Vernon Smith and James Otteson on Adam Smith
Apr 6 2015

Vernon Smith and James Otteson talk with EconTalk host Russ Roberts about Adam Smith in front of a live audience at Ball State University. Topics discussed include Smith's view of human nature, the relevance of Smith for philosophy and economics today, and the connection between Smith's two books, The Theory of Moral Sentiments and The Wealth of Nations.

Video for this special edition of EconTalk, "Will the Real Adam Smith Please Stand Up?" is available below the fold and at Youtube.

Vernon Smith on Adam Smith and the Human Enterprise
Nobel Laureate Vernon L. Smith of Chapman University talks to EconTalk host Russ Roberts about how Adam Smith's book, The Theory of Moral Sentiments has enriched his understanding of human behavior. He contrasts Adam Smith's vision in Sentiments with the...
Vernon Smith on Rationality in Economics
Nobel Laureate Vernon Smith of Chapman University and George Mason University talks with EconTalk host Russ Roberts about the ideas in his new book, Rationality in Economics: Constructivist and Ecological Forms. They discuss the social and human sides of exchange,...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Richard Fulmer
Apr 6 2015 at 12:06pm

The guests’ summations were truly beautiful. Mike Munger will have to dig deep to beat this for podcast of the year.

Cowboy Prof
Apr 7 2015 at 9:51am

This was a very good episode that covered the basics of Adam Smith. While Russ has had several episodes devoted to Smith — including his own with Munger and the series with Klein — I really appreciated this discussion. I’ve been diving deep into the weeds of Smith lately, but this episode helped keep the big picture in context. I will use this episode to remind students that even though you may have read something once (and maybe even twice), it does not mean that you can’t review it over and over and over because those iterations still teach you something.

I would enjoy more podcasts of this variety — general reviews of classic works and two-person panel discussion.

Daniel Winings
Apr 9 2015 at 3:05pm

Regarding the Stoics:

Epictetus on Adam Smith (from Book 1, Chapter 19 of the Discourses):

“This is not a perverse self-regard, for the animal is constituted so as to do all things for itself. For even the sun does all things for itself; nay, even Zeus himself. But when he chooses to be the Giver of rain and the Giver of fruits, and the Father of Gods and men, you see that he cannot obtain these functions and these names, if he is not useful to man; and, universally, he has made the nature of the rational animal such that it cannot obtain any one of its own proper interests, if it does not contribute something to the common interest. In this manner and sense it is not unsociable for a man to do every thing for the sake of himself. For what do you expect? that a man should neglect himself and his own interest? And how in that case can there be one and the same principle in all animals, the principle of attachment (regard) to themselves?”

John Strong
Apr 14 2015 at 4:36pm

Great podcast, but as usual, I must regret that no one draws the explicit distinction between “selfishness” and “self-focus”. Professor Roberts comes close when he says each of us is “the center of his own universe”, but that is not precisely the same thing as wanting to *own* the entire universe. Sorry, but self-focus is just not the same thing as narcissistic selfishness. The distinction is *clearly* present in TMS where Smith says our focus is on the pain in our little pinky rather than distant tragedies in places like China, yet he adds that no person in history would have been so vile as to consider preferring his pinky to the lives of a 1,000 chinamen (a fairly radical claim). American liberal / libertarians (perhaps too prone to view moral philosophy through a Randian prism) *never* notice this distinction. Drives me nuts.

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Podcast Episode Highlights
0:33Intro. [Recording date: March 11, 2015.] Russ: This is a special edition of EconTalk, recorded before a live audience at Ball State University.... So, our topic for today is Adam Smith. We are going to talk about his view of human nature, his impact on economics and philosophy, and his significance for our lives today and for the study of economics. Somehow we are going to manage to do that in about an hour. Jim, I'm going to start with you. Give us a short biography of Adam Smith. Otteson: A short biography of Adam Smith. So, Adam Smith was probably, I think I would classify him as the founder of sociology as a discipline, or the study of human social institutions as a discipline. Born in 1723 in a little town called Kirkcaldy in Scotland, which is just over the Firth of Forth from Edinburgh, if you know the layout of Scotland. He studied at the University of Edinburgh and also studied at Oxford. He was not, by the way, too happy with his studies at Oxford. He thought that his professors at Oxford, because they had tenure and they had an endowment--the President of Ball State might pay attention to this--he thought that that made them all lazy and they didn't actually do their job. But he did get a chance there at Oxford to read very widely and deeply in French, German, Latin, Greek. He was something of an autodidact. Came back to Scotland, there was befriended by one of the other great luminaries of this period, David Hume. Some of you will have heard of the great philosopher, David Hume. His first book, which really gave him the name both in the British Isles and on the Continent, was The Theory of Moral Sentiments. Came out in 1759. His second book, for which he is now much more famous, is An Inquiry into the Nature and Causes of the Wealth of Nations, which came out in 1776. That was an auspicious year, of course. Some of you may remember that was the year in which David Hume died--is that what you were thinking? That is the year David Hume died. Also the signing of the Declaration of Independence. Smith himself never married. After he returned to Edinburgh--apparently we know this from one of his students who talked about it later--that he fell in love with a woman but before he decided to ask her to marry him, his mother fell ill. And so he thought it was his duty as a son to move into the home with her and take care of her. She lived for another 30 years. So, he lived with his mother all the way until she passed away, which was just a few years before he died: he died finally in 1790. At the time, he was in--the last two positions that he had, he was the Rector of the University of Glasgow, which was largely an honorary position. And interestingly maybe for our purposes, for the discussion, also, his final pay job was as a Custom's Collector, which is somewhat interesting for someone considered to be a founder of free market economics. Russ: Thanks, Jim.
4:05Russ: I want to start in our discussion of Smith's ideas with his view on human nature. Which, we could of course spend a few hours on that alone. But, Vernon, I'd like you to start with your view of how Smith saw human beings. VSmith: Let me plug in to what Jim just said about the biography of Adam Smith. Isaac Newton died, I think it was 5 years after Adam Smith was born. And of course, Isaac Newton had a tremendous influence on the Scottish philosophers and that period. And I think that's a central thing to keep in mind in understanding Adam Smith's Theory of Moral Sentiments: is that he was very aware of the power of explaining observations in terms of sort of hidden rules. Rules and order that we're not aware of but nevertheless have great power in terms of explaining observations. And in a sense, what Adam Smith did, was to apply those ideas to trying to understand what he saw as the most obvious characteristic of human beings, and that is our sociability. On the other hand, he was under no misperception that the laws undergirding or helping involved in human interactions were as precise and determinate as those articulated by Adam Smith. In fact, he actually says that. But also, in adding to what Jim said, one of his first written works was a history of astronomy. It was not published until after his death. But there's a great deal--it was very clear that Adam Smith had a thorough understanding of the Newtonian system. Russ: Cool. So, back to human nature. VSmith: So, human nature. What are--how can we account for this sociability? And The Theory of Moral Sentiments basically addresses that question. And what it shows, I think, is the deep capacity of Adam Smith to think about what might underpin, you see, our social nature. And there's a number of propositions in The Theory of Moral Sentiments that have really helped me to understand economics at the level of individual social interactions, and experimental economics as we study it, not in markets but in two-person small group interactions. Russ: Does Smith see human beings as selfish? VSmith: Yes. But that does not, is not the thing that drives human decision-making, particularly at the level of human interactions. And I puzzled--and several places within The Theory of Moral Sentiments, Adam Smith points out that we are self-loving. In that sense he's following the Stoics, the ancient philosophers. And I realized why his proposition--he needs that. If it's common knowledge, you see, that more is better and less is worse, then it's very easy for people to understand actions that benefit others and actions that are hurtful to others. It just becomes common knowledge. And that's the thing that's essential in [?] Adam Smith: that actions that are probably motivated--meaning intended--that are of a beneficent nature to others, he said those alone deserve reward. Why? Because of the gratitude we feel towards someone who takes those actions. And then, on the other hand, improperly motivated actions of a hurtful nature, he says, alone deserve punishment. Why? Because of the resentment we feel from those actions. So, you see, he's making use of the fact that we all prefer more to less. But it's not the thing that governs, you see, our decision-making, because he speaks of us learning to humble the arrogance of our self-love and to bring it down to what other people will go along with. And that's kind of, I think, one of the central sentences in The Theory of Moral Sentiments, that has to do with Adam Smith's notion of self-command, how we develop a command over our lives and our interactions with others.
10:16Russ: Jim? How would you characterize Smith's view of our nature? Otteson: I'm not sure I would agree that--I'm not sure I would put it exactly the way you did, Vernon, that Adam Smith thinks human beings are selfish. I mean I guess it means what we mean by that term. Self-interested, yes. Although for Smith I think the term 'self-interest' is a little bit broader than what you might normally think is included in that term, maybe what we might mean by the term 'selfishness,' because he seems to think that my interests, what's in my interest, includes the interest of people I love and care about. So, if my family is flourishing, if my family is flourishing, if my friends are flourishing, if my country is flourishing, these are my interests in the sense that they are interests that I myself have. And actions I take to serve those interests are in a sense self-interested. But they are also serving the interests of other people as well. But I entirely agree--and I think this is a point that's quite important--one of the amazing things about that book, The Theory of Moral Sentiments--I mean, if you didn't know what that book was about and you cracked open a book of moral philosophy from the 18th century, you might expect the book to be a list of things you should do to be a moral person. So, a book about moralism rather than moral philosophy. But that's not what that book is about. What Smith wanted to do was he wanted to take this Newtonian method and see if we could apply it to human social institutions--the phenomena of human beings. And what he noticed--what he thinks he noticed, what he seems to have noticed--is that when you actually look empirically at the way human beings develop and mature moral sense, it is a process of development. So, when they are children--an infant has no sense of moral propriety. They just scream out and demand whatever they want. But at some point over the course of their lives they become moral adults, where they have a very sophisticated sense of morality. And this process of change is what intrigued him. How do we go from being the amoral infants that all of us are to being the highly sophisticated moral adults that all of us, at least almost all of us, become? Now, for him this is an empirical question. So the book is really his conclusions: I'm looking at the way human beings develop. So the sociality that you were talking about, Vernon, that's so important to him, plays a crucial role. So he says: We all desire--here's one fact about human nature that's Smith thinks that we have. We all desire what he calls mutual sympathy of sentiments. What that means is we all like to see our own sentiments echoed in other people. So, when we become aware that other people agree with us that the like the joke we told, that they share our judgments about music or literature or what we spend our time on, this gives us a good feeling. We like that. It gives us the feedback we need to continue doing some of those same things. It's like a centripetal force holding people into a kind of social community. And then, on the other hand, when you become aware of the fact that other people don't share your sentiments, that's an awkward and unpleasant feeling, isn't it? One of Smith's--if you'll allow me--one of Smith's favorite examples is joke telling. So, it's a small example, but it's a telling example. So, have you ever had the experience which he describes? Suppose you are with your friends; you are out making merry somewhere in the evening; you are having your ales and drinking. And you decide you are going to tell a joke. And you tell a joke to your friends; and after you tell your joke, you laugh, because it's very funny--you laugh uproariously, it's hysterical; and then you look around and you realize nobody else is laughing. Well, that's a very unpleasant experience, isn't it? For Smith this is a very small example of a much larger lesson of how it is we learn the rules of etiquette, the behavior, and even ultimately moral sentiments. We get this feedback from other people. So we don't develop it unless we have interactions with other people. Unless we hear what they think about, they get to share their judgments with us and we share our judgments with them. And this develops as a kind of spontaneous order, to use the term--a commonly shared system of moral judgments. VSmith: Let me just, in responding to that, mention that one of the things that I find very powerful is what I call Adam Smith's mental experiment. He says, to make the point about, his main point about him and sociality, he says: Imagine an individual that is brought up without ever having any contact with another member of the human species. He says: That person can no more have an idea of what it means to have a social mind or deformed mind--and he kind of has in mind here a social mind--a deformed mind than to have a deformed face. He says: Bring that person into society and you give him the mirror he needed before. So the whole idea--and he develops that theme by pointing out that as part of our maturation we constantly, our space intersects with others and they always mark whether there is, by approval or by disapproval, of our actions. And similarly, we feel gratitude of certain actions of other or resentment of others. So that what we learn, sympathy, fellow-feeling--the word 'empathy' doesn't come into the English language for another 150 years. But Adam Smith, clearly, this is the concept he has in mind, the notion of mutual fellow-feeling. And so his idea of human sociability comes from these basic principles, which is definitely sociology and social psychology. Russ: My take on it--the way I like to think about it is, if you watched children playing in a playground, or your own children sometimes when they are younger, their favorite word is 'Mine.' Right? It's all about me. And I think Smith understood that we are somewhat hardwired to think about 'me': that I am the center of my own universe. Then I have to deal with the fact that, bizarrely, you are the center of your universe. What went wrong there? I mean, why aren't you revolving around me? And to interact with people, you have to humble yourself. And--we'll talk about this later when we talk about the connection between Smith's works, but to some extent, both of the books are about dealing with the fact that what you want--which is 'me' all the time--doesn't work very well. I want your property, and I want the floor. I like to hear myself talk. But if I want to have friends, which I also want, I've got to humble myself. I have to figure out--I have to make room, as you said, Vernon. And similarly, if I want to have more stuff--I just take yours, I'm going to get in trouble. And so I have to learn to trade. And by learning to trade, I have to learn about what you care about. As you said--you want more of something; I have to figure out what that is. And so for me, Smith's view is about the tension that we all face between our desire to put ourselves first and our realization that if we do that, we're not going to be very happy. So we have this impulse to put ourselves first that we have to somehow quiet.
18:21Russ: So, one way Smith says we do that is the impartial spectator. So, Jim, why don't you tell us how the impartial spectator works? Otteson: Well, the impartial spectator is Smith's term for something like we might call today our conscience. So, here's the general heuristic, which I'll commend to you. You can actually try it. So, Smith's idea is: If you are deciding what you should do--so, tonight after this event, you maybe have a couple of different options. One of them you are not so sure is the right thing to do. How do you decide? How do you know whether it's the right thing to do? Well, what Smith says is, ask yourself what a disinterested observer of your conduct who knows everything about the situation--what would that person think? Would that person approve or not? And Smith seemed to think that this was actually quite a powerful device. And as I say, I commend it to you. Try it--if you don't do this already--try it some time. Literally stop, take the 5 seconds it takes when you are thinking about what you should do. Ask yourself: Well, what would somebody who observed my conduct--would that person approve or not? Smith used this notion, this term of impartial observer, impartial spectator, as something like the culmination of a long series of experiments, inductive experiments you've conducted in your life. So the idea is, as you go through this process of maturing, of moral maturing, you have lots of experiences where you say things, you do things, and you get feedback from other people. Sometimes it's good feedback; sometimes it's not good feedback. And as you mature, what you develop is a sense of what is appropriate or proper conduct in certain circumstances, and what isn't. And as you become an adult, a moral adult, this sense of what's proper or improper, this sense of propriety, can be internalized almost as what we call a conscience, but it's like the voice of an impartial spectator. So, Smith uses that term. Some people laugh: 'Well, is that the voice of God?' And I mean, in Smith's text it's a little unclear. He doesn't quite say that it's the voice of God, although I think he's open to it being something like the voice of God. But it's an empirically arrived at, inductively arrived at generalization. In exactly the same way--here's another example: How do we determine what the appropriate way to dress at a venue like this is? So, are there appropriate and inappropriate ways to dress? Sure, I suppose there are. Not going to try to--you are looking at each other. Well, wait a minute now. I [?] say anything untoward. Russ: I would just add, for those of you not watching the video or the live stream of this that clearly Jim and I got the same memo about what to wear. We're in light pants, a blue blazer, and a reddish striped tie. I have a blue shirt on; but it could be that the memo told Jim to mix it up a little bit. I especially want to point out that Vernon got a different memo. Vernon is wearing a bolo tie, which I've seen him wear before but not this one. And again for those of you who are only listening at home, it is an Adam Smith bolo tie. Which is incredibly awesome. Sorry. I interrupted you, Jim. Carry on. VSmith: I want to comment, Jim, on the impartial spectator. It's interesting that Smith, he first uses the term 'spectator,' and then he introduces impartial spectator. And then he talks--he just says this once--he speaks of the 'fair and impartial spectator.' Now, he's using the word 'fair' in its 18th century meaning, which is a sports metaphor. Fair in the sense of not foul. He's not talking about outcomes. He's talking about rules. And I think that's very--it's well to keep in mind that really throughout the book it's the fair, impartial spectator. Otteson: So, part of what the impartial spectator does, in talking about a disinterested observer that knows the circumstances, is you know the proper rules. So, what kind of venue is it? Going back to the example about joke-telling, for example, who is the audience? Who are you with? Are they older, younger, is it the same language you are speaking? All of the things--now when you are deciding whether a joke you are about to tell is appropriate or not, you are going to go through all of those heuristics very quickly; maybe so quickly you don't realize. And you'll come to a conclusion about whether a joke you are thinking about telling is appropriate or not. But an impartial spectator is one who is imagined who actually knows all of those facts about the situation, and thus knows rules that apply in a particular situation. So the fair, being fair means applying the proper rules. Russ: Coming back to the children issue--the way I framed it before--you can argue that wanting to listen to the impartial spectator, learning the rules of propriety, is growing up. It's all about figuring it out. And it takes a long time to figure it out. I just want to emphasize that the rules you are talking about, Jim, they are very subtle. And people vary a great deal in their ability to figure out what those rules are. When they apply. And I think it's a fascinating thing to think about the fact that the rules are not written down. People write books about how to dress and etiquette and how to behave. But the fact is that these differences of how to behave in various situations are so subtle that you really can't write them down. And there's an imperfection at the heart of Smith's vision of our social interactions that I think you have to confront, that's different from the Newtonian system. As you, I think alluded to earlier, Vernon, there's an imprecision about it that is the nature of our lives. And I think Smith embraced that. I think modern social science has moved away from that. VSmith: Yes, and impartial spectator is sort of a metaphor for a statement of what governs our interactions. But there's no suggestion that it's precise and determinate. And comment on the difference in our dress: I don't remember--my mother tells me that I called myself 'My.' I said, 'My do it.' Isn't that interesting? And then, of course that was an early thing. But the 'Mine' was picked up as a way of identifying myself. Which--maybe I've still got some of that problem, right? Russ: I think we all do. I think we all do. Do you want to say anything else, Jim, about that? Otteson: About the imprecision? Russ: Yeah. Otteson: I think that's actually a strength of Smith's analysis. Because one thing that I think he saw or came to see about the difficulty of transferring Newtonian methodology to human beings is that human beings are a bit unpredictable. You can't always predict exactly what human beings will do. That may have been thinking about or a reflection of his religious view about human beings having free will. But there is a lack of fit: there's a dynamism about human interaction, about human societies. They go in ways that you can't always predict. And that's part of the process. So, we can describe in very general outlines, but we can't always predict--it's impossible to predict what kinds of clothing people will be wearing in 20 years. No matter how much you know about the facts today, you can't predict things like--you can't predict in a year. And that's one of the exciting things, to me, anyway, about human society and human sociology, that the science of sociology needs to understand that human beings aren't exactly like inanimate objects.
26:25Russ: So, I want to push the impartial spectator a little far and let you guys react to this. You could argue, and I think there's a strong suggestion in the text, that Smith's impartial spectator is what allows us to create civilization. It's what allows us to create the rules and norms. My desire for your approval, my desire to avoid your disapproval, keeps me in line. And I learn through going through life, as Jim suggested, what people approve of, what they disapprove of, one joke's correct, one joke isn't. And I learn the rules of propriety that way. And the result is a harmonious order--mostly, in some situations--that is self-regulating. These rules are not regulations. They are not issued by the government about politeness--though some people would like there to be such rules. In general, our rules of social interaction, they emerge from our choices, our approval and disapproval. And that makes it sound really great. And I think to some extent it is really great. And yet, I think Smith understood that that's a little too extreme, in the way I've just told it. I think he understood that we also deceive ourselves. We also are prone to push the impartial spectator aside when he's telling us something we don't want to do. And we manage to do something perhaps improper anyway. So, I'm curious what you all think-- VSmith: Self-deceit was the term he used. Very easily can deceive ourselves into believing and doing things that don't fit into this model. And that part of our problem is to overcome that self-deceit. And--but it rears its ugly head often in our lives. But that's--it's--the thing that Smith has helped me so much to understand--we'll come back to this, I'm sure, in your interrogation, Russ, but to understand data--that we were getting in experimental economics that you could not understand with the standard model. You see. And to me that was powerful. And moreover, he was able to do that without making use of utility theory. You know, preference theory, the way modern economists do it. Even though underneath it is this, what he calls self-loving orientation where more is better and less is worse. But that was the way we knew whether or not actions were hurtful or beneficial to others. So the common knowledge of that, you see, facilitated this understanding of the actions of others and the signals that you see that they send. Russ: The way I think of it, Vernon, and I learned this from you--I like to say that Vernon's my second-favorite economist named Smith, and I hope that doesn't hurt his feelings. Out in the world of trade and exchange with strangers, what's in it for me? Which is the modern economist's fancy term, is utility theory. Or preference theory. But when I am interacting with my family, and my friends, if that's my motto, I'm going to be in trouble. And it's not about what's in it for me. It's: How do I make sure my conduct conforms to the rules of propriety? Now, of course, if I do that well it's going to benefit me. But it's a different mindset. And I think it's been helpful to me to help me understand-- VSmith: And the external order of market exchange, we have property rights. You see. And if I go into the market and make a purchase and it's in a world where the property rights system supports the seller or deliverer what the product that he advertised, and I will pay in U.S. currency for that--in other words, each side is committed to their obligation--then, you see, we are less dependent on the elements of trust that we need, and reputation, and small groups. And that doesn't mean that those elements don't still come in, because there's many markets where there's an element of personal exchange--the local hardware store, the local mom-and-pop store, and this sort of thing where people know each other. But when you go into Walmart and make a purchase, you are connected to someone in the Pearl River Valley in China through a network of exchanges that you are not even aware of. And those are supported by a property rights system that makes that work. And what that does--see, that's the system which Adam Smith is talking about in the Wealth of Nations and it explains human economic betterment. And the fact that almost all of us are better off than our parents and certainly our grandparents. That explains that. His first book, The Theory of Moral Sentiments, what we can understand from that is what contributes to human social betterment, you see, so they both have to do with human betterment: one at the individual social world of interaction and the other in this extended order of exchange. And human sociality and the demand for it is alive and well; you have to look at it at the enormous success of the social media. Russ: Well, I look at this event. Which always fascinates me. Because you can listen to EconTalk, which many of you are doing right now at home. But there's something different about face to face. There's something different about in the flesh. As great as recorded music is, which is perfect in today's world, near perfect, we still like to go to a live concert, which is a different human experience.
33:29Russ: But, Vernon, you brought up a good segue here, which I'm going to throw over to Jim. I want to talk briefly about the Adam Smith Problem, which arose in the 19th century, when people suggested--Germans particularly, 'Das Adam Smith Problem,' that Adam Smith's two books had some inconsistency, because the Wealth of Nations is about self-interest and The Theory of Moral Sentiments is about beneficence and sacrifice and interact with other people. And yet there's nothing in the Wealth of Nations about kindness or virtue or propriety. Maybe these were written by two different people. So, what's your take on the Adam Smith problem, Jim? Otteson: It was the German scholars, as you mention, who came up with this very grave-sounding name, 'das Adam Smith problem'--this problem, so we have two different books and one talked about sympathy and the other talked about self-interest or self-love. And so you could imagine the kinds of theories that people offer. They said: Well, the first one he wrote, he was still a fairly young man. He was idealistic and maybe he foolishly thought that people actually cared for one another. Then he went and traveled around a little bit, including going to France; of course, then he goes south when he goes to France. Then he learned that, no, that's not what the world really is; instead it's all the dog-eat-dog world; and then he came up with this theory of capitalism, which is capturing the dog-eat-dog world. So this is a--for full disclosure, we've had a lot of ink spilled about this Adam Smith problem, including me: I, too, have written about this. In fact you might argue I got tenure writing about this. Russ: Self-interested research agenda. Otteson: That's right. But this entire way of framing the way the two books go together I think is missing the larger point. What Smith was really interested to do was to understand how human social institutions work, and he thought he was on to something. So, in The Theory of Moral Sentiments he was developing this model of an interactive process by which human beings can give rise to sets of rules that enable them to better themselves--as you were saying, Vernon--on the individual and social level. But this model, which is something like a marketplace model where people exchange their judgments and sentiments with one another--sometimes you accept people's judgments and sometimes you say no--with not too many modifications this can be transferred to this much larger scale model of what we now would think of as a market economy. What goes on when people are engaging in market exchanges? Well, again, you have something like the development of rules of propriety, including in particular rules of property, and a lot of the procedures that govern exchange in the marketplace are also not intended or designed by any one person. They emerge from the exchanges themselves. So there's a sense in which you can see both each of these books as being two iterations: Smith first trying to understand the social phenomena of human moral judgment making, and then trying to understand this other perennial human social phenomenon of people bartering and exchanging and trading and trying to improve our lives also materially. Both of those are fundamental and deep aspects of human life. And you get him attempting to explain each of them separately, but each of them in the two books. So, I see them as two books not as being in conflict but indeed being deeply connected. VSmith: Well, I think the problem arises because people were reading the Wealth of Nations and economists, many had never even heard of The Theory of Moral Sentiments; and so this was what was a problem of imagination, not of reality. Because if you read the Wealth of Nations against a backdrop of The Theory of Moral Sentiments, I think it--The Theory of Moral Sentiments is there. Some of the famous quotations by Adam Smith, you'll notice qualifications in it and those hark back to The Theory of Moral Sentiments. For example, Adam Smith says in the Wealth of Nations that every person should be perfectly free to follow his own interests in his own way, so long as he does not violate the laws of justice. That's what The Theory of Moral Sentiments is about. And if you haven't read The Theory of Moral Sentiments, you don't see what every word in that sentence means in terms of where he's coming from. So that I quite agree with Jim that The Theory of Moral Sentiments enriches very much the Wealth of Nations. And he doesn't plagiarize himself by saying, by quoting himself and referring back to himself. Otteson: That's just what we do now. Every book I write I quote the other books that I already wrote. Just in case.
38:36Russ: The way I think about it--and I do think there's a bit of an Adam Smith problem, but I don't think it's the one that the 19th century Germans were worried about--I think about it as a question of harmony. Why is there so much harmony in our lives? There's so much harmony in our lives we don't even think about it as a question to ask, because we take it for granted that we can sit around with people at a table and joke and laugh and interact and socialize and have a pleasant conversation. We take it for granted that we can go to that store and interact with that Pearl River Chinese merchant that we don't see, that factory worker who we don't know about. Those connections between us are really, as Hayek pointed out, a marvel. It's a marvel that we have this incredible extended order of cooperation and specialization that Smith begins the Wealth of Nations about. It's a marvel that even though we are incredibly self-centered we learn through growing up and the approval and disapproval of others what's courteous and what's proper. And I think that harmony that allows us--I think of it as a dance; I'm mixing metaphors here. Harmony is a musical metaphor, which Smith uses himself. But to me it's a dance of how you partner with an enormous number of people, knowing how fast to dance, how not to bump into other people, how not to override, how not to misstep. And that harmony is what I think he's trying to explain in both books. Having said that, there's sort of an Adam Smith that I don't know much is written about, which is his view of wealth. So, in one hand, we have the Wealth of Nations, which is about how nations get wealthy through specialization, through trade. And Smith has very little to say about wealth other than to explain it. And yet in The Theory of Moral Sentiments he's eager to tell you that the pursuit of wealth is a fool's game; that it doesn't make you happy; it tarnishes your soul; that ambition is destructive. And yet when he's writing about those things in the Wealth of Nations he's silent. He just says, 'This leads to wealth' and he has no moral statements about those things. How do you explain that? Good luck, Jim. Otteson: Wow. All right. Well, first of all, so he's not entirely silent about these worries in the Wealth of Nations. So, there are places in the Wealth of Nations--in fact he has all sorts of quotes where he says things like you can't get a few businessmen together over drinks before immediately the conversation turns to conspiring against the public. They want to fix prices and get special subsidies, etc. He also says, towards the end--you have to read all the way to Book V.-- Russ: It's hard. See, once I get to the Digression on Silver I quit the book. It's true I'm not alone. Otteson: You're probably not alone. But he worries about the potential effects on workers, on laborers who are doing the same repetitive tasks over and over again, and he fears that--he's trying to foresee, and he's writing in the 18th century; he could not have imagined what markets would become later on. But he's imagining that the greater proportion of workers will become more and more specialized, which might mean that they do the same sorts of things over and over again; and this might have various deleterious effects on their minds. So he does have these sorts of worries. But I think there's another point to--there's several points to make. But let me make one. We also have to keep in mind the context in which he was writing the Wealth of Nations. So the full title of that book, which bears repeating, is An Inquiry Into the Nature and Causes of the Wealth of Nations. What Smith wanted to figure out was, he was noticing that some places were beginning to get wealthy and other places weren't. And he wanted to know why. Why is it that some places are becoming wealthy and other places aren't? And for him this was not merely an empirical investigation, not merely something for academic or historical interest, but it was really a moral concern, too. Because right in the introduction to the book--so you really only have to read a page and a half for this--Smith talks about something that would have been quite vivid to his readers at the time and that he himself saw, which is that there are people living in the poor highlands of Scotland, in his day, who are so desperately poor that they often find themselves--that mothers, he says, often find themselves in the horrifying position of trying to decide which of my children will get to eat today. Because they can't all eat. And sometimes these small clans and families have to turn out their older members because they can no longer, they literally cannot sustain them without others being sacrificed. So, when I say the context in which he was writing: that's the level of poverty in which many people lived. So, this is a clear moral imperative and a moral concern for Smith, that we have to figure out what the institutions are that can enable people to rise out of at least those desperate levels of poverty. Once they get above those desperate levels, once we pass certain thresholds, well then this opens up all sorts of worlds of opportunity, frontiers of possibility for human life. Then we can start talking about what is justice. What is a virtuous human life? Am I called to be a musician or a philosopher or something else? None of those questions are possible when people are at that desperate level of poverty. So I think when you are trying to figure out what is going on behind what's the analysis in the Wealth of Nations, you have to remember that he's looking at people living at some very low historical norms of poverty. Looking at the misery at which many human beings live. And he says: That's job number one. Let's figure out first what the institutions are that enable us to rise out of those levels, and then that can enable us to turn our attention to the things that really, that we would like to imagine really do matter, living a truly flourishing, humane life. VSmith: Jim, I think that tells you why Adam Smith is relevant for the 21st century, because these issues are very evident today. And a lot of people have a dim view of markets. They don't--it's not evident to a lot of people that markets have this capacity for raising human betterment, the economic betterment of people. And it's interesting and I think particularly important to notice that Adam Smith was concerned about the conditions of labor. And it's interesting that as societies, groups, become wealthier, then they start to turn to those sort of concerns. You see that in China today, that conditions of labor are starting to become more of a concern in areas of China as their wealth grows. And that happens everywhere. And the issues are basically moral. Otteson: They are. And to say one other thing about your question that initiated that, is: If people make the mistake, which Adam Smith I think thought was a mistake, of thinking of wealth as being an end in itself, well that can lead to various kinds of pathologies and difficulties in people's lives. So that's what he's--I mean, many of the passages I think you have in mind, in The Theory of Moral Sentiments he's worried about this sort of thing: Wealth is not an end in itself, and if someone were to ask Adam Smith, well, if all you read was the Wealth of Nations, and you said to Adam Smith, 'Well, is wealth the only thing, is money the only thing that matters?' the answer is obviously 'No.' That's not the only thing that matters. Russ: He'd be horrified. Otteson: On the other hand, what wealth does do is enable human beings to begin turning their attention to things that are higher. They can raise their attention higher than just the most pressing material needs of survival. And that can enable the kinds of lives that we would be proud of living. Now, if you then make the mistake of thinking that wealth really is the end, and the only thing or the ultimate thing that matters, well then that can lead to all sorts of pathologies. That's a separate kind of mistake; and we would do well to remind ourselves and others and our children that wealth is a tool. It's a powerful tool, but it's only a tool. It's certainly not the end for which the tool is designed. VSmith: Yes; and for someone locked in poverty it's very hard for someone to get to those higher levels.
47:00Russ: I'm going to push back a little bit. So, in The Theory of Moral Sentiments Smith says, if you are out of debt, you have good health and a clean conscience, there's nothing else that adds to happiness. I'm sure each of the people here could quote that more precisely. But that's what he says. It's a beautiful thought. Sometimes I think it's true. But most of us have a desire for this--we like these--I'm holding up my iPhone. We say there's a lot more to happiness than just being out of debt, good health, and a clean conscience. We want more stuff. We want a bigger house. We want more rather than less. We were saying earlier: how do we reconcile Smith's, I think, disdain for wealth, more than just--he certainly discourages the pursuit of wealth for it's own sake; no doubt about that. But he's a little bit disdainful of material success generally in The Theory of Moral Sentiments. What I want to ask is: If he were alive today and if he could see the incredible ways that people sustain themselves--many of us are blessed, not all of us but many of us, to have jobs that we get deep delight from, from our work. Which was much less common in Smith's day. Given that that is the current state of human beings, is--what would Smith say about the progress we've made over the last two centuries? Would he just say, 'It doesn't matter; we would be just as happy if we lived back in my time?' Or would he say there's something qualitatively important about the levels of material success that we have today? Jim, I'll let you go first; then Vernon. Otteson: I think he would almost undoubtedly say that there have been qualitative improvements. On the other hand, Smith didn't have--and this is something we haven't mentioned in our conversation so far: In The Theory of Moral Sentiments Smith had a view of happiness. So, I was going to ask you whether your iPhone finally made you happy, whether that was the thing that gave you true happiness in life. And some people might say it's not clear that it gives you happiness. Russ: And just as an aside, Smith has fantastic passages in The Theory of Moral Sentiments about the gadgets of 1759 and how unsatisfying they ultimately are after you acquire them. An ear-picker. There's an ear-picker you've always longed for it; and when you get it, really, 'what's the point?' he says. So he very much understood the disappointment of the latest gadget. And yet the desire we continue to have to have it. Otteson: Yeah. Golden ear-pickers and devices for clipping your fingernails and all sort of-- VSmith: Well, he sees these as preoccupations that really divert yourself from sources of fundamental happiness. And a lot of that comes from our fellow feeling with others. [more to come, 49:53]