:12that the change from earlier
16:15craftsman-oriented production
16:17to production in factories through the
16:20division of labor i think he's well
16:21aware of the fact
16:22that this entails tremendous and
16:24permanent changes in the structure of
16:25society
16:26i think unfortunately that because he's
16:28writing in the 1750s
16:30and 1760s and 1770s he doesn't have
16:33access to the wealth of historical data
16:35that 19th and 20th century critics of
16:37capitalism had
16:38so if he has a somewhat rosy picture of
16:40the political and social consequences of
16:42these economic changes
16:44it comes from the simple fact that he's
16:45in a historical moment
16:47in which case it's in which it's not
16:48entirely possible to find out
16:50the really unpleasant and the really and
16:52the great
16:53the really unpleasant consequences the
16:55great hardships that come along with the
16:56division of labor
16:58now let's take some of these examples
17:01smith himself says
17:02that one of the the downsides of the
17:04division of labor one of the really
17:05unpleasant consequences
17:07is that it makes laborers as he put it
17:09stupid
17:10for one of a better word now he doesn't
17:12mean stupid in the sense that they're
17:14intrinsically unable to do arithmetic
17:16it's not that they have some genetic
17:17malfunction which prevents their brain
17:19from working
17:20but rather the repeated operation doing
17:23the same
17:23simple tasks reduces them in marxist
17:26terms anyway
17:27to almost the level of a machine they
17:30don't get much
17:30outside stimulation they don't get much
17:33of a chance to develop the other
17:34elements in their personality
17:36because they are wedded to this process
17:38of production they spend all their time
17:39lengthening steel so they can be turned
17:41into pins if you do this for long enough
17:44particularly if you do this
17:45from a very early age if one never gets
17:48a chance to get an education
17:50or cultivate the other elements in in
17:52your soul or in your mind
17:54it is likely to make you if not stupid
17:56at least rather dull
17:57at least to create a new yearning for
18:00some sort of stimulation outside of that
18:03which will create all kinds of social
18:04consequences and all kinds of social
18:05problems later on
18:07but adam smith does point out that the
18:08division of labor has bad consequences
18:10first of all
18:11for the people that are actually doing
18:13this it means a reduction in
18:15the level of skill craftsmanship is
18:18going to be undermined by the division
18:19of labor
18:20it's only a few years after the opening
18:22of his hypothetical pin factory
18:24that all the hypothetical pin makers
18:26guilds are going to fold up shop because
18:28it's going to be no call for handmade
18:29pins anymore what that means
18:31is that there'll be a whole set of
18:33former pin makers who are going to be
18:35thrown upon the labor market
18:36because they can't find a job making
18:38pins the old-fashioned way
18:39the economy when it's organized around
18:42mass production when it's organized
18:44around the division of labor is also
18:46going to have the consequence of being a
18:47sort of self-sustaining mechanism
18:49by creating unemployment by create by
18:53undermining the artisanal production of
18:55commodities it's going to make sure that
18:56there's a
18:57already source of labor already in the
18:59cities ready to go
19:00to the next job that comes available
19:02when the next guy thinks up a new
19:04machine to make shoes
19:05or to make clothing or to make food or
19:07what have you
19:08the idea is this is a self-sustaining
19:10mechanism the advantages of it
19:12are clear it creates enormous wealth the
19:14disadvantages are
19:16that it creates a good an enormous
19:17amount of hardship not just a good deal
19:19an enormous amount of hardship
19:20in the people that actually have to deal
19:22with the first few generations of this
19:25and in addition it creates changes in
19:27the structure of society that are
19:28irreversible and permanent
19:30let me give you some idea of these
19:32because although adam smith doesn't talk
19:33about them
19:34to the degree that he might i think that
19:36at least he hints at some of these
19:37structural changes in society
19:40in the first place there's going to be a
19:41change in the status of men and women
19:43the age of machines is the age in which
19:46men and women can have approximately or
19:49closely approximately
19:50or close approximations of the same work
19:54in an ancient or archaic economic system
19:57where most of the
19:58power or most of the force where most of
20:01the energy
20:02for human activity for human labor comes
20:05from muscles
20:06there's going to be a clear division
20:07between men's labor and women's labor
20:09if the society depends upon quarrying
20:11stone by hand for example
20:13the chances are that men are going to
20:14take that sort of a job there will be a
20:16very clear distinction in other words
20:18prior to the age of machines between
20:20men's labor and women's labor
20:22on the other hand after the advent of
20:24mass production
20:25after the advent of the division of
20:26labor as the age of machines starts to
20:28get a certain momentum to it
20:30we're going to find that muscle power
20:32becomes less and less significant
20:34one of the permanent and important
20:36changes that's going to be introduced
20:38into society as a consequence of
20:40the division of labor will be the advent
20:42of the machine age and one of the
20:43consequences of that
20:44will be a change in family life a change
20:46in the structure of society
20:48and particularly a change in the status
20:49of women in
20:51a pre-industrial age in an age that is
20:54not dominated by machines where muscle
20:56power is the main
20:57energy in human work there's a very
20:59clear distinction between men's work and
21:01women's work for example quarrying stone
21:03or cutting down trees
21:05it's the kind of thing that men are
21:06likely to spend their time doing
21:08but a fundamental and irreversible
21:10change happens
21:11in society as it industrializes as the
21:14division of labor continues
21:15the advent of the machine age means an
21:17undoing
21:19of the distinction between men's labor
21:21and women's labor
21:22it happens gradually as machines become
21:24more and more important
21:25it necessarily occurs to some
21:27entrepreneur
21:28that it would be possible to hire women
21:30to do the jobs that had previously been
21:32done by men
21:33and since their rational utility
21:35maximizers they may even be willing to
21:37pay women or able to pay women less than
21:39they pay men
21:40and of course that's going to give them
21:41a competitive advantage and of course
21:42that's going to become a very
21:44important trend in the structure of
21:46society and in the change in family life
21:48characteristic of
21:49the age of machines one extrapolation
21:52from that will be the advent of things
21:53like
21:53child labor when muscle power is no
21:56longer a question again
21:57not only will women brought directly
21:58into the industrial workforce so will
22:00children
22:01what this means is a change in family
22:03life it means a change in the structure
22:05of society at its very
22:07at its most basic level and it means in
22:09some respects
22:11that the change in the status of women
22:13will be connected with the rise of
22:14modern natural science and the changes
22:16that are characteristic
22:18of a modern industrial economy i think
22:20it's not an accident today
22:22that the places the parts of the world
22:24where women have developed
22:25their greatest drive towards equality
22:28and rights
22:29are those countries that have the
22:31greatest degree of the division of labor
22:33where technology is extended the
22:34furthest i don't think that's an
22:35accidental connection
22:37i think that industrial society and the
22:39division of labor
22:40necessarily change social uh the
22:43structure of society
22:44and they change family life in ways that
22:46are irreversible that can never be
22:47gotten away from
22:48adam smith didn't see the whole of these
22:50changes he saw parts of them
22:52he saw the effect of the division of
22:54labor on the individual laborer
22:56he talks about the downside of it offers
22:58a few kind of
23:00inadequate remedies like an increase in
23:02education
23:03but he is well aware that the division
23:06of labor and the development of modern
23:08economy
23:09means fundamental permanent and enormous
23:11changes in the structure of society
23:13so that he does understand now
23:17in addition to that smith talks about
23:21a number of other important themes
23:23connected to the contemporary political
23:24philosophy
23:25and contemporary connected with
23:27contemporary political questions
23:29first off is a sort of proto-marxian
23:31insight adam smith sees
23:33that the development of an industrial
23:35economy means the stratification of
23:37society based upon
23:39people's wealth and based upon the kind
23:40of work that they do
23:42and it also means that society is going
23:43to fragment into classes
23:46and that there must inevitably some
23:48degree of antagonism in the interests of
23:51these classes
23:52in other words if we assume that people
23:54are rational utility maximizers
23:56that they are what we might call homo
23:58economicus and i'll come back to that
24:00theme later on
24:01that the interests of people who own
24:03factories and who employ labor
24:05are different from the interests of the
24:07laborer
24:08adam smith says that there's a sort of
24:10implicit collusion
24:12between what he calls the masters what
24:14means by that is the employers in
24:16society
24:17that those who own what marx will later
24:19call the means of production
24:20those who hire wage laborers have an
24:23implicit
24:24interest in making sure that the wages
24:26of labor are kept to the absolute
24:28minimum
24:28because they're trying to maximize the
24:30amount of profit that they derive from
24:31their economic activity
24:33and since the number of employers is
24:36always
24:36much smaller than the number of
24:38employees and as a matter of practical
24:41sociological fact the class of employers
24:44generally know each other they generally
24:45have good connections to the government
24:47they often marry into the same families
24:49and get and hang
24:50and uh socialize in the same circles for
24:53all these reasons
24:54it's much easier for there to be a sort
24:57of combination in restraint of trade or
24:59if not in restraint of trade
25:00certainly in restraint of wages by those
25:03who employ labor
25:05so adam smith comes very close to
25:07formulating
25:08a conception of society divided into
25:10classes as a consequence of the division
25:12of labor which is a remarkable insight
25:14when you stop and consider the fact
25:16that the wealth of nations is written in
25:181776.
25:19you stop and think about the fact that
25:20it's over 200 years old that he didn't
25:23have much of a chance to see
25:25the consequences of the division of
25:26labor he saw some of it but he never saw
25:28industrial society full-blown remember
25:30that the steam engine isn't invented by
25:32watt until
25:33what 1757 so the age of machines really
25:36isn't entirely upon us yet
25:38for the level of historical data that
25:40adam smith has
25:41his insights are remarkable now
25:44having said those good things about them
25:46i think there are some problems with
25:47this idea
25:48of intrinsic collusion and the problem
25:51stem not so much from adam smith because
25:52of the fact that he has a very limited
25:54base of historical data to work with
25:56but ask yourself is it really true that
25:59all the employers of labor
26:00are interested in making sure that wages
26:02are kept to an absolute to a minimal
26:04level
26:05i mean subsistence or a very little bit
26:06above subsistence
26:08i think that in the long run that's
26:09probably false
26:11the division of labor entails the idea
26:13of mass production
26:15what i want to suggest as a sort of
26:16extrapolation from this is that mass
26:19production entails the idea of mass
26:21consumption
26:22what are we going to do with all this
26:23stuff we produce if we start a toaster
26:26factory and start producing toasters
26:27in an unprecedentedly un efficient
26:30fashion well we can send some of them to
26:31china
26:32some of them to india some of them to
26:34south america and trade them for
26:35whatever we want from those countries
26:37but economists have an idea called
26:40declining marginal utility
26:42after a while we saturate the market for
26:44toasters and they don't want them
26:45anymore
26:46what are we going to do with our toaster
26:47factory when we find it hard to unload
26:48the toasters in
26:49south america or in india and china
26:51we're gonna have to find someplace else
26:52to unload them
26:53where are we gonna do that well what
26:55we're gonna want to develop is the home
26:56market
26:57it would be nice if all these people
26:58that are working real hard would buy my
27:00toasters
27:01were i the the owner of the toaster
27:03factory i'd like to see everybody buy a
27:04toaster for me i'd like to see you all
27:05buy 10 toasters from me
27:07now how am i going to do that well what
27:09i'd like to see happen as an individual
27:11entrepreneur as an
27:12individual capitalist i'd like to make
27:13sure that i get to pay my labors an
27:15absolute minimum wage
27:16i don't want to give them any extra
27:18wages because i'm not interested in
27:20subsidizing their lifestyle i'm just
27:21interested in making sure they show up
27:22for work
27:24what i would like to see instead is my
27:26laborers
27:27paid a subsistence wage or close to a
27:29subsistence wage
27:30and i would also like to see all the
27:32other capitalists in my society
27:34pay a real living wage i like to see
27:35them get kind of open-handed and liberal
27:37because if that were to happen that
27:39would mean that all these proletarians
27:41that are being hired by all these other
27:42capitalists now have a few extra dollars
27:44in their pocket and they can buy my
27:46toasters in other words
27:49built within the industrial revolution
27:52is the idea of mass production and built
27:54within the idea of mass production is
27:56the idea of mass consumption
27:57the consumer society of the 20th century
28:00is here in embryo
28:02adam smith was not at a historical
28:04moment where he could appreciate that
28:05fact
28:06but some radical thinking capitalists
28:09like say henry ford at the beginning of
28:10the
28:1120th century when he wants to offer his
28:13workers five dollars an hour
28:15is actually thinking through a fallacy
28:18in adam smith's argument he henry ford
28:21wants to pay his workers five dollars an
28:22hour because he thinks they're gonna go
28:23out and buy model t's
28:25and in fact he was right so adam smith
28:27is wrong
28:28when he makes the argument that
28:30capitalists are intrinsically in
28:31collusion
28:32initially they surely are and probably
28:34for the first few generations of the
28:36industrial revolution it became quite
28:37clear to them
28:38that maintaining a clamp on the wages of
28:41labor
28:42would maximize their profit but as
28:44markets become saturated
28:46as the machine age continues on as
28:49industrial society
28:50becomes more and more and more
28:52productive as what marx calls the forces
28:54of production
28:55are brought to a higher and higher level
28:57of perfection
28:58we have to find some place to unload
29:00this stuff so the consumer society is
29:02built right into this
29:03adam smith can't recognize that he's
29:05writing in 1776
29:07it introduces certain fallacies in his
29:09argument but i don't think we ought to
29:10hold that against him we couldn't expect
29:12him to be able to read the future
29:14given the data that he has this is an
29:16extremely
29:17reasonable assertion and it's very clear
29:20that there are proto-marxian elements in
29:22this assertion
29:23when he tells us that all the the
29:26employers are
29:27implicitly or or even explicitly in
29:30collusion
29:30when he tells us that they have
29:32unusually close connections to the
29:33government
29:34he's telling us simple empirical
29:36sociological facts
29:38the problem is he the inferences that he
29:40draws from these facts go beyond the
29:42evidence
29:43he assumes that this is natural and
29:45intrinsic to industrial society and it
29:46turns out not to be
29:49leave that question aside for a while we
29:51can't do very much more from with regard
29:52to that issue
29:54adam smith's big contribution to the
29:57history of social science
29:58and to history of political science is
30:01that by criticizing
30:02the way in which governments interfere
30:04with the economy and by
30:06criticizing both the expenditures and
30:09the taxation policies of the government
30:11he is implicitly laying the foundations
30:13for the modern liberal state
30:16he who he derives from lock ideas like
30:18the labor theory of value
30:20like a minimalist approach to government
30:22which says that he who governs best
30:24governs least
30:25and he gives us good solid economic
30:28reasons to believe that true
30:29he says not only is it a general moral
30:31maxim that he who governs best governs
30:33least
30:34because freedom is a good thing he says
30:36let's get to the bottom line
30:37he who governs best governs least
30:39because it produces the most wealth and
30:41that produces the most happiness
30:43nobody is happy when they're poor or
30:45okay very few saintly types might be
30:47let's leave the house bracket that's not
30:48entirely fair
30:50observation but all enlightenment
30:52englishmen are not happy if they're poor
30:53and adam smith speaks for them
30:55he likes the idea of developing the
30:57productive capacity of society to their
30:59maximum
31:00possible capacity and he wants to
31:02eliminate all political
31:04or conventional impediments to those and
31:06the way to do that
31:07is by criticizing the structure of
31:09political and economic
31:10policy that's what his criticism of
31:12mercantilism is
31:13it's a devastating critique both now and
31:15then
31:16and the strength of his argument lies in
31:18the fact that it gets to the bottom line
31:21instead of praising a minimal government
31:23and
31:24because it leads to human liberty and
31:26that's what human felicity is
31:27he says that it leads to more of
31:29everything and that means we can consume
31:31more and that's at least a part of human
31:33happiness
31:34often adam smith seems to suggest that
31:35it's the whole of human happiness at
31:37least in this book
31:38but if you've ever read his book called
31:40the theory of moral sentiments
31:41you will find that in fact adam smith
31:43has close intellectual
31:45and actual close personal associations
31:47with david hume
31:49smith's moral theory is often criticized
31:51because some people only read
31:52the wealth of nations it's a very unfair
31:54extrapolation
31:56smith does not believe that all people
31:58all the time
31:59are rational utility maximizers in other
32:02words he does not believe that all
32:04people are constantly selfish constantly
32:05trying to get the most for the least
32:08in fact he believes that social cohesion
32:11that human benevolence that concern for
32:13other people that transcends the merely
32:15selfish
32:16is all derived from a common set of
32:17sentiments particularly in this case the
32:19sentiment of sympathy
32:20we feel bad when other people get hurt
32:22that's or we feel bad when other people
32:24are in pain
32:24that's why we give charity without being
32:26coerced to do so so although adam smith
32:29offers us a very
32:31selfish and a very reductive conception
32:33of the human being
32:34in the wealth of nations that is not his
32:37considered opinion about the human
32:39condition
32:40right many people who criticize him will
32:41do so on that basis it's not fair
32:43in fact like hume he thinks that
32:47uh ethical theory is derived from our
32:50emotions that it has no rational
32:51foundation that we're going to try and
32:53develop when we
32:53deal with kant tomorrow and that it's
32:56this
32:56feeling of sympathy or benevolence
32:58towards other people
33:00that makes moral activity possible
33:03now let's think about homo economicus
33:05homo economicus
33:07is our ideal
33:10utility maximizing man he
33:13buys cheap he sells deer he works a
33:16minimum amount so he can get a maximum
33:18amount of goods
33:19he lives to consume he has no feeling
33:22for other people
33:23he only has a closely considered
33:25hedonism with regard to all his
33:27activities everything
33:29ultimately is a question of pleasure and
33:30pain for homo economicus
33:32now adam smith as i said doesn't believe
33:34that this is really what anybody is like
33:36the only people who believe that people
33:38are like that are people are romantic
33:40novelists
33:41if any of you have read uh hard times by
33:44uh charles dickens think of mr bounderby
33:46that's homo economicus that's a
33:48caricature of adam smith's
33:49rational utility maximizer think of but
33:51it's still mr scrooge from a christmas
33:53carol
33:54humbug that's homo economicus adam smith
33:57doesn't believe that there's anyone
33:58really like that
33:59i mean charles dickens does but then
34:00again he saw a different side of the
34:02industrial revolution
34:03well what smith thinks is something like
34:05this that homo economicus
34:08is a reasonable abstraction which gives
34:10us a good way of practically describing
34:12and predicting
34:13the behavior of markets in other words
34:16think about something like the ideal gas
34:18law
34:19which relates the pressure and volume
34:21and temperature of gases
34:22now it turns out that when we go into a
34:24laboratory
34:26we never have ideal gases in front of us
34:28so they always turn out to be real gases
34:30i mean remarkable as that may seem the
34:32ideal gas law
34:33will offer us a reasonable expectation
34:37about the about the behavior of gases
34:40homo economicus as an
34:41idealization of the rational utility
34:44maximizing individual
34:46allows us to make accurate within
34:49certain parameters
34:50and reasonably coherent predictions
34:54and analysis of the behavior of
34:57free markets so while we never encounter
35:00ideal gases
35:01the ideal gas law gives us a way of
35:03manipulating and predicting the behavior
35:05of gases
35:06while we never encounter homo economicus
35:09unless we read a christmas carol
35:10and meet mr scrooge it the assumption
35:13that people will be
35:14rational utility maximizing individuals
35:17when placed over aggregate social
35:19behavior
35:20does give us a rough and ready way of
35:22predicting
35:23and estimating and calculating human
35:25behavior
35:26most of us if given the chance to sell a
35:29piece of our property for one dollar
35:31and to sell it for a million dollars
35:33almost all of it all
35:34almost all of us will sell it for a
35:36million dollars right there are certain
35:38parameters in which we will not
35:39probably sell it for a million dollars
35:41there may well be things we are
35:42unwilling to sell at any price
35:44this does not interfere with the idea of
35:46homo economicus
35:47this is not a refutation of the idea of
35:50rational utility maximization
35:52what it shows is that human beings never
35:55perfectly
35:56realize any kind of ideal but then again
35:58nothing in nature does
36:00it's the degree to which this allows us
36:02to make rational expectations
36:04and rational plans that's the ultimate
36:06practical test
36:07of this or any scientific theory and by
36:10that
36:11smith's achievement is enormous
36:14certainly i think today
36:16economics is the most successful of the
36:19social sciences
36:20it is the one most susceptible to
36:22mathematical formalization
36:24which is one of the the litmus tests of
36:27a highly developed science
36:29as well in addition uh economics is also
36:32the one which has the greatest
36:34predictive power
36:35sociology in certain cases may have a
36:37similarly accurate predictive power but
36:39economics in terms of the generality and
36:41the profundity of its results
36:43has certainly been the most successful
36:44of social sciences adam smith's
36:46achievement
36:47in founding this discipline is enormous
36:50and his influence has been incalculable
36:53he's influenced certainly marx and all
36:55the 19th and 20th century critics of
36:57capitalism
36:58he has influenced those who would try
37:00and rescue capitalism it's from itself
37:02by constructing a kind of social safety
37:04net by constructing the welfare state
37:06of all the english social scientist adam
37:09smith was the greatest
37:10and most important and
37:14this homo economicus idea however much
37:16criticism it has got
37:18still offers us a rough and ready
37:20expectation way of making expectations
37:22and making an analysis
37:24of the way people really do behave in an
37:26economically
37:27on a free market the proof is in the
37:30pudding
37:31all the non-market economies in the last
37:3410 years
37:34have thrown in the towel and given up
37:37the ghost or almost all of them
37:38we still the people's republic of china
37:40and a few command economies
37:42but for the most part in the last 10 or
37:4515 or 20 years in the post-war age
37:47all alternatives to market economies
37:50have pretty much packed it in
37:52and the proof is in the pudding if the
37:53standard by which we're going to judge
37:55a scientific theory is its application
37:57in practice
37:58if we're going to judge a scientific
38:00theory by its utility by its pragmatic
38:02significance
38:03then it seems to me that the fact that
38:05the rest of the world that hasn't had a
38:07market economy prior to the post-world
38:09war ii
38:10age that the rest of the world since
38:11it's scurrying to create a market
38:13economy
38:14is implicitly voting with its feet and
38:16giving testimony to the strength of this
38:18set of ideas
38:19it's primitive in some respects it has
38:21crewed over generalizations
38:23but his achievement is unarguable adam
38:26smith
38:27founded mathematical social science he
38:30connects our theory of society
38:32to our theory of natural science and
38:34what he does
38:35what he does is show us a way of racks
38:38of rationally
38:39constructing public policy so as to
38:42optimize the wealth of society
38:44and thus to maximize human felicity
38:47if he has only shown us and i think this
38:49is true by by showing us the way to
38:51maximize wealth i think he's only shown
38:52us
38:53a necessary but not sufficient condition
38:55for human happiness
38:57but this achievement alone is enormous
39:01and by showing us how to maximize
39:05public wealth or the wealth of a society
39:07he's shown us halfway through the
39:08problem of scarcity
39:10which is bedeviled economics and
39:12bedeviled public policy and
39:13the devil political science since the
39:15very beginning
39:16he deals with the problem of production
39:18shows us how to produce more
39:20it will take the sociological
39:23and political critics of capitalism in
39:26the 19th century to address a new
39:29and perhaps more significant problem the
39:32pro
39:32they'll in the 19th century critics of
39:35capitalism will move
39:36from the consideration of production to
39:39the consideration of distribution
39:41adam smith has shown us how to maximize
39:43the production of wealth
39:44later critics in the utopian socialist
39:47and marxian socialist tradition
39:48will show us how to become concerned
39:50with making sure that this unprecedented
39:52wealth that this enormous production
39:54is distributed in such a way as
39:56maximizes human felicity
39:58if adam smith is sho only shown us
39:59halfway through the
40:01labyrinth that by itself is an enormous
40:03achievement
40:04and even though economics with some
40:06justification is called the dismal
40:07science
40:08this book is worth your reading and
40:10worth your serious consideration

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