I have a story I want to open with. Not because it relates so much to Adam Smith, which is the subject of this first talk, but because the spirit of it is, I think, a spirit that we at FEE can relate to. And you'll see what I mean by the time I get to the end of it. It's actually a true story based upon testimony given before a congressional committee some years ago by a developer in Louisiana. This developer was planning a construction project in Louisiana when he learned that he had to secure the approval first of no fewer than twenty-three local and parish, as they call counties over there, and state agencies before he could begin. Well, he did all that, and just when he thought everything was ready to go, he learned that he also had to apply for approval from the Federal Department of Housing and Urban Development in Washington. So he and his attorney filled out all the required forms and sent them off to HUD in Washington whereupon the agency sent the following reply:
"We received today your letter enclosing application in support of abstractive title. We have observed, however, that you have not traced the title to the property prior to 1803. Before final approval can be granted, you must trace the title previous to that year."
Well, as you can imagine, the developer and his attorney were outraged at this example of bureaucratic foot-dragging, so they fired off to HUD the following reply, which has become somewhat of a classic. And there's history in here, too, so I think that makes it particularly relevant to this seminar.
[1:54] "Dear gentlemen,
Your letter regarding title has been received. I noted that you wished title to be traced further back than I have done. Well, I was unaware that any educated man failed to know that Louisiana was purchased from France in 1803."
But nonetheless, they go on and trace the title. The next paragraph read:
"The title to that land was acquired by France by right of conquest from Spain. The land came into the possession of Spain by right of discovery in 1492 by an Italian sailor named Christopher Columbus. The good Queen Isabella had taken the precaution of securing the blessing of the pope of Rome upon Columbus' voyage before she sold her jewels to help him. The pope is the emissary of Jesus Christ, who is the son of God. God made the world. I think it's safe to assume that God created that part of the world known as the United States and that part of the United States known as Louisiana, and I hope to hell you're satisfied."
That's tracing the title back about as far as you can go.
[3:08] Well, in this first lecture, we'll be talking about Adam Smith and the birth of economics. So there's a lot of econ in this, but also a lot of history. Because to understand Adam Smith, it's important to understand the system of economic organisation into which he was born -- the system which he picked up his pen and wrote so eloquently against, the world that he found when he first began his study, the world that he would dramatically change by virtue of his powers of persuasion and reasoning.
[3:45] Now, anyone know what the system of economic organisation was, that at least Western Europe was practicing at the time that Adam Smith wrote his books? Mercantilism. Right. M-E-R-C-A-N. There's no H in there. That's a common error. I used to get a lot of students on exams write “merchantilism.” There's no H in there. M-E-R-C-A-N-T-I-L-I-S-M. That's the system that prevailed in Western Europe from roughly 1500-1800. I'll tell you a lot about that in a moment, but let's remember what came before. What came before mercantilism -- that roughly 300-year period from 1500-1800 -- was feudalism across Europe. And feudalism really lasted for about a thousand years -- from the fall of Rome, the Western Empire anyway, which was in 467 AD. For about a thousand years, feudalism was the order of the day across Western Europe. In that system, of course, there was very little private property. Property, including in people, was held primarily by those with political connections. Most of the people who lived in feudal times were serfs to one degree or another. Answerable to the lord of the manor who in turn was answerable to the lord of the realm or the king or whatever they called it. Mercantilism, which begins roughly around 1500 -- keep in mind, there's no precise date when the world switches, but ideas were percolating that would lead to some change around 1500, and then those ideas would prevail, for the most part, for the next 300 years. If I had to pick between the two, of which system I would want to live under, feudalism or mercantilism, I guess I'd swallow hard and pick mercantilism, but it wouldn't be an easy decision, because both are systems in which government played a key and central role in almost everyone's life. Ultimately, government at one level or another dictated the norm, the mores of society, in both of those systems. But at least under mercantilism there was a rising sense that enterprise was a good thing -- that being in business, that trading, exchange, was a positive thing. So, for that reason and maybe a few others, I think I’d rather live under mercantilism. But as Adam Smith will show us, there was plenty of room for improvement.
[6:33] Now, a few words about Smith and his background before I tell you what he had to say about mercantilism and how he changed the world of that day: He was born in 1723 in Kirkcaldy, Scotland, north of Edinburgh. And his profession from an early career was – early in his career – was moral philosophy. He was not born an economist. In fact, economics as a discipline of its own, as a science with its own name, in fact, didn’t exist when Adam Smith first began his study in the 1740’s and 50’s. His focus was moral philosophy; that’s the subject he taught at Glasgow, and I believe for a time perhaps even at Edinburgh. I don’t recall exactly. I think perhaps moral philosophy at both. My recollection is that that was his – what he was teaching at both places. The first of his two books dealt with moral philosophy. The title of it was The Theory of Moral Sentiments. [That] doesn’t sound like an economics text, and it wasn’t. The second book, and the only other one that he wrote, is the one of interest to economists. In fact, it’s the book that profoundly changed the world. He only wrote two in his lifetime. The second book we know as The Wealth of Nations, but does anybody here know what the formal and full title of the book was?
[8:07] Yes, sir. You’re close, you’re close. “An Inquiry into the Nature and Causes of the Wealth of Nations.” Now, you might think, “Well, what’s the big deal?” I think that’s important, especially in the current day when you find so much focus in the public policy realm, as well as even in economics still, is on what? It’s on poverty, not wealth. But Adam Smith didn’t write about an inquiry into the nature and causes of the poverty of nations. In fact, I would guess, given what he did write, that if he were here today and you were to ask him, “Well, why did you write about the wealth instead of the poverty of nations? Isn’t everybody more interested in poverty? That’s something that concerns people. It’s something that we’re worried about. We know that poverty is harmful. People die from it. Why didn’t you write about that instead of wealth?” I think he would say, “Because everybody knows how poverty comes about.” That’s no big deal. Poverty happens when you don’t do anything. Right? It’s sort of the natural state of things. It’s what happens if people just sort of get bored and sit around and do nothing for the rest of their -- what would ultimately be -- a very short life. He was more interested in: how do we go from the natural state of poverty and create things out of it? How does that happen? And what kind of man-made institutions might be more conducive to the creation of wealth? Poverty: [there are] a lot of ways to create it if you haven’t got it already. You can find things of value and then bomb them or tax them to death. I mean, it’s easy to take things of value and destroy them. He was more interested in knowing: how do they come into being in the first place, and why? Why do people make investments? What causes them to go in this direction instead of that direction? So, I think the title is really a very important one. He was not so interested in poverty; he was much more interested in the creation of wealth.
[10:24] Well, when he wrote The Wealth of Nations, which appeared in 1776, you might argue that the world was ready for a change. And, so, perhaps as eloquent as he was he was helped by the fact that the world was looking for something new. There were other thinkers in other spheres, like political philosophers, who were already writing about such things as liberty, people having more say in what their government looked like. And, of course, that was the year when America would revolt against Britain. So, there was a lot of turmoil and ferment in both of the political world and then in the world of ideas in the time that Smith would write his book. So, I don’t want to give him too much credit by saying, you know, everybody was of one mind and all of a sudden he changed them. His ideas fell on ready ears, perhaps. But more than anybody else, he brought the world out of its mercantilist days and set it on a path of individual liberty. And the world a hundred years later would be profoundly different and profoundly better than he left it, in part because of his ideas.
[11:36] There are those who argue that The Wealth of Nations perhaps had more impact on the course of society, of shaping Western Europe and beyond, than any other book in history except for the Bible. I have heard noted scholars make that case. And he’s certainly on everybody’s list of the 100 most influential people who’ve ever lived. I don’t know that I’d quite go so far as to say, you know, only the Bible had more impact in terms of a book. But there’s no question -- and I hope I’ll make this plain to you -- that more than almost anybody else, Adam Smith changed the world and changed the way we thought about the world. He singlehandedly, as much as anybody, more than anybody, was responsible for giving economics a science of its own, of making it a science of its own. He took it out of moral philosophy and said, “This business of people buying, selling, trading, producing” – all of this stuff that we now identify as economics –; he said, “That needs to be taken out of moral philosophy because it’s worthy of a study of its own. It’s not a subset of moral philosophy; it is worth a separate study and discipline of its own. And hence he’s known as the father of economics.
[12:56] ---
[12:56] The way I’d like to present his ideas to you today is in the context of what he had to say about mercantilism, which I’ve already briefly mentioned. I want to talk more about it, and what he had to say about it. In fact, this is a rather unique way of presenting Adam Smith, but it’s a good way when your time is limited to about forty-five minutes. When you think of Adam Smith, you think of what? What would be the most – say, the best-known contributions of Adam Smith in terms of thought?
The invisible hand, yes, very well-known. The invisible hand, which we’ll touch on, but that’s a remarkable concept for those of us who believe in markets today maybe take for granted. But at the time, it was revolutionary to suggest that you don’t have to have the king telling everybody what to do. That, in fact, there are forces within the nature of what we call markets that guide people, that direct them, that punish them if they make things that people don’t want, and that reward them if they make things that people do want. And that there are incentives that work, that you don’t need a central planner who tells everybody what they have to do. The world had to discover that before – and embrace that principle – before you could really expect economic freedom to blossom because for centuries the feeling was, “Gee, the king has to do it, or at least tell us who is going to do it, otherwise it might not be done.” What’s another contribution of Smith?
[14:30] Division of labor is another. The division of labor. The importance of that. We knew about it before, but it was Smith -- through his analogy of the pin factory, how a pin is made, and other examples -- who really explained that the division of labor is at the core of what makes a nation wealthy. When we decide we’re not going to be Robinson Crusoes living on deserted islands, ignoring everybody else, that instead we’re going to find ways to cooperate with others, magical things happen. And through the division of labor we’re able to produce far more and enjoy a higher standard of living than if we tried to do it all on our own. Those are two of his contributions, but I want to focus on what he had to say about mercantilism and as a result I think you’ll have a unique perspective on it. The first idea of the mercantilists – keep in mind, they were not a monolithic glob over 300 years; there were differences among them, but by and large, these are the ideas I want to share with you that most mercantilists held to one degree or another – but the first idea is the world’s wealth was fixed. The world’s wealth was fixed. This was the idea that -- however you may want to define it; there may have been some differences at the time; I know there were – but there’s only so much wealth in the world. Now, to us, you know, that sounds ridiculous because, you know, we have means to measure wealth supposedly, things like GDP, GNP, and so forth. And we also know that within your young lifestyles you’ve seen Pi get bigger, haven’t you? You know that you can have more wealth, not just individually but society as a whole can become wealthier. You’ve seen it within your lifetimes. I recall when fax machines out of the – in fact, I remember vividly when (just one of many examples here of how, in my lifetime, of how standards of living have dramatically improved) …when we first opened the Mackinac Center in 1987 in Michigan, fax machines had just appeared. I’d never heard of them and hadn’t used one up to that point. And somebody told me, “Oh, for your office you need to get a fax machine.” And I had to ask, “Well, how does it work? What does it do?” And he explained it and my first thought was, “You mean I can put a piece of paper in a machine and it goes through the phone lines and comes out looking the same at somebody else’s end? I can’t believe it.” And he said, “Yeah, that’s right. You need to get one.” And I remember telling him, “I don’t know anybody yet who’s got one to send anything to, so I think I’ll just wait to see if it catches on.” And of course now it’s been superseded by e-mail and any number of other means of communication, but barely twenty-five years ago fax machines had just begun to make their appearance. So, we know that we can increase the quantity of wealth, but in those days, the late eighteenth century, it was not apparent to most people that you could bake a bigger pie, that you could make a society wealthier without finding somebody who’s got it and taking it from them, because they had no means of measuring wealth, and to them it didn’t look as though from what they remembered perhaps their parents telling them or their grandparents telling them -- to the people of the 1770’s, it didn’t seem like the wealth of the world had increased measurably over long periods of time. In fact, you know, if you look at the Middle Ages, the notion that the world’s wealth can be increased would’ve even seemed more preposterous. They were constantly fighting plagues that would wipe out twenty, thirty percent of Europe.
[18:18] So, Smith takes on this idea [that] the world’s wealth was fixed, and says basically, “Get over it. It’s not true. You can bake a bigger pie. And how do you get there? Through things like the division of labor, property, private property, and through trade, exchange, commerce, people engaging in mutually beneficial transactions.” He argued that trade is every bit as productive as production itself because it takes goods from the hands of those who value them less and puts them in the hands of those who value them more. And people are better off on both sides, in fact, to every trading transaction. So, he argued that the world’s wealth was not fixed, just quite the opposite, in fact. But if you believe that it is and you’re the leader of your nation’s government and you want your country to do better, what are you going to do? How do you get ahead if you think the world’s wealth is fixed and you’re the king of England? You go to war or you plant a flag somewhere and create a colony. So, it’s no coincidence that in the 300 years of mercantilism, Europe was either at war or constantly preparing for war during much of that time. They would go to war sometimes for the least little thing.
I remember taking a history course and learning of the War of Jenkins' Ear. How many of you have heard of that? Anybody? OK. You know what triggered that war? I’m not even sure when it was. I think maybe the sixteenth century. Jenkins was a British ship captain and he strayed into Spanish waters, or at least that was the claim. His vessel was commandeered by the Spanish who promptly cut off his ear [and] gave it back to him. He then sailed back to Britain and produced his shriveled ear in the parliament. And it so enraged the members of parliament [that] they said, “Ah, let’s go to war.” Just because one guy may have strayed into waters he shouldn’t have, gets his ear cut off, the whole country goes to war. They were always on a hair-trigger for conflict in part because that was the way you get ahead. War meant conquest and plunder. It meant maybe grabbing a colony or taking the gold of the foreign power that you go to war with. So, Smith helped disabuse societies of the day of this notion that the world’s wealth is fixed. You can bake a bigger pie so to speak through production, trade, commerce; that’s far more fruitful than trying to take what others may have.
[21:00] The second notion of mercantilism is economic nationalism. Economic nationalism. I’ve always found it difficult to provide a very concise definition of this, but I can tell you that you know you’re talking to an economic nationalist when you hear the person saying things like this: “We don’t need those foreign people or their goods. Keep them out. When you buy from someone overseas, you’re hurting the domestic economy. That’s not a very patriotic thing to do. Buy American.” We hear that sort of thing today. “Buy American. Buy from home, not from overseas.” Wrapped in a patriotic fervor, economic nationalism is often sold as a way for the domestic economy to improve. “Don’t engage in trade. Don’t buy from overseas; buy from home instead. It’s for the good of the country. It’s what patriots do.” That’s economic nationalism. Smith was just the opposite; he was an economic internationalist. If he’d had his way, he would’ve virtually, if not entirely, removed barriers to commerce. He would say, “Allow people from different countries to engage freely in commerce because it’s through trade that we get things either we can’t get at home or that we can’t get at low of cost or that we can’t get at as high of quality. It broadens our choice. It makes all of us better off. Economic internationalism,” he would argue, “tends to bring people together. And the result is greater prosperity, less conflict, [and] higher standards of living.” We take this for granted, but it was Adam Smith, more than anyone else in his day, who made these ideas understood and popular and conquered the world with them.
[23:00] The third idea of mercantilism is that imports were bad, exports were good. You see this yet today. I don’t want to suggest that mercantilism expired, [that] mercantilistic ideas expired in 1800 roughly, because in some ways some of its ideas still are holding sway today. And you see it in the mist surrounding the balance of trade. It goes back to mercantilist days when the feeling was you got to -- you know, it’s bad for imported goods to come here. What we need to do, though, is to export goods. And when you export goods, that’s the road to national prosperity and wealth. Don’t let that foreign stuff come here. That only competes with what we’re making at home, makes us poorer… [unintelligible], then we can’t compete, we can’t grow our own businesses because foreigners in some areas at least will do better than we can. Smith would argue that this is nonsense, especially if you’re a third party who’s not even involved in the trading transactions that comprise things like the balance of trade or the balance of payments. He would say, “It’s none of your business. When people are actually engaging in trade, they do so because they feel that what they’re getting is worth more than what they’re giving up. It represents an improvement or they wouldn’t be doing it. How can you add up all of these favorable trades,” he would say, “from the standpoint of those who are actually engaging in them and arrive at something unfavorable?” So, he would say, “If you’re a third party, don’t stand back and judge other people’s trading transactions. They’re doing what they’re doing because each side feels that they’re better off when they engage in these trades.” So, he would render no such value judgment about imports, exports, how much, which is good, which is bad. He would say, “All trade, when it’s free [and] voluntary, is inherently positive from the standpoint of those who engage in the trade.” That’s not to say that some people might say, “Hey, because he’s buying from that guy instead of from me, it hurts my business.” But Smith would say, “I’m not looking at what is beneficial to one person’s particular business. I’m looking at what is beneficial to society at large. And more trade, not less – more international cooperation, not less – is an important aspect of the road to the prosperity.”
[25:28] ---
[25:28] The fourth idea of mercantilism was that gold and silver constitute a nation’s wealth. Gold and silver constitute a nation’s wealth. This is tied into the previous point as well. Whenever mercantilists, through their regulation of trade, tried to so skew it as to cause more exports to leave than imports to come, what was in their mind in terms of how the difference would be settled? I mean, if you’re going to send more stuff out than you’re taking back, if the goods you’re importing aren’t paying fully for the goods you’re exporting, then what’s the difference going to be settled in? Gold and silver. Those were the widely accepted international media of the day in which balances were typically settled. So, they thought, “Well, this is another reason why you want to encourage exports but discourage imports because then if you’ve got more going out than coming back, the difference will be settled in gold and silver. And that’s good because they constitute a nation’s wealth.” A mercantilist to the core, a dye-in-the-wool mercantilist, if you were to ask him, “Who’s richer, France or Britain?” He would say, “Well, let’s see who’s got more gold and silver. Whichever country it is, that’s the one that’s richer.” Smith would argue that gold and silver are not a nation’s wealth; in fact, whatever form your money may take, whether it’s gold and silver as I think he was partial to and as some of us today would regard as superior to what we have, but whatever your form of money is – gold, silver, paper, seashells, tobacco, various things that we’ll be talking about tomorrow that have been monies at one time or another – whatever form will leave you starving if you can’t get what with it? Goods and services. Gold and silver aren’t wealth; goods and services are. All the gold, all the silver in the world would leave you starving and impoverished if you couldn’t get goods and services with them. That’s what makes us wealthy. Whatever your form of money is, you should think of it not as wealth itself, but as sort of a claim ticket to wealth. It’s what you turn it in order to get what you’re ultimately after: goods and services. And, so, it’s not metals that pile up, it’s not coinage; it is goods and services. More of them, cheaper, better quality, broader choice: that’s what makes a nation wealthy.
[28:03] Now, over the years, various people in high places have had some really odd views about what makes a nation wealthy. You have a school of thought that’s been largely – has held sway in the highest councils of governments for most of the last century that suggests that more money, paper or whatever, really is a nation’s wealth. I wish as an economist I could stand before you and say that that was true, that money is wealth and more of it will make a society wealthier. Because, especially if your money is unbacked, irredeemable, inconvertible paper -- fiat money, like we have today -- if only that were wealth. We know how to make more of that. In fact, just by adding zeros to bills, you don’t even add to the cost of making them. You can make a one dollar bill or a hundred dollar bill and have a hundred times as much money without any extra cost, right? Except for the ink to put on a couple extra zeros. Would we be wealthier? No, it would be like the guy at the concert hall. When you turn in your coat and you get a ticket for your coat. While you’re in the concert, what if he’s back there manufacturing more tickets and passing them out all over the neighborhood, each ticket good for one coat? Well, you might think for the moment that if you happen to get one of those tickets that, “Wow, I’ve got a ticket for a coat.” But then all you do is cause havoc a little later when five thousand people show up for a hundred coats. The tickets may be a claim for the real thing, but they’re not the real thing. Think of money in those terms.
So, Smith would say, “Disabuse yourself of the notion that money is wealth.” Full employment is not wealth. I’m sure the ancient pharaohs in Egypt – they probably had full employment [with] everybody building pyramids. But the question is, were they making something that people wanted? Being busy is not the same as being wealthy or making for a wealthier society. So, he helped us blow away that notion that money, gold, silver, and whatever form it may take, is synonymous with a nation’s prosperity.
[30:18] The fifth notion of mercantilism is government-created monopolies. Government-created monopolies. Boy, here’s something that hasn’t gone away, has it? Even though we say mercantilism died around 1800, we still have a lot of these things. In Smith’s day and for quite a long time before that it was customary for governments in Western Europe to bestow special privileges upon a politically well-connected few. Sometimes the government itself would say, “Only we get to do this business.” Other times it would say, “Well, we like these guys. We’ll let them do it, but we’ll use the force of law to prevent competition.” …which was a very cozy arrangements for those who got the special privileges. And it wasn’t just because of corruption. You might look at that today and say, “Well, that’s nothing more than corruption. The king using his police power to give special favors to his cronies to buy their support, and those guys using rent-seeking profiteers using the power of government to bestow a privilege upon themselves: just pure corruption.” Well, it was more than just that. There actually was a prevailing view that this is how you get things done. Because this is pre-Adam Smith, pre-invisible hand, before people came to understand the forces that are at work in a free society that direct production and allocate resources without a central planner or a mastermind doing it for us.
[31:56] Now, what’s the best example of a government-created monopoly today that all of us have dealt with, all of us deal with almost every day of the week? Federal reserve: oh, that’s a good one. Well, phone companies have been in the past recipients of special privileges, but there’s more competition now and they tend to be private. I’m thinking of one – yeah, postal service! – I’m thinking of one that’s actually a step beyond giving a non-governmental entity a private, special privilege. It’s actually government itself arrogating to itself a monopoly over the delivery of first-class letter mail. Right? It doesn’t have that in second, third, or fourth class, although there are many people, I’m sure, who would love for government to have that. If you ever want an area for further study, I think there’s still room for study of this. But if you go back to the 1840’s and try to examine: well, what was the source of the law or the series of laws that gave the federal government a monopoly in first-class letter mail, and why did they get passed? It was not in the constitution. The constitution provides for government to – it could do post roads and presumably mail service, but there’s nothing in the constitution that says only the federal government can deliver letters. That happened in the 1840’s when congress decided we’ve got to do something about this private mail delivery business. Because up until then the post office was a source of federal patronage. The guy who got to be the post master back home in a particular town usually supported the local congressman in the previous election. It was a way of parceling out federal jobs to friends. But as private competition began to whittle away at the government post office, it threatened the patronage power of members of congress. So, they said, “We’ve got to stop this. Pretty soon we won’t have a post office. People will be buying their service from private people.” So, that’s when they passed a law saying that only the federal government can engage in letter delivery. So, I hope none of you ever thought before today that only people who worked for the federal government would know how to delivery letters. That’s not the reason we have the so-called Postal Express Statutes. It was rather the private sector was doing too good of a job, and the government wanted to take it over [to] prevent the competition. We have competition in second, third, and fourth class. Everybody knows it.
[34:48] And I remember Johnny Carson one time talking about several classes of mail. Let me tell this story and then I’ll take your question. He said, “First class is when you hand your letter to the person you were going to send it to when he comes to your house for a visit; that’s first class. Second class is when the post office stamps your package until it becomes a letter. And third class is when they hand your package to a blindfolded rhino and spin him around and push him out the door.” Certainly in all other classes but first there’s lots of very vigorous, comparatively low-cost private competition. And those companies do rather well. They have to pay taxes unlike the post office. They have to pay dividends to shareholders or they wouldn’t attract capital. [The] post office doesn’t have to. They get their plant and facility provided for by the tax payer free of charge; that is to say the government does, not the private firms. Yet the private companies make money, make a profit, pay dividends, and do a better job.
[35:52] ---
[35:52] Yes, sir. What’s the substantive difference? It’s really just an arbitrary definition. It has to do with weight, I think. Maybe, I don’t know if the post office --; depending on how big it is, maybe it ceases to become first class and it becomes something else. I’m not sure. Oh, no, second class is more –; it’s non-letter mail, but what’s its difference with – I don’t know. It’s bureaucratic; it’s arbitrary; it’s post-office gibberish; I don’t know what it is, really. But, a good question. Ask the post office next time. What’s the difference? I’d like to know myself. But government-created monopoly need not be government itself doing it. It could be special privilege granted to someone else. This is the kind of monopoly that our founders were concerned about. America’s founders. Even in the Declaration, there are allusions to this. They were concerned about monopoly, but to them monopoly wasn’t bigness in business. Monopoly meant a government grant of exclusive privilege, the way Adam Smith looked at it. And they, like Adam Smith, said, “We don’t want that. We don’t want the power of government used to prevent competition.” They wanted competition. And this is what Adam Smith vigorously argued. He was against government grants of exclusive privilege, against government-created monopolies because he was pro-competition. He explained for us how vigorous competition keeps us on our toes. He even applied this to his own world of academia. He had complaints about other professors noticing how once you get tenure and you’re prevented from competition and you’re on the public dole, he said, “You forget you’re customers. You’re forget you’re students.” He saw it in his own profession.
[37:48] Can anybody think of --; what were the laws that the colonists very early had an objection to in America that are good examples of precisely what I’m talking about? [They] stirred up a lot of fuss with Britain. Yes, sir. No, I’m thinking of even before that. Way back in 1651; would you believe? The Navigation Acts, because The Navigation Acts passed and London said, “If you want to engage in the transatlantic trade, you [have] to do so in British-made vessels,” which hurt the American ship building industry. That was a government grant of exclusive privilege to British ship builders. They even had a monopoly in playing cards. For a time in Britain there was one guy, one lord, noble, who was granted an exclusive privilege to produce and sell decks of cards, and anybody else who might try to compete with him could be arrested and fined. Yes, sir. No, I wouldn’t go so far just yet to say that; this does not prove that any government intervention is bad. Although, Smith said –; he tried to get us away from the notion that sort of giving government a blank check is a good idea because they are just so wise. He would say –; he was not an anarchist. He believed in government, but he said it should be confined to some narrow purposes. In fact, I think he gave four. One was defense against foreign aggressors. The second function of government was defense against domestic aggressors, arguing for police, courts, that kind of thing. Another one was –; he actually thought government in the post office was a good thing. That’s where I would part company with him and say, “There’s nothing about letters that suggests the market couldn’t handle that too.” And the fourth was –; I think he would argue the post office was an example of one. It’s escaping me. Anybody remember what that fourth thing was? Was it education? It doesn’t ring a bell. I even mentioned it last week in this lecture, and it’s escaping me for the moment. I’ll think of it. He had a very limited perspective for government in any event, but I would not go so far as to say –; this is simply arguing in favor of more competition rather than less. Less monopoly rather than more, especially if you define it as a government grant of exclusive privilege.
[40:38] The sixth idea of mercantilism, even more so of feudalism before it, was that self-interest was anti-social. Self-interest was anti-social. This has always been around to one degree or another, and not every mercantilist was rabid about this. But it was still a prevailing sentiment quite common across Europe that self-interest is easily taken to excess and that if you’re doing something for your own personal benefit, don’t play that up because that’s kind of –; we frown upon that to one degree or another. Some of this was the influence of the church of the day. There were laws against things like the charging of interest in part because that seemed to be so profiteering and self-interest-focused; that was bad. Smith said, “Wait a minute.” And he first talked about this in the Theory of Moral Sentiments and then later in The Wealth of Nations. He said, “Self-interest can be a powerful motivator.” In fact, he would argue that there are more things that sustain life, far more things that sustain life, that are the result of the profit motive, the self-interest motive, the desire to do better by yourself, and more things that feed and clothe and house people at higher levels that are the result of the profit motive than are the result of, say, the altruistic motive. I don’t think he would belittle the altruistic or charitable impulse. Neither would I; I think charity is great. I love it when it’s voluntary, it’s private, it comes from the heart. Those are good things. It solves problems. But I would never mistake of assuming that the charitable impulse can feed a world of six billion people. In fact, if you look around you, how much of what is available here during this week, the food that you’ll be eating, the chairs you’re sitting in –; how much of what you see and experience in Atlanta do you suppose is the result of somebody's altruistic motive of wanting to flog themselves and do good by you? Not all that much. Not very much. The farmers that grew the food that you’re going to be eating this week –; I’ll bet there’s not one of them who grew it because they were thinking, “I want to make sure those people at that seminar in Atlanta eat.” They’re not thinking of you; they’re thinking of themselves.
[43:12] But in a free society, as Smith points out, you can’t just put a crown on your head, wrap a robe around you, and say, “I’m the queen. Cough it up.” People will say, “What are you going to do for me? Tell me what you’re offering and then I’ll tell you whether I’ll give you something.” So, the self-interest motive, Smith said, is powerful, it’s positive, although it can go to an excess. Certainly somebody who wants to do better by themselves by stealing from somebody, he would say, “Throw the book at them. That’s not proper.” But wanting to live better and getting there through things like peaceful exchange and commerce, creation of goods: that’s a good thing. And I think he would be thankful that we are imbued by our creator with a motive of wanting to do better, wanting to improve, as opposed to –; what if we were all imbued with a motive of wanting to be parasites sucking off of other people? Or what if we were imbued with –; what if our primary animating feature of being a human being was to make ourselves worse off tomorrow than we were today? That would not be a very pleasant world, right? It’s the self-interest motive that gets things done. And he would call it of course –; “The Invisible Hand” is the phrase he used to describe the self-interest motive working in tandem with supply and demand, to produce more so people can live better. If Smith simply wrote these things and criticized mercantilism along the lines that I mentioned to you and did it in a mundane, colorless, unpersuasive fashion, he may have had some influence, but I doubt that he would’ve gone down in history as a man who helped to change the world. But he did these things so well at a time when perhaps people were looking for answers that had eluded societies for centuries that the world was profoundly changed. And I want to tell you a quick word about that and open it up for about eight or ten minutes of questions.
[45:28] Smith was so effective, so influential in his day and beyond, that his own Britain – it would be a wonderful example of a society transformed by the influence of ideas. It wasn’t Smith alone. It was some of his disciples, people like Frédéric Bastiat and other economists who came after him who carried his ideas forward. But he really to a great extent started the ball rolling toward what would become the century a relative laissez-faire. And Britain, from whence he came, in 1900 would be a profoundly different and richer place than it was in 1800, with three times the population and living on average much higher than one third lived a century before. How could that happen? That was unheard of in world history, that you could triple a country’s population in 100 years and have much higher standards of living for the many. How is that possible? Because ideas of trade, commerce, government limited to protecting the peace and otherwise letting people go to town, be creative, engage in exchange: those were the prevailing ideas of much of the nineteenth century in large part because of Adam Smith.
[46:50] Now, I’ll give you some notable hallmarks along the way at least in British history. Anybody know what the laws were called on the books in Britain in the early part of the nineteenth century that prevented the importation or stymied – didn’t prevent altogether – but stymied the importation of grain into Britain? Right, the Corn Laws, and they will become the focus of a political firestorm by the 1840’s. Both sides in these debates in Parliament would line up vociferously on behalf of their case, keeping these laws, these high tariffs against the importation grain versus the those who would take the Adam Smith perspective that they should come down so that people can engage in trade so the economy can improve. When the Irish Potato Famine hit in the 1840’s, the pro-free trade side got a little extra boost, and in 1846, the Corn Laws were repealed. It was seen at the time and still to this day by historians as a hallmark, an important watershed in the development of Britain as a free-trading nation. My favorite British prime minister was a man named William Ewart Gladstone. He, to this day -- though he was prime minster in the nineteenth century -- he holds the record as having been the prime minister the most times of anybody: four times. [He] still, I believe, has the record for most years in Parliament, although I’m not quite as sure about that. He was in the House of Commons for sixty-one years. Obviously they didn’t have term limits back then. When he was prime minister in the 1890’s for the fourth time for a couple of years, he was in his eighties and because he had been involved in the reduction of British trade barriers throughout most of his political lifetime, he was able, in the 1890’s as prime minister, to brag that since the day when he was first chancellor of The Exchequer half a century before until prime minister all those decades later –; he said, “The number of tariffs that Britain had on the books had fallen from 1,200 to just twelve.” And he could take a big share of the credit for that because he helped as prime minister and an influential member of Parliament to bring those barriers down. And what happened? Britain became the premier trading nation in the world. It became a world-class C-power. London became the capitol of capitol. Highest standards of living until the U.S. would surpass Britain in 1913. So, it hasn’t even been a century yet that American standards of living have superseded those of Great Britain. But Britain did it largely on a policy of free trade in great measure because of the influence of Adam Smith and those who carried on in his day thereafter.
[49:50] To this day in economics there is a bias among economists – an informed prejudice, you might say – in favor of trade. There aren’t too many economists who will go to Washington and testify that raising barriers is good for an economy. There are some who will say that raising is barriers is good for the industry that employs them, but not necessarily --; it’s hard for them to argue that it’s good for society at large. There are many of us economists who think that the moment you run into somebody who tells you that trade is bad, that barriers should go up [and that] it’s better to do everything at home – that anybody who believes that can hardly be called an economist. That’s how important trade – free trade – is to the whole notion of being an economist and understanding how the economic world works. We owe a great debt to Adam Smith for helping move us along in these directions in 1776. He died in 1790, but not before he could see that his ideas were beginning to take root, especially in America, and that free trade held such great hope for the next century. With that, I’ll open it up to some questions.
