Juliette Sellgren 

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliet Sellgren, and this is my podcast. The great antidote- named for Adam Smith, brought to you by Liberty fund. To learn more, visit www.adamsmithworks.org.

Welcome back. I'm so excited to announce that the great antidote will now be hosted by Liberty Fund’s Adam Smith works.org to celebrate and honor my host website and this transition. I will be starting the new era by exploring Adam Smith, great philosopher and father of modern economics even further and even deeper than before, today on February 18th, 2022. I'm so excited to speak with James Otteson business ethics professor at Notre Dame university and the author of several books. Many of his books are about Adam Smith, but his most recent one is called Seven Deadly Economic Sins. I'm really looking forward to reading it. Welcome, Jim.

James Otteson 

Thank you. Thank you very much, Juliette. It's a pleasure to be with you.

Juliette Sellgren 

So before we jump in, what is the most important thing that people my age or in my generation should know that we don't?

James Otteson 

Ah, that's a good question. It has a little bit of the, uh, “you kids get off my lawn” tone to it, about talking to younger generations. But, I guess I would start with, something that I think is very important, that for some reason, many people aren't aware of and that's that, things in the world are actually getting better, not worse. One of the things I come across a sentiment, I come across a lot when talking with, either recent college graduates or students, is that they think everything is just going to hell in a hand basket, it's all getting worse. But if you actually look at the data in almost every way that we can imagine, or that we can measure human wellbeing, things are actually getting better. So it's not just in wealth.

So we have more wealth in real terms in the world today than we have ever had in human history. But it's also in other important things that matter for human wellbeing, like, uh, everything from air quality to education, access to education, to rates of violence, death by violence has gone down child mortalities going down access to healthcare. And even one thing I would emphasize is life expectancy, life expectancy is historically unprecedented heights. And, you know, that's a very important measurement because in order for you to lead a long life a lot of things have to go well for you. You have to have survived, survived childbirth and childhood. You probably had to have some, some good medical attention. You had to have good nutrition. You, um, did you needed to not live in a war torn society or violent society?

So a lot of things have to go well. And the fact that that life expectancy, I mean, in the United States, in the, in 1800 in the United States, which was right after the founding of the country in the, in 1800, the life expectancy at birth average life expectancy at birth was only 29. I mean, just think about that. It was 29 and now it's in the high seventies, it's about 78, so it's more than doubled. So, you know, things are not perfect in the world. That's certainly true, but in many ways, things are, the trajectories are good and we are at, as I said, historically, unprecedented achievements in many ways.

Juliette Sellgren (3.30)

And last time I checked, I don't know, I haven't checked this recently. We have more trees than we've ever had on earth, which is something that most environmentalists would not want you to know and probably don't even know themselves. Yeah. So definitely keep that in mind. That's a lovely reminder. Thank you so much.

Let's get into Adam.

He's written two books, An Inquiry into the Nature and Causes of the Wealth of Nations or the Wealth of Nations, as most people know it. And that's the most famous of his works, even though I would argue that his other work should get more attention. And so then there's The Theory of Moral Sentiments, which is not as well known, but it's incredibly important. I learned recently that throughout his whole life, he was revisiting and revising and editing the theory of moral sentiments. That's right. I did a podcast with Russ Roberts on it. I have so many questions still, but my first question is why did he only write two books?

James Otteson (4.33)

Ha uh, well, that is a very good question. Yeah, so you're right. He only wrote those, only published those two books, which, as you probably know, that's hardly enough even to get tenure at a modern research university. So he wrote those, he published those two books, revised, as you said, both of them, went through several editions during his lifetime. But one thing that many people don't realize, so he didn't publish anything. I mean, there were a couple of essays that we have from him, but no other books. But about a week before he died, he died in 1790, about a week before he died, he apparently sensed that the end was coming near. And so he called to his quarters, a couple of his friends, and he said, I, I think the, the end might be coming near. So I would like for you to burn my manuscripts, my unpublished manuscripts. And apparently he had been making gestures, mentioning things along these lines for a while. And his friends had been resisting, but this time he insisted. And so they actually burned 16 volumes of handwritten manuscripts. So, uh, we can only guess and have speculation about what exactly was in them, but, certainly would, seems like it would've been enough for several more books. But in the end then we only have those two books that he published.

Juliette Sellgren 

Why do you think, well, first, why do you think he burned them?

James Otteson (6.00)

Yeah, I mean, apparently he didn't think he had brought them to a sufficient level of perfection; so he was a perfectionist, and, you know, we have some indication of what, of some of the things that might have been in the book. We have a couple of places where he mentions offhandedly, including letters and some other places where he mentions that he's at work on something of a universal history of humankind. Maybe also a universal history of the, of what he called police or policy that is, various kinds of government policies. So we're not exactly sure what all was in it, but apparently he just thought it wasn't, he, he hadn't quite fashioned it as, uh, perfectly as he had hoped and he didn't want the world to see less than perfect work from him.

Juliette Sellgren (6.46)

It's kind of a good lesson, maybe something that I don't know. I don't know. I mean, part of the good thing about the internet and about writing books and all this stuff is that you're learning, you're experimenting with different ideas, but right. At the same time, sometimes I would like the stuff I put out to be more polished <laugh> because then you see my best work, but no human is perfect. So I guess…

James Otteson (7.10)

Yeah, no, exactly. And it, it, I mean, I think there might be a balance to be struck there, so yeah, you don't wanna just necessarily rush out with the very first thought you have about something.  Although I guess today's digital age kind of encourages that people rush out with all kinds of, you know, not, we very well formed thoughts. So you don't wanna do that, but on the other hand, you know, having such a high level of, you know, demanding level of perfection, you know, that can rob the world also. I mean, who knows what, what great insights were contained in those 16 volumes that were consigned to the fire?

Juliette Sellgren 

Especially when the quality of the other works he published were so high. It's hard to imagine that they were bad. Maybe they weren't at the same level in his mind, but were they really too bad to publish?

James Otteson 

Yeah. Questions? No, I, yeah. I'm with you. I, I think that that was probably a mistake and I, I wish those volumes had not been burned.

Juliette Sellgren 

So the Wealth of Nations and The Theory of Moral Sentiments are often perceived as being very, very different. And almost as though they were written by two different authors, not the same person. Do you agree with that statement? And what's your take on that?

James Otteson (8.26)

Yeah, that's a good question. And that's a question that scholars have been sort of arguing about, uh, for about a century and a half now. It's the so-called Adam Smith problem; you know, how do these two books go together? The first book, The Theory of Moral Sentiments is about human morality and talks about a, a natural desire for what he calls mutual sympathy of sentiment. So that word sympathy, and then, in the second book, The Wealth of Nations, it's it, doesn't, it's not as obviously about anything relating to morality. It's, it's about what we would now recognize as, economics or sort of, bringing the principles of what we now recognize as, uh, economics to understanding human behavior. And you're right, the, the two books do have different tones and they seem to have largely different subject matter, even though it all has, in both cases they had to do with human behavior.

But I don't think that the, that the two books are unable to be reconciled. So some people have thought that in the past, I don't think that's true. In my view, I mean, just to give you, you know, the short story of that, I think what Smith was trying to do was to try to use the emerging science of sort of empirical investigation into human behavior and use that to understand different, large scale human social institutions. So, he wanted to, in the first book, The Theory of Moral Sentiments, he was trying to understand empirically the way something like an empirical or cognitive psychologist today might. He was trying to understand how it is that human beings go from when they're infants or children, they basically have no moral sentiments at all. They just have things they want and they scream and yell to get whatever they want satisfied.

But then they transition through their life to, to at some point when they're adults, they have a very sophisticated set of moral sentiments and, and ideas about what's proper and improper to ask for. And what are proper and improper ways to ask for things and how to behave, et cetera. So he wanted to understand sort of empirically what explains that process, so that it ends up with a kind of shared system of moral sentiments. And that's the large scale social institution that he was interested in the first book. But then if you transition to the second book, The Wealth of Nations, there, what I think he's trying to do is something very similar. So one of the things he notices is that human beings, unlike other animals in the world, so we don't have fur and we don't have claws and wings to help us get what we want, what human beings have is what he calls reason and speech and reason.

And speech means that in order for us to get what we want to survive and flourish, we have to cooperate with one another. And so what that means is that sort of built in almost into the DNA of human beings, although that was a term that wasn't available to Smith, but sort of built into the nature of human beings is this propensity to trade as he calls it to truck barter and exchange, and to cooperate with one another. And when we do this, this gives rise to conventions and habits and maybe even policies and governments, um, that also form a system of social, um, social institutions. And so what I see him doing in both books is trying to understand the process by which human beings create these large scale social institutions in the one case, uh, morality. In the other case, what we would now recognize as systems of political economy or economics.

Juliette Sellgren (11.51)

I see them as very much connected, and this might be me as a double philosophy-econ major, and that I'm like, oh, good for you. You can't have one without the other, but I truly think that neither of them are complete without the counterpart and that to have econ, to have that meaning behind it, you need philosophy and to have philosophy doesn't really have a direct application. I mean, it helps you understand the world helps you learn to think, but econ would be that application. And so I think they go together in that way. And that's just kind of how I've seen it.

James Otteson (12.28)

No, I think you're, you you're putting your finger right on it. I mean, you, that's a very Adam Smithy way to look at it. You know, it's, it was only much later, long after Adam Smith was writing that the discipline of economics sort of separated itself off from what we might think of as moral philosophy and became more strictly about, and I'm speaking, I'm exaggerating a bit, but became more focused on strictly the empirical analysis of human behavior without asking questions about what ought to be or, what the virtues are or how economics can help us understand how to achieve, how to live a flourishing or a virtuous life. But in Adam Smith's day, and I would say it should be the case today too. Both of those things go, as you said, hand in hand, if we wanna understand how to live, how to lead a prosperous flourishing virtuous life, well, then you do need to have some understanding of the moral aspects of that.

What does it mean to be a morally virtuous person? And then on the other hand, how do we make our way in a world of scarce resources and with other people who have differing and sometimes conflicting  hierarchies of value and differing goals and, and preferences, how do we, um, negotiate those differences? And if we wanna think about not just how I, as an individual can be a virtuous person and lead a flourishing life, but how we can in cooperation with one another and in society with one another, then it seems you really do have to have  an intersection and really a, an integrated discussion between both philosophy on the one hand and the discipline of economics on the other…

Juliette Sellgren 

Which one is your favorite?

James Otteson 

Uh, which book you mean?

Juliette Sellgren 

Yes.

James Otteson (14.16)

<laugh>, ah, that's a good question. That's a tough one. That's like asking a parent, which one of your children is the favorite <laugh>, um, you're, you're not supposed to have a favorite, but, um, um, I guess I would say, I think the, uh, The Theory of Moral Sentiments is my favorite. I, I, you know, look, I think the, The Wealth of Nations is a deep and, and extremely influential book. I think it has, you know, it, it, in the last thousand years, it's one of the most, important and influential books that has been written, in a millennium. But, but for my money, you know, if you're just asking me for my favorite, I think it's the Theory of Moral Sentiments, because, I mean, there are lots of reasons. But I'll just maybe just mention one it's so full of the, of novel and deep insights about what matters to human beings, how human beings respond to one another.

And it really, inaugurates almost a new field in moral philosophy. So, you know, most of the stuff that was written about more, almost all the stuff that was written about moral philosophy in, before Smith's time and even in Smith's day, you know, people like David Hume would be an exception to this, but most moral philosophy was really what I would call moralism, meaning it was really telling you about, you know, how to behave, to be a moral person. These are the things you should do. These are the things you should not do. This is what virtue requires. This is what vice is. Smith wasn't uninterested in those questions, but The Theory of Moral Sentiments really took a kind of different tack. He wanted to understand the process by which human beings develop moral sentiments. And then how do we affect one another's moral sentiments by for example, sharing our judgements with one another.

When you find out that other people have formed a negative judgment about something you did or something you said, or, some preference or judgment that you, that you, shared with them that has an effect on you. And similarly, the other way around when, when other people find out that you judge them negatively or positively, it gives them negative or positive feedback as the case may be. And what Smith was trying to show in that book, was that, that matters to us, that we care about the judgements that other people form about us. And so, what that means is that that can provide a kind of central force for society. So we want, we, we desire what he calls mutual sympathy of sentiments, or seeing our own sentiments echoed, or reflected or approved in other people.

And it gives us a feeling of displeasure when we see that other people have different sentiments from ours, and so what that does is it, it helps us at the margins develop our sentiments in directions that we think can, that we anticipate or that we can expect will give us favorable feedback from others. So it's an inherently social mechanism. Human beings, he thinks develop moral sentiments only in community with one another. They wouldn't do it. If you were Robinson Crusoe alone on an island, you wouldn't have any moral sentiments, so it's an inherently social phenomenon, and it gives us a mechanism for understanding how moral sentiments, at least at the margins can change over time. So it's really a deep, and almost entirely new and novel theory. So I think it's really an extraordinary feat.

Juliette Sellgren (17.31)

And on kind of a service level I've been playing with this idea as ethical or unethical as this might be. I don't think it would be ethical. It would either be neutral or unethical. I have been testing this out on people. I react in a way that they wouldn't expect, or negatively when they think they're funny. I don't laugh. Or when they think they're saying something that's not funny, I'll laugh. <laugh> and not in a way that I just see how that influences their behavior each time it happens. And I don't, it feels so wrong to do that. And also to be saying it here, but I've noticed it to be true. So at least for me, I truly believe that that is how it works at least to a certain extent. And so it's been kind of interesting. It doesn't work with my cat though. My cat doesn't care.

James Otteson (18.24)

<laugh> well, I mean, that's actually an important distinction, isn't it? So, I mean, you know, Smith says that, the Smithy argument is that it's human beings who develop moral, sentiments, not other animals. And he, he thinks that, that the experience you're talking about sounds like you're just, you're running sort of social scientific experiments on people, but that those would be to, uh, to test or illustrate Smith's theory, which is, you know, his claim. I mean, when he made this claim in 1759, so it's 250 years ago, but he said, he argued that one of the core and enduring features of human nature is not only are we social inherently social creatures, but we actually care about what other people think about us. You know, so one of the things that parents like to say to kids and teachers like to say to students is, oh, it shouldn't matter.

You shouldn't let, what other people think about you, matter you should, you know, do the thing you think is right or be yourself. On the Smithian view, that's really sort of, you know, whistling in the wind because, you know, human beings are, are built as social creatures and we're built to, in such a way that we can only succeed and flourish if we cooperate with others. And that means we have to pay attention to one another, we have to figure out ways that you and I can cooperate such that both you benefit and I benefit. And so all of that means that we are paying, we are sort of hardwired to pay attention to what other people think about it. So back to your example, if you, if somebody tells you a joke, and expects, you're going to laugh and you don't, that's actually a pretty, you know, a pretty significant piece of feedback for that person.

And if you're the only person who didn't laugh, then that's quite an anomaly and people will remember. In fact, I don't know if you knew this, but, the, the phenomenon of joke telling and laughing at jokes, that's something that, Smith talks about quite a bit in The Theory of Moral Sentiments. He likes that exact example because he says, you know, it's certainly true that we've all or many of us have had the experience of, you know, being out with our friends and, we have, and we decide to tell a joke to people. We tell our joke, and then after we tell the joke we laughed, because we think it's funny. And imagine if nobody else laughed, if you were the only one laughing, that's a pretty stinging rebuke. And if you have that experience, that's, you're gonna learn a lesson from that. You're gonna think, well, I don't wanna do that again. And so that's going to help develop your sentiments in the right kinds of directions. So, it'll develop your sentiments in a way that, that moves you away from not enjoying the mutual sympathy of sentiments with others towards enjoying mutual sympathy with, of sentiments with others. So Smith actually thinks that's a very telling example in a good test of his hypothesis.

Juliette Sellgren 

So then look at me, I'm doing exactly what he wants me to do. 

James Otteson 

You are a social scientist.

Juliette Sellgren 

I vaguely remember reading that part. I've read it a few times, different parts at different times. Let's talk about Smith and the thinkers of the time who were, and what were the intellectual influences on Smith?

James Otteson (21.33)

That’s a good question. So, I, I would highlight two people in particular, um, and I'll go in order of importance from less important to more important. So the less important person was Francis Hutcheson. So Francis Hutcheson was a professor of, now we would call it, philosophy, moral philosophy and theology, who was actually Adam Smith's, Adam Smith's, teacher. So, Smith, he had a lot of influence on Smith. Hutcheson was someone who argued for what he called a moral sense, meaning, sort of on analogy to our other senses of sight- hearing, you know, touch, et cetera. He thought we had just a, an innate moral sense where there were some, almost some properties in the world, moral properties in the world that we could perceive with this moral sense as being moral or immoral, and Smith spent a lot, that had a lot of influence on Smith, especially early on, as he was thinking about how it is.

We come to the moral sentiments that we have. He ultimately rejected that idea that there was an innate moral sense, and thought instead, that what we did was we engaged in this sort of negotiation process that we were just talking about a second ago, where we, we observe how other people respond to our behavior or respond to our expressions of sentiment, and we notice whether we get positive feedback or negative feedback, and we also share the same thing to other people's behavior and judgment. And this, has this kind of negotiation process that leads him to shared moral sentiments. But Francis Hutcheson was one of his, one of the big influences, but I would say an even greater influence and probably the single greatest influence on Smith, was David Hume. So David Hume was arguably the, the greatest of all Scottish philosophers, one of maybe the greatest philosophers in the English language, and one of the, you know, 10 or so great philosophers in the history of the west.

And Hume had a tremendous influence on Smith, and it was actually Hume who coined the term and sort of announced his intention to develop what he called a science of man. That was his term- science of man. So Hume and Smith were friends. They knew each other very well.  Hume was a little bit older than Smith, but, Hume had been very deeply impressed by what Isaac Newton had done for the natural world for understanding, you know, motion not only on earth, but in the heavens as well, for coming up with universal laws that describe the motion of all things and, allegedly anyway, all things in the universe, by observing and then, trying to write out or come up with laws or principles, maybe even mathematical laws or principles that would describe the motion of things, what Hume decided to set himself as a challenge was, well, could we do the same thing for not the behavior of, inanimate objects, like the stars and the heavens or, you know, rocks that you might throw or that fall from cliffs, but human behavior, could we come up with principles that would describe human behavior?

And I think that's really that deeply impressed Smith. So I think Smith thought that Hume got a lot of those things, right, maybe not all of the details, right. And Smith departed in some of the details from in his own description of human behavior, but the general project of sort of applying observational skills and trying to gather empirical evidence and come up with general rules that describe all of that. I think that had a very big influence on, and really sort of captures what Smith was doing in both of his books.

Juliette Sellgren (25.16)

About the moral sense. It kind of, it seems to align somewhat with the fact that across countries, across continents, we have similar laws in terms of murder and protecting human life to an extent. And then the stuff that differs more is the more surface level stuff that might be more because of what Smith is talking about. I don't know. I just started thinking about that. But about Hume, did, did Smith influence Hume in the other direction?

James Otteson (25.50)

That's a good question. And I think there's less known about that. I mean, you know, maybe, maybe another podcast we'll have to have is on the, the tragic life of David Hume, but, so Hume was, Hume was a very interesting person, and he was, and led a very interesting life, but that was filled with a lot of disappointments for him. So, you know, he never married despite apparently falling love. And there are stories that he actually asked a couple different people to marry him who said no for various reasons, never married, never had children, and both of those things I think were disappointments to him. And he was also, but he was a good friend. Lots of people enjoyed his company because apparently he was a very, he was vivacious and he was a great conversationalist and people loved having him at parties or at dinner parties because he would tell stories.

And he was just a, a real wit and really loved being with him, but one of the interesting things was that, Hume seemed not to have very many deep friends, so he knew a lot of people, a lot of people liked him, didn't have a lot of deep friends. But one of the people he considered a deep friend was Smith, and so Smith was, was a little bit his junior, as I mentioned, about 13 years12 years his junior. But Hume, I think very much appreciated and recognized the, the promise of the young Smith and then saw and encouraged the development of the genius that Smith became. And you know, whether Smith influenced Hume, I think there might be a couple of places in which that happened, but I think really it was more like a mentor-mentee relationship where Hume saw his job as being someone who as, really encouraging, supporting, and giving space and encouragement to Smith so that Smith could let his own genius bloom.

Juliette Sellgren 

Are there any fundamental issues that they disagreed on?

James Otteson (27.49)

Um, yeah. So now, now we might wade a bit into scholarly controversies about this. So I'll, I'll preface what I'm gonna say with saying that, you know, there, there might not be scholarly consensus about this. So scholars, you know, they argue about everything, but they, they also argue about, the degree to which Hume and Smith agree on all aspects of their philosophy. But, I'll mention, maybe just one in particular, and that is, the, the degree to which utility underlies our moral values or our moral virtues. So Hume seemed to think that utility, in other words, usefulness, in some general way, was the basis of most, or maybe even all of our moral virtues. So you pick a virtue, justice, temperance, prudence, courage, whatever it was, why is it that those things are virtues, because ultimately they conduce to the benefit of the person who has them and maybe also society in which any society in which those are championed as virtues. Smith had a slightly different view.

Although he didn't, he, he did not discount the role of utility in many ways. He also thought that there might be a kind of additional standard or a different kind of standard that he wanted to employ to think about what was morally proper or morally improper conduct, and that was what he called the perspective, the imagined perspective of an impartial spectator. So Smith thought that in the morally mature person, so as you're, you know, we're going from amoral infancy to highly moralized adulthood during this process, we have the experience among the experiences will have with other people, is that we are misjudged. So other people, without really knowing our full situation, or maybe being partial in one way or another, they judge us negatively, but for, but for the wrong reasons, they don't really know full story.

They don't really know what all is going on, but nevertheless, they judge us negatively when we have those experiences. Smith thought what we do instead, to sort of protect us from the bad feeling that we would otherwise get from other people's negative judgements is we ask ours, we get in the habit of asking ourselves, well, what would've fully informed, but impartial observer think of what we did or think of our conduct. And that imagined perspective that Smith calls the impartial spectator, Smith says that really becomes the standard, that people apply to themselves and to other people when they're judging moral conduct, but especially to themselves, and so that's not necessarily directly related to, or dependent on utility. But it is a kind of independent standard. I mean, maybe there might be some remote connection to, you know, the, the more that you follow, what a, what an imagined impartial spectator would, would approve or would disapprove, the more likely you are to succeed in life or with, you know, friends or with business partners or something.

But, Smith seemed to see that as the emergence of a separate and maybe even independent, quasi at least independent standard that may, and this is the last thing I'll mention about this, that may even for Smith, but not for Hume, that may have been, that may approximate what God might have wanted. So there's a lot of language about the author of nature, capital “A” author of nature, and a lot of discussion of God and Smith, much less so in Hume. And so it may be that Smith thought that this standard approximated something like what God intended or God willed, even if a particular belief in God wasn't necessary for us to understand what this perspective of the impartial spectator would be.

Juliette Sellgren (31.34)

And Hume struggled in the professional world because of his skepticism of God. Yes, I'm sure did. So I mean, you said you that Adam Smith would mention author with a capital A and all that, but how much do we really know about what Smith thought about God, as opposed to what Hume thought?

James Otteson (31.56)

Yeah, I mean, it's a fair question. And I think, the, the only objective and fair answer we could give is not much. You know, you have to, there, there isn't any, any play, anything that survives from Smith where he says, I am here going to tell you what my, my religious views are. <laugh> so we don't know, you can sort of infer it, based on some of the things you wrote. So in The Theory of Moral Sentiments, especially in the very first edition of The Theory of Moral Sentiments, which came out in 1759, in that edition, there's quite a lot of language of God. And, and as I said, the author of nature, and there's a lot of that language, also the, the ultimate judge of us, capital “J” a lot of that language, which doesn't necessarily mean that Smith believed at all, but he was certainly using that language and that could just reflect his upbringing.

As you know, in the, in the Scottish Kirk, he was raised, in the, you know, in that ethos. So maybe those, that kind of language was just seemed natural to him, or just seemed comfortable to him. But what were his ultimate beliefs? That's very hard to know. And one interesting sort of data point there is that in subsequent editions, after the first edition of The Theory of Moral Sentiments in subsequent editions Smith removed some of the, the more overtly religious and theological language, so, why would that be well, you know, was he changing his mind about his religious beliefs, maybe, you know, as he got to know Hume more and Hume’s skeptical influence on him, sort of, you know, changed his mind or, you know, had an effect maybe, but those are really speculations.

Juliette Sellgren 

Thank you. That's I've always kind of wondered about that. That's so interesting that he took it out. 

James Otteson 

Yeah, very interesting. Yeah, not all of it, but he did take, but he did, yeah, take out more and more of it over the course of the additions.

Juliette Sellgren (33.55)

Adam Smith is often described as the father of modern economics. I said it in the introduction. That's how it just comes to mind when I say Smith, I think modern economics. Yeah. The Wealth of Nations is what gave rise to what we now call economics, as you were saying, what are the specific elements of that work, that diverge from the way that people were thinking about economics at the time?

James Otteson (34.21)

Oh, gosh, that's a, that's a big question. And there are a lot of things. So, maybe a first clue is, if you just think about the full title of that book, it's called An Inquiry into the Nature and Causes of the Wealth of Nations. So first the nature of the wealth of nations. So one of the big targets that Smith had in that book is to make an argument that what people thought and when he was writing in his day, especially, but although this is a view and one under one guise or another, that some people still have today, was that he wanted to dispute was that people thought that wealth really consisted in little yellow pieces of metal. So in gold, the more gold you had, the more wealth you had, and if wealth really was identical with say gold, then that could lead to lead to countries.

Having policies that Smith wanted to argue were actually destructive of real wealth. So for example, if you thought that that wealth consisted of gold, then maybe what you wanna do is you want your country to retain gold. You don't want gold going to other countries. So if you're in Britain, you're the king of Britain. Well, you don't want British citizens buying wine from France because if they buy wine from France, then that means the gold goes to France. And if wealth consists in gold, then that means France is getting wealthy and Britain is getting less wealthy. And so in fact, many countries had policies like that that would restrict trade. They would try to encourage trade within their countries, and restrict trade out of their countries. And what Smith argued was that, no, you, you have that all wrong.

The wealth is not the gold. The wealth is the ability for people to satisfy their desires and needs. So, you know, that's left outta the equation when British citizens buy wine from France. Yes, the gold goes to France, but the wine comes to the British citizens. So we forget that they're actually getting something that they apparently wanted more than the gold, otherwise they wouldn't have traded the gold for it. So, the currency, the gold is really just a tool. That's not the, well, you can't eat gold. You can't, you know, that that is not the consumable good or service itself. It's all of the things that that enables you to get. So that's really the first, one of the main, and, and the first one I would mention main arguments that Smith wants to oppose, that people, the idea that people had in his day was that the nature of wealth just consisted in the gold itself.

It's really in the goods and services that people can use to improve their lives. But the other one I'll just mention this quickly, you know, it's an inquiry into the nature and causes of the wealth of nations. Notice that he doesn't say into the nature and causes of the poverty of nations, and that wasn't an accident. You know, so for Smith, what are the causes of poverty? Well, if, if you wanna be poor, that's actually pretty easy. All you have to do to be poor is literally nothing. If you, if you do nothing at all, you will be poor. What Smith thought and what he was trying to encourage people to realize was that being poor wasn't something that was an achievement- that was just sort of the natural and default state of doing nothing. The achievement was how do we create wealth? That's where, where we need to turn our attention. It's how do we produce wealth? And wealth is produced by human labor, under certain kinds of institutions, with certain kinds of, under certain kinds of constraints. That's where all the interesting stuff and all the hard stuff to understand that's where it comes from. So let's pay attention to the production of wealth rather than poverty.

Juliette Sellgren 

What was the biggest error that Adam Smith made from the perspective of people living in 2022?

James Otteson (38.13)

Oh, that's another good question. You know, there were a few things that I think you might point to, but I'll mention just one. Smith seemed to have the view that the value of something was dependent on, and maybe even determined by the labor you put into something. So that, that later became called the labor theory of value. So if I worked really hard on something, if I put eight hours of labor into something, then that somehow determines the value, or at least it has a big influence on what the actual value of it is. And the significance of that is that, = you know, if I labor on something for eight hours, but, and when I go to try to sell it in a market, if the market price of it is much lower than what the, the value of it is, according to my labor, then that might enable somebody to say that the, that a price is that the price, the market price for it is unjust.

It's not properly reflecting the labor that went into it. And that, I think by, for contemporary economics, I don't think any hardly any economists today believe that labor is what gives something value. They look at the other side of the exchange. So what gives something value is not how hard I worked on it, or how much time I put into it, or how much effort, but rather how much does somebody else value it? So the labor, the value of something really comes out of sort of this two part or maybe multipart, but this, this, negotiation relationship between the person who did it and the person who might want it, and leaving out that second part, who might want it and what, and how, and what it matters to them, how much value they place on whatever I created, that is a central determinant in what we might think of as value now. So I think that's a, that, that is something that contemporary economists, contemporary economics think, is a mistaken theory that Smith probably had, but this labor theory of value, many others had it too. Karl Marx had a similar labor theory of value, but I think that's been just about universally rejected by contemporary economics.

Juliette Sellgren (40.25)

Yeah. We kind of, when we learn about the, the market value of something and equilibrium, it's always, we talk about Alfred Marshall's scissors and how it's the intersection of supply and demanded. They both work to find this middle. Right. But that, it also, I mean, some of my professors disagree on this, but a good amount of them say that supply is born from demand. And so without demand first, then supply wouldn't even be in question. And so it's kind of interesting that Adam Smith came at it from the, from the thought of supply comes first.

James Otteson (41.02)

Almost. Yes. Yeah. That's interesting. And, and I think there's a, there's a good case to be made that, that it can't only be demand. I mean, you know, if you think about the fact that there are lots of things that innovators and entrepreneurs come up with, for which there was no previous demand and nobody even knew they wanted it until it appeared. I mean, take the iPhone, for example, nobody, nobody had ever heard of an iPhone. Nobody had ever seen an iPhone, but the minute they appeared, suddenly everybody demanded it. So, I think, there are lots of, of things where people can actuallythat if you think about the, on the supply side of things, innovators, entrepreneurs, inventors, they often come up with things for which demand is then created, or triggered afterwards, rather than the other way around.

Juliette Sellgren 

It's just such an interesting thing to think about <laugh>. So I wish we had more time, but unfortunately we don't, but before we go, I wanna ask you, what is one thing you believe that one time in your life that you later changed your position on and why?

James Otteson (42.04)

Oh, that's a good question, and maybe a subject of another future podcast too. We can go into more about, I'll give you a short one. So I, as an undergraduate, I studied philosophy, did not study business, a little bit of economics, but I was mostly a philosophy student, and one of the things that I used to think, was that it wasn't possible for business to be honorable, meaning that I thought that if you were successful in business, then that probably means that somewhere along the way, you did something wrong, and that you probably need to atone for it. So I was one of those people who, like many people today who thought that business people or businesses need to give back to society. I mean, that's a phrase, we hear a lot now that people need to give back to society or give back to their communities.

But I've begun to change my mind about that. Especially the more I learned about actual business people and their actual motivations, what they do in business, that it's entirely possible. In fact, I would say it's even more common that, what business people do is they're successful by trying to figure out how can I make your life better? What can I do with my skills or my abilities, or my resources, whatever they are, to find some problem in your life, to address maybe not entirely solve, but make it a little bit better. So in that way, I think a lot of business in it, to a degree that I did not used to appreciate, really is aiming at improving other people's lives. So yeah, a successful business person, you know, might be improving their own lives also.

But they do it only by, at the same time benefiting others, and that I think is something that, that can and should be viewed as being honorable. And maybe you don't need to give back as if you're atoning for a sin, but, I think honorable business is something that, in the activity itself, it's actually creating value in the world, not just for the individual business person, but also for the consumers, the customers, the employees, and the other people they work with. So I think there can be such a thing as honorable business.

Juliette Sellgren 

Once again, I'd like to thank my guest for their time and insight, and I'd like to thank you for listening to the Great Antidote podcast. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at greatantidote@libertyfund.org. Thank you.