The Real Adam Smith: Morality and Markets - Full Video — Transcript

Full transcript

1. 0:01Corruption, fraud, and greed continue to dominate media here in the United States and around
2. 0:07the world. As high unemployment and wage stagnation plague the middle class...and growing income
3. 0:13inequality has caused millions to wonder: is the system rigged? Is the free market,
4. 0:18in its very nature, corrupt? What is the relationship between morality and markets? Amazingly-a
5. 0:26Scottish philosopher and economist explored that very relationship nearly 250 years
6. 0:31ago in the 18th century. His name was Adam Smith.
7. 0:37Adam Smith was first and foremost a moral philosopher.
8. 0:40His great gift was observation. But perhaps he is best known for his groundbreaking
9. 0:45work in economics. Some people say that he is really the father
10. 0:49of modern economics. He's a synthetic thinker that crosses these
11. 0:53disciplinary boundaries. Adam Smith was born in a small Scottish town
12. 0:58and learned early in life about morality and economics at the local merchants' market.
13. 1:03He went on to study at Glasgow University, became its top administrator, and then a pillar
14. 1:09of the most unlikely intellectual revolution the world had ever known... the Scottish Enlightenment.
15. 1:14He lived, lectured and socialized in Scotland's capitol city of Edinburgh, created the unique
16. 1:21economic concept of an "invisible hand" to describe what happens when we act in our own
17. 1:25"self interest"; and invented the idea of the "impartial spectator" in his surprising
18. 1:31analysis of the evolution of morality. And I'm fascinated by Adam Smith, a man who
19. 1:36would turn the notion of how societies and economics work on its head, and make way for
20. 1:42the modern age. He recorded his ideas in two comprehensive
21. 1:46books, The Theory of Moral Sentiments, and The Wealth of Nations.
22. 1:50Was he a revolutionary moralist, an uncompromising advocate of self-interest and free markets,
23. 1:57or something altogether different? Who was the real Adam Smith?
24. 2:05Funding for this program has been provided by John Templeton Foundation, and Templeton
25. 2:11Religion Trust. Historic Edinburgh still reflects the energy
26. 2:22and cultural vitality for which it was known in the 1700s. A dramatic castle still dominates
27. 2:30the landscape above the old town. Below stretches the "Royal Mile" and the hustle and bustle
28. 2:36of modern city life. Edinburgh today is a haven for the arts, full of open, warm and
29. 2:43welcoming people. In 1707, Scotland had joined with Ireland
30. 2:49and Wales, to become the United Kingdom. It would be Europe's largest free trade zone.
31. 2:55And the great cultural and intellectual revolution, to be known as "The Scottish Enlightenment,"
32. 3:00would soon transform Scotland and much of the world. Adam Smith was destined to be part
33. 3:07of that change. He was born in 1723, in the town of Kirkcaldy,
34. 3:13just across the bay from Edinburgh. His father, also named Adam Smith, was a lawyer and customs
35. 3:20inspector, who spent many of his working days chasing whisky smugglers, and who died several
36. 3:25months before his son was born. The young boy's widowed mother, Margaret, would devote
37. 3:30the rest of her life to raising her son, and would become his lifelong companion. Adam
38. 3:36Smith loved growing up on the shores of the river estuary known as the Firth of Forth.
39. 3:42This small town of Kirkcaldy would remain his spiritual home for most of his life.
40. 3:47I'm Johan Norberg, a writer and an analyst, born and raised in Sweden. For many years,
41. 3:53I've studied markets and global trade. And no one thinker has been more important to
42. 3:58the development of today's widespread prosperity than the revolutionary 18th century philosopher,
43. 4:03Adam Smith. Most people today remember only half of what
44. 4:08makes him important: his economic principles. They associate Adam Smith with free markets,
45. 4:14but few think of him as the great moral philosopher that he was. We need to put both sides of
46. 4:20the man together to find The Real Adam Smith. Smith's primary concern as a political economist
47. 4:27and a moral philosopher is the well-being of the poor.
48. 4:31Ryan Hanley is associate professor of political philosophy at Marquette University. His work
49. 4:36concerns the moral aspects of Adam Smith's worldview.
50. 4:40So in many ways, Smith subverts our conventional distinction between left and right by sharing
51. 4:45with the contemporary left a deep concern for the goods and the well-being of the poor
52. 4:50and with the contemporary right a belief that the proper means for achieving this, the most
53. 4:55efficient means are, in fact, free markets. These steps lead up to the church that Smith's
54. 5:02mother, and sometimes he himself attended. Hi George!
55. 5:05Hi Johan... let me show you around. Thanks. George Proudfoot is a local historian,
56. 5:11college professor and trustee of the Adam Smith Global Foundation.
57. 5:16Can you tell me a little bit about the church? Well, this was the church that Adam Smith
58. 5:20was baptized in, on the 5th of June 1723. Adam Smith and his mother would have attended
59. 5:28the church on a Sunday, and these are the very steps that they would have climbed from
60. 5:34the house, up to the church. So Smith walked on these steps.
61. 5:38On these very steps, that's correct. And he went to school somewhere around here?
62. 5:43Yes, the Barrow School was just across the way there; it was a very good school and its
63. 5:49headmaster, David Miller was exceptionally good.
64. 5:52Apparently, all of the students received a good grounding in classical education, and
65. 5:57Smith was instilled with a life-long appreciation of learning.
66. 6:01His mother's house stood right there and across there was where the outdoor market was; and
67. 6:08of course, he would be able to see the market from one of his windows.
68. 6:14Imagine him waking up early in the morning and seeing the market through his window...
69. 6:18and on his way home from school, watching the buyers and sellers in action. From an
70. 6:22early age, he was a keen observer. And the economics and morality in the marketplace
71. 6:28of his youth inspired his written word. "The propensity to truck, barter and exchange
72. 6:34one thing for another is common to all man." They were exchanging ideas. They were exchanging
73. 6:41gossip. They were exchanging goods. They were exchanging money.
74. 6:45Nick Phillipson is an honorary fellow at the University of Edinburgh and the author of
75. 6:49the award-winning biography, Adam Smith: An Enlightened Life.
76. 6:55And that notion of exchange and watching people exchanging things... that's something which
77. 7:01I'm pretty sure was with Adam Smith right from the word "go".
78. 7:06Exchange... and through exchange, trust. He sees trust and the morality underpinning it
79. 7:13as the key to any successful society. And this rather curious, withdrawn, observant
80. 7:21chap simply spent his life observing the peculiarities of human behavior. Cataloging them, turning
81. 7:30them into systems, theorizing about them, building up this portrait of what human behavior
82. 7:37tells us about human beings in general. He will return to Kirkcaldy again and again,
83. 7:45to think and to write, and to take long walks along this beach. And Smith was quite a walker.
84. 7:51There is a story that one morning Smith walked along the beach in his bathrobe, and got so
85. 7:56caught up in his own train of thought, that he went 12 miles before he knew it. It's in
86. 8:02this small seaside town where he would be most productive.
87. 8:08At the very young age of fourteen, Smith leaves home and travels to Glasgow, the seat of one
88. 8:13of Scotland's four ancient universities. The University of Glasgow was founded in 1451.
89. 8:21Here he begins his studies and almost immediately is immersed in the revolutionary thinking
90. 8:26of the Scottish Enlightenment. The University of Glasgow is fast becoming
91. 8:30one of the best universities in Europe. Here he will build the intellectual foundation
92. 8:35of his life's work- one constructed on the firm base of Enlightenment values.
93. 8:41Scottish Enlightenment thinkers are deeply rooted in reality. They value reason, debates,
94. 8:46evidence, and reject any authority that facts cannot justify; but it also enables them to
95. 8:52develop an astonishingly powerful tool: the Scientific Method.
96. 8:57His favorite professor is Francis Hutcheson, a respected father of the Scottish Enlightenment
97. 9:03and the first to teach in English and not the traditional Latin. Hutcheson's thoughts
98. 9:08will guide Smith's early education and influence his later writings. This is Adam Smith's personal
99. 9:14copy of Hutcheson's book, Illustrations on the Moral Sense with Smith's notations in
100. 9:20the margins. He was marked out as a star, as a university
101. 9:25student. He got a special fellowship to take him to Oxford for six years for study.
102. 9:31Something happens in Oxford that will change the direction of Smith's life forever. He
103. 9:35reads the work of David Hume, one of the most prominent philosophers of the Enlightenment.
104. 9:41Reading Hume introduces the young student to an entirely new set of ideas. Hume explains
105. 9:47how human beings can grow and develop, survive and prosper, without once drawing an assumption
106. 9:52about God. It is dangerous thinking. The authorities at Oxford are not fans of
107. 9:58Hume and they punish Smith for his self-education. In protest, Adam leaves Oxford and England.
108. 10:05It's the Scottish thinkers, like David Hume, who appeal to Smith's intellect and he is
109. 10:10eager to share his ideas with them. When he arrives back in Scotland, he settles
110. 10:15here, in Edinburgh, just across the Firth of Forth from his hometown of Kirkcaldy. And
111. 10:21when he gets here the Scottish Enlightenment is in full swing.
112. 10:25If you had wondered in the 17th century or the 16th century what country would be a likely
113. 10:30place for an enlightenment, Scotland would not have probably been on the list.
114. 10:33James Otteson is an Adam Smith scholar and professor of political economy at Wake Forest
115. 10:39University. For that magical period in the 18th century,
116. 10:43Edinburgh had a lot of things come together. A country, with no apparent warning at all,
117. 10:49suddenly developed a small but extraordinarily sophisticated and creative group of philosophers,
118. 10:56scientists, men of letters. The central figures of the Scottish Enlightenment
119. 11:00were not just interested in material prosperity. They were also interested in the character
120. 11:05of people. Are human beings naturally selfish? Are they
121. 11:09naturally benevolent? The Scots decided that you couldn't really answer these questions.
122. 11:13They're all speculative. All you could do is observe the world around you.
123. 11:19And that's exactly what the Enlightenment thinkers did: Observe.
124. 11:23For example, it was common knowledge in the 1700s that the earth was less than 6,000 years
125. 11:28old. It was the Irish Bishop, James Ussher, who had carefully researched the issue.
126. 11:33"And Adam begat Seth, and Seth lived 105 years and begat Enos..."
127. 11:40By adding up each and every one of the "begats"- or generations- in the Bible's Old Testament,
128. 11:47Bishop Ussher declared that the earth was created on Sunday, October 26th, 4004 B.C.
129. 11:54The issue was "settled." Until James Hutton, a medical doctor from
130. 12:00Edinburgh and a keen observer of the world around him, takes a walk in the British countryside
131. 12:06and comes upon a section of Hadrian's Wall. The wall is most certainly old. The Emperor
132. 12:12Hadrian built it during the Roman occupation of Britain in about 120 A.D. Hutton sees almost
133. 12:19no signs of erosion. Yet these nearby volcanic mountains have been
134. 12:24almost completely eroded by the same processes. To Hutton the conclusion is obvious: the earth
135. 12:30is much older than 6,000 years. The bishop must be wrong.
136. 12:37But challenging the Church on any issue without suffering reprisals was something new. Even
137. 12:43now there were hardliners in the Church opposed to the ideas of the Enlightenment thinkers.
138. 12:49It's this combination of keenly observing the world and bravely challenging conventional
139. 12:54thought that is at the heart of the Scottish Enlightenment, just as critical thinking is
140. 12:58at the heart of the scientific method today... and that inspires Smith.
141. 13:02Oh and today's best estimate of the age of the earth... is about four and a half billion
142. 13:08years. Finished with Oxford and his formal education,
143. 13:17Smith finds himself out of work. He is now an educated young man looking for a job, and
144. 13:22by a stroke of good luck, he's invited to give two series of public lectures to Edinburgh's
145. 13:27movers and shakers. He will focus on human behavior and morality,
146. 13:32in what will be known as his lectures on jurisprudence and rhetoric.
147. 13:37He begins by wondering how humans acquired the gift of language. These college students
148. 13:43have just met and are getting to know something of each other through their conversation.
149. 13:49Traditionalists considered language a special gift from God. Smith thought otherwise.
150. 13:55The earliest human beings, he thought, lived in a dangerous world, and had to communicate
151. 13:59to survive. And that meant using signs and sounds. From these first signs and sounds
152. 14:05and under the pressure of life, language developed. Smith argues that society and civilization
153. 14:11were born as people, like these students, traded information through language, and built
154. 14:16a common understanding of the world around them through this exchange.
155. 14:21But Smith considers other forms of "trading." "The offering of a shilling, which to us appears
156. 14:27to have so plain and simple a meaning, is in reality offering an argument to persuade...
157. 14:33And in this manner everyone is practicing oratory on others through the whole of his
158. 14:39life." What Smith sees from a very early stage is
159. 14:44that this business of exchange can actually lead us into investigating how we acquire
160. 14:51values, not just information, but values, how we acquire ideas of what's good and evil.
161. 14:59Good and evil fascinate Smith and in his lectures he asks, "How do human beings develop a sense
162. 15:05of morality?" Before Smith, people thought that morality
163. 15:09was somehow out there. It was objective. Eamonn Butler is co-founder and director of
164. 15:15the Adam Smith Institute in London. And then Smith came along and said no, morality
165. 15:20is not something that's objective and that it is out there... it is inside ourselves.
166. 15:24The "sine qua non" of Smith's moral theory is what he called "sympathy," what we might today
167. 15:28call empathy. It was not feeling sorry for other people. What it was ,instead, was this
168. 15:32idea that we desire to see our sentiments echoed in other people.
169. 15:38By "echoed in other people" Smith means that we all want to be liked, and will do things
170. 15:42to gain approval. He thinks that in ordinary, everyday interactions with people, we come
171. 15:47to learn when others like us and when they don't.
172. 15:50Kind of like the Rockefeller Center in New York, that really Christmassy vibe...
173. 15:53This fellow is a bore and he's insensitive. His friends are getting tired of him... and
174. 15:59their expressions and body language reveal their disapproval.
175. 16:03We ourselves, we're approved of when we do certain things; we're disapproved of when
176. 16:07we do other things. We watch other people in society, we see the way in which they're
177. 16:11approved of and they're disapproved of, when they say certain things, when they do certain
178. 16:15things. Smith took a kind of evolutionary view 100
179. 16:21years before Darwin. He knew that there was something in us as
180. 16:24social creatures that made us follow a moral path, because if we didn't, if we went around
181. 16:31robbing, and stealing, and killing each other, then we wouldn't get very far as a species.
182. 16:36How do we move from knowing how to act in social settings, of how to be approved of
183. 16:40and disapproved of, to knowing the difference between right and wrong?
184. 16:46How do we solve the moral dilemmas that we all face each and every day? This man is in
185. 16:52danger of losing his wallet. It's full of cash. What do you do? Keep it all? Keep the
186. 16:59cash but return the wallet? Or do you just give the wallet back, untouched? What do we
187. 17:06do? We all know what we do. We turn in on ourselves,
188. 17:11and we start to have conversations with ourselves, internal, private conversations. And the funny
189. 17:17thing about these internal conversations is that they are with a fictitious person, and
190. 17:22he calls it an "impartial spectator." Smith says that the impartial spectator is
191. 17:27the sum total of everything that we've ever learned about what's polite and rude, what's
192. 17:31right and wrong. Built up over time, it's our moral compass.
193. 17:36"We endeavor to examine our own conduct as we imagine any other fair and impartial spectator
194. 17:43would examine it." Putting ourselves in the position of a spectator
195. 17:48of ourselves, imagining a third figure outside of us. What does he or she see when she's
196. 17:55looking at us? Sir, you left your wallet.
197. 18:01Thank you. Thank you so much. The impartial spectator will become one of
198. 18:08Smith's most important concepts and the centerpiece of his first book, The Theory of Moral Sentiments.
199. 18:13He will spend the rest of his life refining these ideas. But for now, he's caught the
200. 18:18public's attention and established himself as an innovative member of the Scottish Enlightenment.
201. 18:24He's moving from rhetoric, from questions of religion, to questions of morality and
202. 18:29moral philosophy, to questions of political economy.
203. 18:32You can't have ideas of fairness without getting- having ideas of justice. I think what is happening
204. 18:38to that man over there, I might say, is just unfair, and someone ought to do something
205. 18:43about it. And so, it leads me to thinking about what governments ought to do. And so,
206. 18:48there's a natural progression from Smith's new "science of man," which studies exchange
207. 18:55in terms of language, to studying how we acquire moral ideas, ideas of justice, even ideas
208. 19:02and thoughts about what governments ought to do. Smith is on a big trajectory, and he knows it.
209. 19:18In 1751, at age 27, he's appointed professor of logic and metaphysics here at his alma
210. 19:23mater, the University of Glasgow. He will be a teacher, a researcher and an administrator,
211. 19:30all at the same time. "By far the most useful, and therefore by
212. 19:35far the happiest and most honorable period of my life."
213. 19:40Smith throws himself into day-to-day operations, even the minutiae of managing the University's
214. 19:45Roman artifacts, currently on display here at the Hunterian Museum.
215. 19:50He takes charge of the university library and creates space on campus for the workshop
216. 19:54of a young inventor, James Watt, who will refine the steam engine for practical use.
217. 20:00It is a hectic schedule dominated by teaching. Every weekday, from October tenth to June
218. 20:06tenth, with just a single day's break for Christmas he teaches moral philosophy and
219. 20:11continues to refine his ideas. And this, of course, is a perfect opportunity
220. 20:15for him to develop his thinking about exchange on an enormous scale.
221. 20:22In fact, we know exactly how his thinking developed during these years, thanks to a
222. 20:27fascinating discovery. So what have you got here?
223. 20:30Well, these are two volumes of student notes from Adam Smith's time here at Glasgow University
224. 20:37as a professor. Robert MacLean is an assistant librarian of
225. 20:41Special Collections. On the left, we've got a volume of notes that
226. 20:46describe his lectures on jurisprudence, and on the right from his lectures on rhetoric.
227. 20:51And why are these relevant... what do they tell us?
228. 20:54Well, they can tell us all sorts of different things about the subjects that were taught.
229. 20:58Very little is known, other than from lecture notes, about what he taught in his classes.
230. 21:04He taught about ethics and morality, economic concepts like the mechanism of the price system,
231. 21:10the shortcomings of protectionism, and the development of governmental and economic institutions.
232. 21:17What it shows is that his thinking about economics is embedded in his thinking about justice,
233. 21:26and about the duties of government. Years later, these ideas will become the cornerstones
234. 21:31of his works on morality and economics. His teaching has transformed him into something
235. 21:36of a cult figure, an academic rock star whose portrait bust can be bought by the students
236. 21:41in the local bookshop. If he were teaching today, they'd probably buy a T-shirt with
237. 21:45his face on it. No one can have worked harder than Smith as
238. 21:49a professor. It's- by any standards- ancient or modern, it's an absolute killer regime
239. 21:56that he goes through. After years of research, and writing, his
240. 22:00first great book is ready. At its core are the ideas that trust and empathy are the root,
241. 22:06the essence of any successful society. Today, first editions of Smith's breakthrough
242. 22:12book are very rare and can sell for hundreds of thousands of dollars. By special arrangement,
243. 22:18Nick Phillipson and I are going to be able to see one, close up.
244. 22:21Johan, what we have here is a first edition of Adam Smith's Theory of Moral Sentiments.
245. 22:28Bill Zachs is a distinguished Scottish Enlightenment scholar.
246. 22:32It was published in London in April of 1759; one thousand copies were printed for distribution
247. 22:39there, in Edinburgh and in other places across Britain, at a cost of six shillings per copy.
248. 22:46And who got this first edition? Lucky people got presentation copies. And
249. 22:52the lucky people tended to be powerful people in London, members of the literary elite.
250. 22:57But the books sold like hotcakes and two thirds of the first edition were sold out in a couple
251. 23:03of months. One of the most profound things about Adam
252. 23:06Smith is his view of social evolution. That many of the institutions that we have, language,
253. 23:13markets, you name it, these are indeed the results of human action, but they're not the
254. 23:19results of human design. We never planned these things.
255. 23:22So, note that phrasing, individual human action- but not individual human design.
256. 23:27Smith thought that those people who believed they knew what was best for others were represented
257. 23:32by a figure he called: the "man of system." The man of system is the man who is entranced,
258. 23:40enthralled by his own idea of the ideal, tries to make that ideal a reality.
259. 23:46And decides that he's going to impose it from the top down, whether people want it or not.
260. 23:51And as Smith said, the man of system makes the mistake of thinking that he can move people
261. 23:55around the way a hand moves chess pieces around on a chess board.
262. 23:59And Smith thinks that this is dangerous for two reasons.
263. 24:02First, he thinks he knows more than he can actually know. He thinks he knows what's good
264. 24:08for all individuals and then tries to force them into his particular boxes.
265. 24:12But of course the mistake, Smith says, is that human beings are not like chess pieces.
266. 24:17They have principles of motion all their own. They have their own ideas about what they'd
267. 24:21like to do in life. They have free will. Far better for the well-being of the economy
268. 24:25as a whole, far better for actual individuals to be free to pursue their own self-interest
269. 24:32as they see fit. Smith had clearly made his mark with The Theory
270. 24:38of Moral Sentiments, but the pressure of writing, teaching and management had been extraordinary.
271. 24:45He was exhausted, nearing a breakdown. The Theory of Moral Sentiments saved him.
272. 24:50It was well read in influential quarters in London, and in fact, by the guardian of the
273. 24:58young Duke of Buccleuch. ...who then promptly hired him at a salary
274. 25:03of 300 pounds a year for life, which was a fabulous amount of money, to become the tutor
275. 25:10to the young Duke of Buccleuch... ...who was an 18-year-old, just about to become
276. 25:13into his legal majority, to take him on a grand tour of Europe.
277. 25:17And so, Smith found himself, going through France and Switzerland with the young Duke
278. 25:23of Buccleuch. It was an offer you don't refuse... and Smith
279. 25:28had always wanted to go to Paris. It is the first time and will be the only
280. 25:36time he leaves Great Britain. It will be a life-changing experience.
281. 25:42Still a destination for writers and thinkers from all over the world, Paris today is even
282. 25:46more glorious than when Smith arrived in 1764. Its wide and airy boulevards showcase a stunning
283. 25:53ceremonial architecture, yet Paris remains an accessible city, as it was when Smith came
284. 25:59here to walk in the parks with the great French thinkers of the day.
285. 26:05Smith, along with Henry Scott, the young Duke of Buccleuch, and his entourage, settled into
286. 26:10this neighborhood... St. Germain-des-Pres. As now, it was a cosmopolitan mixture of shops
287. 26:16and restaurants. You have to imagine Smith going to Paris with
288. 26:23one of the richest, grandest young men in Britain whose estates were gigantic in Scotland and
289. 26:33in England. You also have to remember that Smith went
290. 26:36to Paris as a man who had written The Theory of Moral Sentiments, and was enjoying an enormous
291. 26:43success in the salons, and in the clubs of Paris.
292. 26:48Paris was ready for Smith- and Smith was ready for Paris.
293. 26:52The Theory of Moral Sentiments was a smash hit here. It was twice translated into French
294. 26:56during Smith's lifetime. He was taken up by the ladies in Paris; his
295. 27:01bad French became a talking point. He started to dress rather well.
296. 27:06His social life is suddenly full. There are frequent gatherings in grand salons like this,
297. 27:12where intelligent men and women meet to discuss literature, ethics... and Smith's own works.
298. 27:18One of the things that's funny about Smith is that, awkward eccentric though he is, very
299. 27:24few people have a bad word to say about him. And, rather improbably, Paris loved him.
300. 27:32Adam Smith probably dined here, with some of his new friends. This is Le Procope, founded
301. 27:37in 1686. It's one of the oldest restaurants in Paris.
302. 27:43This establishment was a gathering place for many of the great thinkers of the age. Voltaire
303. 27:48was here so often that he actually had his own desk here. And he was often joined by
304. 27:53likes of Thomas Jefferson, Benjamin Franklin, Diderot, Rousseau, and many, many others.
305. 27:59Smith now changes his focus from the perfection of private nature to the improvement of public
306. 28:07systems. These are the ideas that will take final form in his second book, The Wealth
307. 28:12of Nations. In France, Smith met many of the very early
308. 28:17economists of his time, so-called Physiocrats... ... who were theorizing interestingly on what
309. 28:24he took to be the central problem of economics. How do you extend the wealth and power of
310. 28:32a nation? In Paris, Smith meets the leader of the Physiocrats,
311. 28:37Francois Quesnay. They take long walks and discuss novel ideas with other French intellectuals
312. 28:43and economists. They thought, like Smith, that the key to doing
313. 28:48this in a modern world was liberalizing the market.
314. 28:52Both Smith and Quesnay are radical critics of the old mercantilist system of tariffs
315. 28:57and monopolies. They both believe in free trade and they both think that wealth is created
316. 29:01by individuals and businesses... not by the government.
317. 29:06Like Smith, the Physiocrats apply the scientific method to the study of economics.
318. 29:12They coupled liberalizing the market with absolutely massive state intervention.
319. 29:20Quesnay believes that the French economy can only be rebuilt after radical changes in land
320. 29:25ownership and inheritance law are imposed in a revolutionary manner, from the top down.
321. 29:31And this is where they part ways, because Smith thinks that revolutionary changes like
322. 29:35that are politically disastrous. He is convinced that economic growth is dependent on progressive
323. 29:43improvements and freeing up change at the bottom.
324. 29:47Smith thinks that markets, governed by civil society are much better than a revolution
325. 29:51to improve the lot of the common man. Years later, the terror of the French Revolution
326. 29:56will bear him out. For now, he finds a perfect example of progressive improvement in a method
327. 30:03of industrial production that has fascinated many French Enlightenment thinkers.
328. 30:07Ah... there it is... Diderot's famous print of a pin factory.
329. 30:12"One man draws out the wire, another straightens it, a third cuts it..."
330. 30:18There are dozens of stages involved in making pins from straightening out the iron, to flattening
331. 30:25it, to sharpening it, and so forth and so on, and so on...
332. 30:27The pin factory becomes Smith's most famous example of how division of labor can create
333. 30:32large-scale voluntary cooperation between people specializing in different tasks.
334. 30:37What Adam Smith suggested was when you divide the labor of a particular task among many
335. 30:41people; the overall productivity goes up. If you want to know the state of a nation's
336. 30:46economy, look at the stage of its division of labor.
337. 30:50The more division of labor, the more productivity and the more prosperity. That means that the
338. 30:54larger the market, the more prosperity. Smith doesn't conceive of division of labor.
339. 31:00His great contribution is to show how necessary it is for widespread prosperity, and that
340. 31:04the roles we play in that division must constantly change according to our skills, the demand
341. 31:09for them and the competition we face. From the hustle and bustle and glamor of Paris,
342. 31:22Smith returns home to the quiet of Kirkcaldy to settle down and develop ideas for his next
343. 31:27book. The deal with the Duke of Buccleuch means
344. 31:31that he doesn't need to worry about paid labor anymore. He is his own man financially.
345. 31:38This gives him the opportunity to finish The Wealth of Nations and to define many of the
346. 31:42economic principles that will stand the test of time and usher in the modern world.
347. 31:47He is reading voraciously. It's intense writing, rewriting over a three, four-year period.
348. 31:55We know that after a hard day's work, Smith occasionally visited The Path Tavern to exchange
349. 32:00stories and raise a glass or two. Established in 1750, it was just a few blocks from his
350. 32:07home. Hi, how are you doing?
351. 32:08Not bad, how are you today? Great... thanks.
352. 32:10Good, that's lovely. Can I have a glass of claret, please?
353. 32:12Yes, of course you can. His drink of choice is claret and even in
354. 32:17a simple glass of wine he sees an economic principle.
355. 32:20"It is the maxim of every prudent master of a family, never to attempt to make at home
356. 32:27what it will cost him more to make than to buy..."
357. 32:31Never to make at home what is cheaper to buy elsewhere - and that was certainly true of
358. 32:35wine in Smith's day. In Scotland, the land lacks the chalky limestone
359. 32:40and gravelly soils that lend so many flavors to the wines of France. Even more, it's too
360. 32:46cold and wet to grow good wine grapes here. In Smith's day, like today, most good wine
361. 32:53drunk in Scotland is imported from France. It's reasonably priced, readily available,
362. 32:58and tasty. So when it comes to wine, France has a competitive
363. 33:02advantage. It's nearly impossible to produce fine wines in Scotland. But the Scottish soil
364. 33:06is perfect for something else. Could I have a Balvenie please?
365. 33:10Certainly. Although the Scottish soil or "terroir" is
366. 33:14inhospitable for the growing of grapes for wine, it's perfect for growing barley - and
367. 33:20malted barley is the major ingredient in single malt scotch whiskey.
368. 33:25The moral of the story? Do what you do best- and trade for the rest. Sure, the best wines
369. 33:31from France cost a fortune. But so do the best single malts.
370. 33:35The essential thing about the free market is that it is voluntary trade between different
371. 33:40people, voluntary exchange. What we're doing is looking at each other
372. 33:43as potential partners, as peers, not as enemies. You are my opportunity, not my enemy. So Smith
373. 33:50saw the market economy as extending the frontiers of opportunity for everyone, including and
374. 33:55especially the least among us. Smith knew that moving products to supply
375. 34:00people with what they needed and wanted from around the world is a complicated process,
376. 34:05too complicated even for the most powerful government to manage. But he saw it as a natural
377. 34:10function of a free market. If you make that into a system, whereby it's
378. 34:15not just you and me, but it's millions and millions of people all trading with each other
379. 34:20and exchanging things that they produce, then that is an extremely efficient system.
380. 34:25It's all highly organized, not from the top, but from below. It's the result of millions
381. 34:32of people acting in their individual interests. Have you ever noticed that, when it's raining,
382. 34:37there's someone there selling umbrellas and when you're at the beach, it's easy to find
383. 34:42sunglasses and suntan lotion? Adam Smith told us why.
384. 34:46"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our
385. 34:53dinner, but from their regard to their own interest. We address ourselves, not to their
386. 34:58humanity but to their self-love." By self-love, Smith means that sellers want
387. 35:05to earn a living in order to support their families. To do that, they make the products
388. 35:10that they think you and I will want to buy. Not because anyone tells them to, but because
389. 35:15it's in their best interests. So, for Smith, what he saw was not mutual
390. 35:20selfishness. What he saw was mutual respect, which is an entirely different moral paradigm.
391. 35:26Here's how it works: the prices we're willing to pay send key signals and Smith used a baker
392. 35:32as an example. Hi, this all looks delicious... Could I have
393. 35:35a cup of coffee? Yeah, of course.
394. 35:37And a scone, please? But let's say we all want scones, and the
395. 35:42baker keeps running out, well then, she can charge a bit more.
396. 35:47Seeing the demand and money to be made, other bakers will start offering scones. All throughout
397. 35:52the supply line, people spring into action. Farmers see that bakers are buying wheat so
398. 35:58they plant their fields, and up production. Truckers see money to be made in delivering
399. 36:03wheat to bakers, so they buy trucks and hire drivers.
400. 36:07Thank you. So...we vote with our wallets, and all around
401. 36:14the world, people spring into action, to satisfy our demands. No one orders them to do this,
402. 36:19but every purchase sends a message. As the supply increases, competition forces
403. 36:25prices down. Fewer bakers bake scones and things stabilize as supply meets demand dynamically
404. 36:32and automatically. This all happens without government intervention,
405. 36:37without any trade commissar, "man of systems" dictating quotas. This is Smith's "invisible
406. 36:44hand" at work; it guides large businesses and even a small baker.
407. 36:50Just as "the impartial spectator" summarizes much of The Theory of Moral Sentiments, the
408. 36:55"invisible hand" summarizes much of The Wealth of Nations.
409. 36:58"He is in this, as in many other cases, led by an invisible hand to promote an end, which
410. 37:06was no part of his intention." When the baker sees that we want to buy bread,
411. 37:12she makes the bread so she can make a living; and the other side of the coin is that we
412. 37:16get bread. And it's a beautiful place, welcoming, friendly.
413. 37:22There's more to competition than price alone. One of Smith's great contributions to humanity
414. 37:27is his realization that things didn't have to be planned in order to be orderly.
415. 37:34He believed that many complex systems can be generated by local behavior. They don't
416. 37:39have to be, and actually can't be created from the top down.
417. 37:43If you just left people to their own devices in what he called the "system of natural liberty,"
418. 37:48that people will find ways of working with each other, and cooperating with each other,
419. 37:53and collaborating with each other. Smith thought that entrepreneurs and businesses
420. 37:57create wealth, but don't get the idea that he was an apologist for all business. On the
421. 38:02contrary, he saw how many businessmen were drawn to create monopolies and deceive the
422. 38:07public interest for their own benefit and that is precisely why he argued for free competition
423. 38:12and free trade. Greedy businessmen who try to rob consumers
424. 38:16by raising prices or lowering quality would be ruined if the consumers were allowed to
425. 38:22turn to another competitor. And that is why Smith thought that the government shouldn't
426. 38:27be pro-business; it should be "pro-market." I think probably the biggest misperception
427. 38:31people have about Smith is that he advocated some kind of extreme selfishness or greed.
428. 38:36Smith recognized selfishness for what it is; something that's unattractive when we see
429. 38:41it, and something that's unhealthy when we experience it.
430. 38:47Smith sees the "invisible hand" working in small market places, but in the wider countryside,
431. 38:53kings and queens had long sold monopolies and lavished gifts of land upon their favorites.
432. 39:00In Adam Smith's day, castles like this dotted the Scottish landscape. Their owners were
433. 39:06nobles devoted to a life of ease and pleasure, and the legal system was structured and enforced
434. 39:12to keep it that way. Of course, those people had enormous power,
435. 39:17not just economic power, but also political power as well.
436. 39:21Inheritance laws forced family estates into the hands of eldest surviving male, and that
437. 39:26kept them intact, instead of being divided among the siblings.
438. 39:30Among tradesmen you had the guilds, who were deliberately trying to get regulations in
439. 39:36their favor to- to keep out competition. So, the ordinary working person really was very
440. 39:42much left out by this system. "Laws and government may be considered in
441. 39:47this and indeed in every case as a combination of the rich to oppress the poor and to preserve
442. 39:54to themselves the inequality of the goods." People used to think that wealth is the treasure
443. 40:00you keep safely locked up behind thick walls. In the 18th century, many people thought that
444. 40:06what wealth was- was gold. ...That what we needed to do is to export
445. 40:10a lot and then we would get money from other people, and import as little as we could.
446. 40:16It was a zero-sum worldview: where one country's gain had to be another's loss. So they created
447. 40:21a legal framework that was a lot like their castles: high walls all around, and a drawbridge
448. 40:27to keep competition and imports out. Of course, Smith said that was all wrong,
449. 40:32that both sides benefit from a transaction, both the buyer and the seller, and that if
450. 40:37you really want to increase prosperity, what you should do is to increase trade as much
451. 40:42as possible, rather than try to prevent one side of it coming into you.
452. 40:47Smith's detailed study of markets leads him to realize that it's the labor of a nation's
453. 40:53inhabitants that is the major source of wealth. If you read The Wealth of Nations, the very
454. 40:59first sentence he says, "The wealth of a nation is fundamentally the productive labor of its
455. 41:06people." In other words, it's gross national product, as we would call it these days, absolutely
456. 41:11breathtaking. And in the second sentence he talks about
457. 41:13gross national product per capita. In the third sentence he talks about productivity.
458. 41:18These are completely new concepts. That is how you grow; that is how you acquire
459. 41:23wealth. It isn't the amount of silver that you can get into the- into your vaults. It
460. 41:29is the productive capacity of your citizens. Before Smith, almost every school of thought
461. 41:36taught people that one's own interest is always contrary to someone else's.
462. 41:41But Smith changes everything. If trade increases our wealth, then other people, other groups
463. 41:48and other nations are not by nature our enemies. Tying the progress of modern society to productive
464. 41:54people and open markets is a revolutionary idea, but he also speaks to the role of government
465. 42:00in a free society. "Little else is requisite to carry a state
466. 42:06to the highest degree of opulence... but peace, easy taxes, and a tolerable administration
467. 42:12of justice; all the rest being brought about by the natural course of things."
468. 42:18This displays a striking faith in the average human being. If we just give you some space
469. 42:24and protect your basic rights, you can figure out how to improve your own life. We don't
470. 42:29have to do things for you; we just have to stop doing bad things to you.
471. 42:35In 1773, Smith is here in Kirkcaldy working on The Wealth of Nations but the material
472. 42:42he needs is miles away in London. So, he sets out to visit Parliament, to investigate taxes,
473. 42:49a potential war with the American Colonies and the government's support of monopolistic
474. 42:53companies. Because "peace, easy taxes and a tolerable
475. 42:57administration of justice," does not describe what goes on in the British Parliament.
476. 43:1018th century London didn't have cars or buses, but it was a huge, vibrant metropolis; and
477. 43:24the center of the most important political debates. Smith followed them closely and he
478. 43:29wrote about them in detail. As you read Smith it becomes very clear that
479. 43:33the problems of his day are very much similar to ours: poverty and unemployment, failure
480. 43:39in the educational system, political pork, foreign conflict, runaway spending, and a
481. 43:45burgeoning national debt. Some of that debt can be blamed on what was
482. 43:51perhaps, the greatest state supported monopolistic company in history. Here along the Thames,
483. 43:58in the southeast corner of London, lay the docklands, home to those mighty fleets of
484. 44:02sailing ships in the days when Britannia truly "ruled the waves."
485. 44:08This place doesn't look like much today, but in the early 19th century; this was a bustling,
486. 44:14wide expanse of docks and port facilities owned by the East India Company.
487. 44:19This used to be the homeport of one of the most powerful organizations on earth. Now
488. 44:24it's just filled with mud. Smith saw the East India Company as the epitome
489. 44:29of monopolistic evil. Britain's National Maritime Museum in Greenwich has the story.
490. 44:36Here within the galleries of this World Heritage Site is an amazing repository of the seafaring
491. 44:42heritage of the British Empire... filled with treasures large and small, including a superb
492. 44:47exhibit of the East India Company. I think what surprises people when they come
493. 44:52into this gallery is just A, how large the Company was, and B, how long it lasted. I
494. 45:00mean this is something that's dominating Asian trade for more -- almost 250 years essentially.
495. 45:07Robert Blyth is the senior curator of world history here at the museum.
496. 45:12The East India Company actually becomes an Asian power. It has its own army, its own
497. 45:17navy, and of course, its own merchant ships are armed as well.
498. 45:22In fact, it was one of the most powerful organizations on earth. In Smith's day, the company accounted
499. 45:28for much of the world's trade and had its own army of almost 70,000 soldiers. It ruled
500. 45:34all of India. So, the company is actually minting its own
501. 45:38coinage in India in order to strike some of its deals.
502. 45:44So an official coat of arms and minting your own coins, it seems like they're almost spontaneously,
503. 45:51without intention, moving from being a company to becoming a government.
504. 45:55Absolutely, this is monopoly. The company has real power. So, this is company as government.
505. 46:03The story of the East India Company highlights how easy it is to divert public resources
506. 46:09for private gain. If you think of Adam Smith's ideas of a free
507. 46:14market, of free trade- the company is the absolute antithesis of that.
508. 46:20Smith denounced the company as a bloodstained monopoly: "burdensome," "useless" and responsible
509. 46:27for "grotesque massacres" in Bengal. Its managers and officers became incredibly
510. 46:33wealthy, but the company itself was never very profitable.
511. 46:36When it's not making a profit, when military conquests in India really is a drain on its
512. 46:42finances, the British government has to step in to prop up the East India Company.
513. 46:46Essentially, the company becomes too big to fail.
514. 46:50In order to bail out the company, Parliament passed the Tea Act of 1773, allowing the company
515. 46:56to sell its tea to the American colonies, on privileged terms, at a tax rate lower than
516. 47:01the local tea merchants. This, of course, led to the Boston Tea Party.
517. 47:06So, it is East India Company tea that is thrown into the harbor at Boston. Now, it might be
518. 47:14too much of an exaggeration to say that the East India Company's monopoly caused the American
519. 47:19Revolution, but definitely a factor in it. Smith finds himself having to think about,
520. 47:26how do you manage empire in the modern age? But even worse, there is the problem of America.
521. 47:34What to do about those discontented, troublesome, American colonies who have begun to demand
522. 47:40more influence or even independence? Smith thought that the Americans were victims
523. 47:46of the mercantilist system. That Britain was trying to extract wealth from America and
524. 47:51make sure that no wealth went from Britain to America.
525. 47:54Smith gets caught up in this debate, and becomes closely involved.
526. 47:58"The Parliament of Great Britain insists upon taxing the colonies; and they refuse to be
527. 48:04taxed by a Parliament in which they are not represented."
528. 48:09Smith is widely respected, very well connected, and feels that the way Britain deals with
529. 48:13the American colonies is very important not just for the colonies, but for Britain as
530. 48:17well. Is a commonwealth, a free trade zone with
531. 48:21America, is that possible? Because he believed that the best for both
532. 48:25sides would be open and free trade. This is one of the most hotly debated and
533. 48:30difficult problems that any British government has ever had to face.
534. 48:34Smith listens to debates on the American issue in the British Parliament. He even lobbies
535. 48:38politicians, urging them to let go of their mercantilist thinking and keep Americans on
536. 48:43friendly terms with open trade and migration. In fact, he speculates that America could
537. 48:48one day be the seat of the capitol of Great Britain.
538. 48:53Yet war is clearly on the horizon - in which thousands of British troops will be sent to
539. 48:58die on a faraway shore. It will be a very unpopular and costly war.
540. 49:05In Smith's day, the military is the government's single largest expense. And this is one reason
541. 49:10why. This is the HMS Victory, on which Admiral Lord Nelson defeated the French Navy, and
542. 49:16lost his own life, at the Battle of Trafalgar in 1805. It's been beautifully restored and
543. 49:22rests here in Portsmouth, England. Built at a cost in excess of what would be
544. 49:2775 million U.S. dollars today, the Victory was a deadly floating gun platform with 100
545. 49:34bronze cannons on three decks. She carried four acres of canvas and made battle speeds
546. 49:40of eight knots. Launched in 1765, this ship had a crew of
547. 49:45821 men. The Royal Navy in those days had more than 500 active ships, and 140,000
548. 49:52seamen, plus huge homeport facilities in England to maintain and repair all those ships.
549. 49:59Smith has run the numbers in detail-as he always did-and he really couldn't see any
550. 50:03way in which the colonies would ever be profitable to Britain. Controlling colonies, just to
551. 50:08monopolize trade, would never pay. As we all know, the British government didn't
552. 50:12adopt Adam Smith's views on the colonies. But he felt so passionately about it that
553. 50:17he concludes The Wealth of Nations with them as an example.
554. 50:22In 1776, just months before America's seething discontent bursts into outright rebellion,
555. 50:29the Wealth of Nations is published. It's a beautiful book. It's expensive.
556. 50:35If you walk through the great libraries of the world, you will find the Bible. You will
557. 50:42find Newton. You will find Darwin's Origin of the Species. That collection is not complete
558. 50:49without The Wealth of Nations. It is one of the path-breaking books of all time.
559. 50:55And it's written to be understood and taken seriously by governments, as well as by philosophers.
560. 51:02And governments do take it seriously. Almost immediately, Smith's ideas catch fire around
561. 51:07the globe. The founders of the American Republic, the kings, queens and parliaments across Europe
562. 51:13from Great Britain to Russia, become convinced that Smith has conceived of a revolutionary
563. 51:18blueprint for prosperity. And they start reforming their countries, with the result of unleashing
564. 51:24growth and speeding up the Industrial Revolution. Smith is now wealthy, famous, and influential.
565. 51:35He and his aging mother move to Edinburgh. Here in this building on High Street, he will
566. 51:41follow in his father's footsteps as a commissioner of customs. He will live out the last 12
567. 51:46years of his life, in his new home just a few blocks away.
568. 51:50He chooses the Canongate neighborhood, known for its large and fashionable homes and gardens.
569. 51:56And he settles into this home, the Panmure House, named after its original owner, the
570. 52:01Earl of Panmure. Big ugly house next, however, to a church.
571. 52:06And his mother is a deeply religious woman. But it's near the center of things, and in
572. 52:13a sort of way it's a friendly house. Here in this large and friendly house, he
573. 52:17convenes weekly dinner parties that soon become major intellectual and social events.
574. 52:22All of the minds that were there in Edinburgh at the time, the great minds could come around
575. 52:26to his house and talk about life, and politics, and art, and literature and economics.
576. 52:32And so, the end of his life, it's a sociable life. The only snag is that it doesn't give
577. 52:38him much time for writing. And yet something he does write shines a critical
578. 52:43light on the real "Adam Smith." He returns back to The Theory of Moral Sentiments,
579. 52:48and he revises it very comprehensively. He adds a very significant section... and it's
580. 52:53a study of the virtue and indeed, the virtues that he believes to be necessary for modern
581. 53:00commercial society. "To feel much for others and little for ourselves;
582. 53:06to restrain our selfishness and exercise our benevolent affections, constitute the perfection
583. 53:13of human nature." Smith mattered to his contemporaries, and
584. 53:21the fascinating thing is he's gone on mattering to posterity.
585. 53:24He was deeply concerned for the plight of the working poor that he felt were really
586. 53:30kept out of opportunities by the kind of cartel and the crony capitalism of his day.
587. 53:37So, laws and institutions shouldn't only be set up to favor the already entrenched interests;
588. 53:43people at the bottom of the economic spectrum matter, too.
589. 53:45Every generation has to cope with the problem of how far should governments intervene in
590. 53:52the business of trying to maximize the wealth of their own country. These are eternal questions,
591. 53:59which every single government, in every single generation, in every single country has to
592. 54:05address. Perhaps the greatest gift that Adam Smith
593. 54:07has given to us is a set of institutions, political economic institutions that have
594. 54:12enabled the greatest increase in productivity and prosperity that the world has ever known.
595. 54:19To an impressive degree, the world now runs according to Smith's vision. In fact, his
596. 54:24ideas are so universal that it's difficult to tell where they begin or end.
597. 54:29He died in 1790, six years after his mother. He's buried here, in a cemetery just a few
598. 54:36houses from his beloved Panmure House and next to the church where his mother used to
599. 54:41worship. Together with Newton, Voltaire, Jefferson, Darwin and other great thinkers, his was one
600. 54:49of the greatest minds of his era. Through persistent observation and astonishing
601. 54:54insight, he showed how society and human interaction really worked...and how much happier and more
602. 54:59prosperous the citizens could all be. Who was the real Adam Smith? Surely he was
603. 55:05both free market advocate and moral philosopher. I was intrigued to learn that in the twilight
604. 55:11years of his life and in secret, he gave the bulk of his wealth to charity.
605. 55:17In the end, and true to his principles, he left his considerable estate to the poor and
606. 55:23his ideas...to us. Funding for this program has been provided
607. 56:15by John Templeton Foundation, and Templeton Religion Trust.