WEBVTT

NOTE 16. The Celebrated Adam Smith

1
00:00:00.000 --> 00:00:05.000
Chapter 16 The Celebrated Adam Smith

2
00:00:05.000 --> 00:00:10.000
1. The Mystery of Adam Smith

3
00:00:10.000 --> 00:00:19.000
Adam Smith, 1723 to 1790, is a mystery in a puzzle wrapped in an enigma.

4
00:00:19.000 --> 00:00:25.000
The mystery is the enormous and unprecedented gap between Smith's exalted reputation

5
00:00:25.000 --> 00:00:47.000
Smith's reputation almost blinds the sun. From shortly after his own day until very recently, he was thought to have created the science of economics virtually de novo. He was universally hailed as the founding father.

6
00:00:47.000 --> 00:01:02.000
Books on the history of economic thought, after a few well-deserved sneers at the mercantilists and a nod to the physiocrats, would invariably start with Smith as the creator of the discipline of economics.

7
00:01:02.000 --> 00:01:09.000
Any errors he made were understandably excused as the inevitable flaws of any great pioneer.

8
00:01:09.000 --> 00:01:13.000
Innumerable works have been written about him.

9
00:01:13.000 --> 00:01:18.760
The bicentennial of his magnum opus, An Inquiry into the Nature and the Causes of the Wealth

10
00:01:18.760 --> 00:01:27.760
of Nations, 1776, a veritable flood of books, essays and memorabilia poured forth about

11
00:01:27.760 --> 00:01:30.660
the quiet Scottish professor.

12
00:01:30.660 --> 00:01:36.080
His profile, sculpted on a medallion by Tassie, is known throughout the world.

13
00:01:36.080 --> 00:01:42.960
A hagiographic movie was even made about Smith during the bicentennial by a free-market foundation

14
00:01:42.960 --> 00:01:49.760
and businessmen and free market advocates have long hailed Adam Smith as their patron saint.

15
00:01:49.760 --> 00:01:57.040
Adam Smith ties were worn as a badge of honor in the upper echelons of the Reagan administration.

16
00:01:57.040 --> 00:02:01.240
On the other hand, Marxists, with somewhat more justice,

17
00:02:01.240 --> 00:02:07.360
hailed Smith as the ultimate inspiration of their own founding father, Karl Marx.

18
00:02:07.360 --> 00:02:13.440
Indeed, if the average person were asked to name two economists in history whom he has

19
00:02:13.440 --> 00:02:20.360
heard of, Smith and Marx would probably be the runaway winners of the poll.

20
00:02:20.360 --> 00:02:25.940
As we have already seen, Smith was scarcely the founder of economic science, a science

21
00:02:25.940 --> 00:02:33.060
which existed since the medieval scholastics and in its modern form since Richard Cantillon.

22
00:02:33.060 --> 00:02:39.920
But what the German economists used to call in a narrower connection, das Adam Smith problem,

23
00:02:39.920 --> 00:02:42.220
is much more severe than that.

24
00:02:42.220 --> 00:02:47.340
For the problem is not simply that Smith was not the founder of economics.

25
00:02:47.340 --> 00:02:52.660
The problem is that he originated nothing that was true, and whatever he originated

26
00:02:52.660 --> 00:02:54.520
was wrong.

27
00:02:54.520 --> 00:03:00.740
That even in an age that had fewer citations or footnotes than our own, Adam Smith was

28
00:03:00.740 --> 00:03:09.740
Smith was a shameless plagiarist, acknowledging little or nothing and stealing large chunks, for example from Catillon.

29
00:03:09.740 --> 00:03:16.740
Far worse was Smith's complete failure to cite or acknowledge his beloved mentor, Francis Hutchison,

30
00:03:16.740 --> 00:03:24.740
from whom he derived most of his ideas, as well as the organization of his economic and moral philosophy lectures.

31
00:03:24.740 --> 00:03:32.740
Smith indeed wrote in a private letter to the University of Glasgow of the never-to-be-forgotten Dr. Hutchison.

32
00:03:32.740 --> 00:03:41.740
But apparently amnesia conveniently struck Adam Smith when it came time to writing The Wealth of Nations for the general public.

33
00:03:41.740 --> 00:03:51.740
Even though an inveterate plagiarist, Smith had a Columbus complex, accusing close friends incorrectly of plagiarizing him.

34
00:03:51.740 --> 00:03:58.740
And even though a plagiarist, he plagiarized badly, adding new fallacies to the truths he lifted.

35
00:03:58.740 --> 00:04:10.740
In castigating Adam Smith for errors, therefore, we are not being anachronistic, absurdly punishing past thinkers for not being as wise as we who come later.

36
00:04:10.740 --> 00:04:20.740
For Smith not only contributed nothing of value to economic thought, his economics was a grave deterioration from his predecessors.

37
00:04:20.740 --> 00:04:27.740
Assessors, from Cattillon, from Turgot, from his teacher Hutchison, from the Spanish Scholastics,

38
00:04:27.740 --> 00:04:34.740
even, oddly enough, from his own previous works, such as The Lectures on Jurisprudence,

39
00:04:34.740 --> 00:04:46.340
Unpublished, 1762 and 63 and 1766, and The Theory of Moral Sentiments, 1759.

40
00:04:46.340 --> 00:04:53.820
The mystery of Adam Smith, then, is the immense gap between a monstrously overinflated reputation

41
00:04:53.820 --> 00:04:56.460
and the dismal reality.

42
00:04:56.460 --> 00:05:01.660
But the problem is worse than that, for it is not just that Smith's Wealth of Nations

43
00:05:01.660 --> 00:05:06.980
has had a terribly overblown reputation from his day to ours.

44
00:05:06.980 --> 00:05:13.620
The problem is that the Wealth of Nations was somehow able to blind all men, economists

45
00:05:43.620 --> 00:05:52.420
in place with a book so derivative, so deeply flawed, so much less worthy than its predecessors.

46
00:05:52.420 --> 00:05:59.420
The answer is surely not any lucidity or clarity of style or thought, for the much revered

47
00:05:59.420 --> 00:06:07.620
wealth of nations is a huge, sprawling, inchoate, confused tome, rife with vagueness, ambiguity

48
00:06:07.620 --> 00:06:10.540
and deep inner contradictions.

49
00:06:10.540 --> 00:06:17.160
There is, of course, an advantage in the history of social thought to a work being huge, sprawling,

50
00:06:17.160 --> 00:06:19.600
ambivalent and confused.

51
00:06:19.600 --> 00:06:24.160
There is a sociological advantage to vagueness and obscurity.

52
00:06:24.160 --> 00:06:30.280
The bemused German Smithian, Christian J. Krauss, once referred to the wealth of nations

53
00:06:30.280 --> 00:06:33.840
as the Bible of political economy.

54
00:06:33.840 --> 00:06:38.000
In a sense, Professor Krauss spoke wiser than he knew.

55
00:06:38.000 --> 00:06:41.880
For in one way the wealth of nations is like the Bible.

56
00:06:41.880 --> 00:06:48.760
It is possible to derive varying and contradictory interpretations from various or even the same

57
00:06:48.760 --> 00:06:50.560
parts of the book.

58
00:06:50.560 --> 00:06:56.600
Furthermore, the very vagueness and obscurity of a work can provide a happy hunting ground

59
00:06:56.600 --> 00:07:00.320
for intellectuals, students and followers.

60
00:07:00.320 --> 00:07:06.940
To make one's way through an obscure and difficult tract, to weave dimly perceived threads of

61
00:07:06.940 --> 00:07:09.900
of a book into a coherent pattern.

62
00:07:09.900 --> 00:07:14.100
These are rewarding tasks in themselves for intellectuals.

63
00:07:14.100 --> 00:07:20.540
And such a book also provides a welcome, built-in exclusion process, so that only a relatively

64
00:07:20.540 --> 00:07:27.840
small number of adepts can bask in their expertise about a work or a system of thought.

65
00:07:27.840 --> 00:07:33.720
In that way, they increase their relative income and prestige and leave other admirers

66
00:07:33.720 --> 00:07:46.600
Adam Smith did not found the science of economics, but he did indeed create the paradigm of the

67
00:07:46.600 --> 00:07:52.440
British classical school, and it is often useful for the creator of a paradigm to be

68
00:07:52.440 --> 00:07:59.060
inchoate and confused, thereby leaving room for disciples who will attempt to clarify

69
00:07:59.060 --> 00:08:10.740
Until the 1950s, economists, at least those in the Anglo-American tradition, revered Smith

70
00:08:10.740 --> 00:08:16.980
as the founder, and saw the later development of economics as a movement linearly upward

71
00:08:16.980 --> 00:08:24.060
into the light, with Smith succeeded by Ricardo and Mill, and then, after a bit of diversion

72
00:08:24.060 --> 00:08:31.500
created by the Austrians in the 1870s, Alfred Marshall, establishing neo-classical economics

73
00:08:31.500 --> 00:08:36.820
as a neo-Ricardian and hence neo-Smithian discipline.

74
00:08:36.820 --> 00:08:42.260
In a sense, John Maynard Keynes, Marshall's student at Cambridge, thought that he was

75
00:08:42.260 --> 00:08:48.360
only filling in the gaps in the Ricardian-Marshallian heritage.

76
00:08:48.360 --> 00:08:54.760
To this complacent miasma of Smith worship, Joseph A. Schumpeter's History of Economic

77
00:08:54.760 --> 00:09:03.400
Analysis, 1954, came as a veritable blockbuster. Coming from the continental, Walrassian and

78
00:09:03.400 --> 00:09:09.760
Austrian traditions, rather than from British classicism, Schumpeter was able, for virtually

79
00:09:09.760 --> 00:09:17.040
the first time, to cast a cold and realistic eye upon the celebrated Scott. Writing with

80
00:09:17.040 --> 00:09:23.840
With thinly veiled contempt, Schumpeter generally denigrated Smith's contribution and essentially

81
00:09:23.840 --> 00:09:30.460
held that Smith had shutted economics off on a wrong road, a road unfortunately different

82
00:09:30.460 --> 00:09:33.680
from that of his continental forebears.

83
00:09:33.680 --> 00:09:40.040
Since Schumpeter, historians of economic thought have largely retreated to a fallback position.

84
00:09:40.040 --> 00:09:47.760
Smith, it is conceded, created nothing, but he was the great synthesizer and systematizer,

85
00:09:47.760 --> 00:09:53.240
the first one to take up all the threads of his predecessors and weave them together into

86
00:09:53.240 --> 00:09:57.160
a coherent and systematic framework.

87
00:09:57.160 --> 00:10:04.000
But Smith's work was the reverse of coherent and systematic, and Ricardo and Say, his two

88
00:10:04.000 --> 00:10:10.440
Two major disciples each set themselves the task of forging such a coherent system out

89
00:10:10.440 --> 00:10:12.880
of the Smithian muddle.

90
00:10:12.880 --> 00:10:20.480
And furthermore, while it is true that pre-Smithian writings were incisive but sparse, to-ergo,

91
00:10:20.480 --> 00:10:26.600
or embedded in moral philosophy, Hutchison, it is also true that there were two general

92
00:10:26.600 --> 00:10:32.480
treatises on economics per se before the wealth of nations.

93
00:10:32.480 --> 00:10:39.200
One was Cartillon's Great Essay, which, after Smith, fell into grievous neglect, to be rescued

94
00:10:39.200 --> 00:10:41.960
a century later by Jevons.

95
00:10:41.960 --> 00:10:48.040
The other, and the first book to use political economy in its title, was Sir James Stewart's

96
00:10:48.040 --> 00:10:57.240
1712-1780, outdated two-volume work, Principles of Political Economy, 1767.

97
00:10:57.240 --> 00:11:12.240
Stuart, a Jacobite, who had been involved in Bonnie Prince Charlie's Rebellion, was, for much of his life, an exile in Germany, where he became imbued with the methodology and ideals of German Cameralism.

98
00:11:12.240 --> 00:11:21.240
Cameralism was a virulent form of absolutist mercantilism that flourished in Germany in the 17th and 18th centuries.

99
00:11:21.240 --> 00:11:29.240
Cameralists, even more than Western European mercantilists, were not economists at all.

100
00:11:29.240 --> 00:11:35.240
That is, they did not analyze the processes of the market, but were technical advisors

101
00:11:35.240 --> 00:11:42.840
to rulers on how and in what way to build up state power over the economy.

102
00:11:42.840 --> 00:11:48.400
Stuart's principles was in that tradition, scarcely economics, but rather a call for

103
00:11:48.400 --> 00:11:55.560
for massive government intervention and totalitarian planning, from detailed regulation of trade,

104
00:11:55.560 --> 00:12:01.320
to a system of compulsory cartels, to inflationary monetary policy.

105
00:12:01.320 --> 00:12:08.640
His only contribution was to refine and expand previously fleeting and inchoate notions of

106
00:12:08.640 --> 00:12:16.200
a labor theory of value, and to elaborate a proto-Marxian theory of inherent class conflict

107
00:12:16.200 --> 00:12:18.080
in Society.

108
00:12:18.080 --> 00:12:25.200
Furthermore, Stuart had written an ultra-mercantilist tome just at the time when classical liberal

109
00:12:25.200 --> 00:12:32.860
and laissez-faire thought was rising and becoming dominant, at least in Britain and France.

110
00:12:32.860 --> 00:12:38.880
Even though Stuart's principles was out of step with the emerging classical liberal zeitgeist,

111
00:12:38.880 --> 00:12:44.240
it was no foregone conclusion that the work would have little or no influence.

112
00:12:44.240 --> 00:12:50.520
The book was well received, highly respected and sold very well, and five years after its

113
00:12:50.520 --> 00:12:58.360
publication in 1772, Stewart won out over Adam Smith in acquiring a post as monetary

114
00:12:58.360 --> 00:13:02.840
consultant to the East India Company.

115
00:13:02.840 --> 00:13:08.840
One reason that the Schumpeter view of Smith shocked the economics profession is that historians

116
00:13:08.840 --> 00:13:20.340
have habitually treated the development of science as a linear and upward march into the truth.

117
00:13:20.340 --> 00:13:32.840
Each scientist patiently formulates, tests and discards hypotheses, and thereby each succeeding one stands on the shoulders of the one who came before.

118
00:13:32.840 --> 00:13:43.840
What might be called this Whig Theory of the History of Science has now been largely discarded for the far more realistic Kuhnian Theory of Paradigms.

119
00:13:43.840 --> 00:13:52.840
For our purposes, the important point of the Kuhn Theory is that a very few people patiently test anything,

120
00:13:52.840 --> 00:13:57.840
particularly the fundamental assumptions or basic paradigm of their theory,

121
00:13:57.840 --> 00:14:04.320
and shifts in paradigms can take place even when the new theory is worse than the old.

122
00:14:04.320 --> 00:14:13.880
In short, knowledge can be and is lost as well as gained, and science often proceeds in a zigzag

123
00:14:13.880 --> 00:14:20.840
rather than linear manner. We might add that this would be particularly true in the social or humane

124
00:14:20.840 --> 00:14:27.960
and Brain Sciences. As a result, paradigms and basic truths get lost, and economists,

125
00:14:27.960 --> 00:14:34.120
as well as people in other disciplines, can get worse, and not better, over time.

126
00:14:34.120 --> 00:14:40.080
The years may well bring retrogression, as well as progress. Schumpeter had heaved a

127
00:14:40.080 --> 00:14:47.060
bombshell into the temple of the Whig historians of economic thought, specifically of the partisans

128
00:14:47.060 --> 00:14:51.680
of the Smith-Ricardo-Marshall tradition.

129
00:14:51.680 --> 00:14:57.260
We have thus posed our own version of the Das Adam Smith problem.

130
00:14:57.260 --> 00:15:04.060
How did so badly flawed a work as the wealth of nations rapidly become so dominant as to

131
00:15:04.060 --> 00:15:07.660
blot out all other alternatives?

132
00:15:07.660 --> 00:15:13.500
But before considering this question, we must examine the various aspects of Smithian thought

133
00:15:13.500 --> 00:15:14.500
in More Detail

134
00:15:14.500 --> 00:15:18.700
2.

135
00:15:18.700 --> 00:15:25.100
The Life of Smith Adam Smith was born in 1723 in the small town

136
00:15:25.100 --> 00:15:28.200
of Kirkcaldy near Edinburgh.

137
00:15:28.200 --> 00:15:37.580
His father, also Adam Smith, 1679-1723, who died shortly before he was born, was a distinguished

138
00:15:37.580 --> 00:15:44.300
Judge Advocate for Scotland, and later Controller of Customs at Kirkcaldy, who had married into

139
00:15:44.300 --> 00:15:48.460
a well-to-do local landowning family.

140
00:15:48.460 --> 00:15:52.180
Young Smith was therefore raised by his mother.

141
00:15:52.180 --> 00:15:58.500
The town of Kirkcaldy was militantly Presbyterian, and in the borough school in the town he met

142
00:15:58.500 --> 00:16:05.340
many young Scottish Presbyterians, one of whom, John Drysdale, was to become twice moderator

143
00:16:05.340 --> 00:16:09.700
of the General Assembly of the Church of Scotland.

144
00:16:09.700 --> 00:16:13.540
Smith indeed came from a customs official family.

145
00:16:13.540 --> 00:16:19.660
In addition to his father, his cousin Hercules Scott Smith served as collector of customs

146
00:16:19.660 --> 00:16:25.900
at Kirkcaldy and his guardian, again named Adam Smith, was to become customs collector

147
00:16:25.900 --> 00:16:31.260
at Kirkcaldy as well as inspector of customs for the Scottish outports.

148
00:16:31.260 --> 00:16:39.720
Finally, still another cousin named Adam Smith, later served as customs collector at Aloha.

149
00:16:39.720 --> 00:16:47.400
From 1737 to 1740, Adam Smith studied at Glasgow College, where he fell under the spell of

150
00:16:47.400 --> 00:16:53.520
Francis Hutchison and imbibed the excitement of the ideas of classical liberalism, natural

151
00:16:53.520 --> 00:16:56.680
law and political economy.

152
00:16:56.680 --> 00:17:03.080
In 1740, Smith earned an MA with great distinction at the University of Glasgow.

153
00:17:03.080 --> 00:17:09.000
His mother had baptized Adam in the Episcopalian faith, and she was eager for her son to become

154
00:17:09.000 --> 00:17:11.700
an Episcopalian minister.

155
00:17:11.700 --> 00:17:17.080
Smith was sent to Balliol College, Oxford, on a scholarship designed to nurture future

156
00:17:17.080 --> 00:17:22.760
Episcopalian clerics, but he was unhappy at the wretched instruction in the Oxford of

157
00:17:22.760 --> 00:17:31.360
of His Day and returned after six years at the age of 23 without having taken holy orders.

158
00:17:31.360 --> 00:17:36.880
Despite his baptism and his mother's pressure, Smith remained an ardent Presbyterian and

159
00:17:36.880 --> 00:17:44.800
returning to Edinburgh in 1746, he remained unemployed for two years.

160
00:17:44.800 --> 00:17:51.880
Finally in 1748, Henry Hume, Lord Cames, a judge and a leader of the liberal Scottish

161
00:17:51.880 --> 00:18:00.880
The British Enlightenment, and a cousin of David Hume, decided to promote a series of public lectures in Edinburgh to educate lawyers.

162
00:18:01.880 --> 00:18:05.880
Along with Smith's childhood friend, James Oswald of Dunicare,

163
00:18:06.880 --> 00:18:17.880
Keynes got the Philosophical Society of Edinburgh to sponsor Smith in several years of lectures on natural law, literature, liberty and commercial freedom.

164
00:18:17.880 --> 00:18:33.880
In 1750, Adam Smith obtained the chair in logic at his alma mater, the University of Glasgow, and he found no difficulty in the requisite signing of the Westminster Confession before the Presbytery of Glasgow.

165
00:18:33.880 --> 00:18:47.880
Finally, in 1752, Smith had the satisfaction of ascending to his beloved teacher, Hutchison's, Chair of Moral Philosophy at Glasgow, where he was to remain for 12 years.

166
00:18:47.880 --> 00:18:59.880
Smith's Edinburgh and Glasgow lectures were very popular, and his major stress was on the system of natural liberty, on the system of natural law and laissez-faire,

167
00:18:59.880 --> 00:19:05.880
which he was then advocating with far less qualification than later in his more cautious

168
00:19:05.880 --> 00:19:08.120
Wealth of Nations.

169
00:19:08.120 --> 00:19:13.280
He also managed to convert many of the leading merchants of Glasgow to this exciting new

170
00:19:13.280 --> 00:19:15.200
creed.

171
00:19:15.200 --> 00:19:21.120
Smith also plunged into the social and educational associations that were beginning to be formed

172
00:19:21.120 --> 00:19:27.980
by the moderate Presbyterian clergy, university professors, literati and attorneys in both

173
00:19:27.980 --> 00:19:30.940
With Glasgow and Edinburgh

174
00:19:30.940 --> 00:19:37.640
It is likely that David Hume attended Smith's Edinburgh lectures in 1752, for the two became

175
00:19:37.640 --> 00:19:41.580
fast friends shortly thereafter.

176
00:19:41.580 --> 00:19:46.920
Smith was a founding member of the Glasgow Literary Society the following year.

177
00:19:46.920 --> 00:19:53.020
The Society engaged in high-level discussions and debates and met diligently every Thursday

178
00:19:53.020 --> 00:19:56.140
evening from November to May.

179
00:19:56.140 --> 00:20:01.580
Hume and Smith were both members, and at one of the first sessions, Smith read an account

180
00:20:01.580 --> 00:20:06.280
of some of Hume's recently printed political discourses.

181
00:20:06.280 --> 00:20:12.180
Oddly enough, the two friends, clearly the brightest members of the society, were extremely

182
00:20:12.180 --> 00:20:17.420
diffident and never said a word in any of the discussions.

183
00:20:17.420 --> 00:20:23.100
Despite his diffidence, Smith was a busy and inveterate clubman, becoming a leading member

184
00:20:23.100 --> 00:20:29.540
member of the Philosophical Society of Edinburgh and of the Select Society, Edinburgh, which

185
00:20:29.540 --> 00:20:36.580
flourished in the 1750s, and met weekly, bringing together the moderate power elite from the

186
00:20:36.580 --> 00:20:41.260
clergy, university men and the legal profession.

187
00:20:41.260 --> 00:20:47.900
Smith was also an active member of the Political Economy Club of Glasgow, the Oyster Club,

188
00:20:47.900 --> 00:20:53.920
of Edinburgh, Simpsons Club of Glasgow, and the Poker Club, Edinburgh, founded by his

189
00:20:53.920 --> 00:21:00.400
friend Adam Ferguson, professor of moral philosophy at the University of Edinburgh, specifically

190
00:21:00.400 --> 00:21:03.900
to promote the martial spirit.

191
00:21:03.900 --> 00:21:08.920
As ifivid this were not enough, Adam Smith was one of the leading contributors and editors

192
00:21:08.920 --> 00:21:17.600
of the Abortive Edinburgh Review, 1755 and 1756, dedicated largely to the defense of

193
00:21:17.600 --> 00:21:25.840
of their friends Hume and Kames against the hardcore evangelical Calvinist clergy of Scotland.

194
00:21:25.840 --> 00:21:34.600
The Edinburgh Review was founded by the brilliant young lawyer Alexander Wedderburn, 1733-1805,

195
00:21:34.600 --> 00:21:44.680
who was to become a judge, a member of Parliament in England, and finally Lord Chancellor, 1793-1801.

196
00:21:44.680 --> 00:21:50.420
Wetterburn was so latitudinarian as to favor the licensing of brothels.

197
00:21:50.420 --> 00:21:54.980
Other luminaries on the Edinburgh Review were top moderate leaders.

198
00:21:54.980 --> 00:22:03.860
The politician John Jardine, 1715-1760, whose daughter married Lord Cain's son, the powerful

199
00:22:03.860 --> 00:22:12.380
Reverend William Robertson and the Reverend Hugh Blair, 1718-1800, Professor of Rhetoric

200
00:22:12.380 --> 00:22:15.660
at the University of Edinburgh.

201
00:22:15.660 --> 00:22:21.900
The intensity of Adam Smith's Presbyterianism, even though not fundamentalist, may be seen

202
00:22:21.900 --> 00:22:24.600
in his relationship to Hugh Blair.

203
00:22:24.600 --> 00:22:31.400
Blair, the minister at the High Kirk, Greyfriars, was in constant hot water with the Orthodox

204
00:22:31.400 --> 00:22:38.560
Calvinist clergy, who repeatedly denounced him to the Glasgow and Edinburgh Presbyteries.

205
00:22:38.560 --> 00:22:43.920
In The Wealth of Nations, Adam Smith delivered the following encomium to the Presbyterian

206
00:22:43.920 --> 00:22:45.880
clergy.

207
00:22:45.880 --> 00:22:52.240
There is scarce, perhaps, to be found anywhere in Europe a more learned, decent, independent

208
00:22:52.240 --> 00:22:57.960
and respectable set of men than the greater part of the Presbyterian clergy of Holland,

209
00:22:57.960 --> 00:23:04.620
Geneva, Switzerland and Scotland, to which his old friend Blair, though himself a leading

210
00:23:04.620 --> 00:23:22.820
After Smith published his Moral Philosophy and his Theory of Moral Sentiments, 1759,

211
00:23:22.820 --> 00:23:29.980
his increasing fame won him a highly lucrative position in 1764 as tutor to the young Duke

212
00:23:29.980 --> 00:23:32.220
of Buccleuch.

213
00:23:32.220 --> 00:23:37.860
For three years of tutoring, which he spent with the young duke in France, Smith was awarded

214
00:23:37.860 --> 00:23:45.540
a lifetime annual salary of 300 pounds, twice his annual salary at Glasgow.

215
00:23:45.540 --> 00:23:52.300
In three pleasant years in France, he made the acquaintance of Turgot and the physiocrats.

216
00:23:52.300 --> 00:23:58.820
His tutorial task accomplished, Smith returned to his home town of Kirkati, where, secure

217
00:23:58.820 --> 00:24:05.020
Over in his lifetime stipend, he worked for ten years to complete the Wealth of Nations,

218
00:24:05.020 --> 00:24:09.540
which he had started at the beginning of his stay in France.

219
00:24:09.540 --> 00:24:15.580
The fame of the Wealth of Nations led his proud erstwhile pupil, the Duke of Buccleu,

220
00:24:15.580 --> 00:24:22.820
to help secure for Smith in 1778 the highly paid post of Commissioner of Scottish Customs

221
00:24:22.820 --> 00:24:24.860
at Edinburgh.

222
00:24:24.860 --> 00:24:30.660
With a pay of 600 pounds per annum from his government post, which he kept until the day

223
00:24:30.660 --> 00:24:38.500
of his death in 1790, added to his handsome lifetime pension, Adam Smith was making close

224
00:24:38.500 --> 00:24:46.160
to a thousand pounds a year, a princely revenue, as one of his biographers has described it.

225
00:24:46.160 --> 00:24:52.100
Even Smith himself wrote in this period that he was fully as affluent as I could wish.

226
00:24:52.100 --> 00:24:57.780
He regretted only that he had to attend to his customs post, which took time away from

227
00:24:57.780 --> 00:25:00.700
his literary pursuits.

228
00:25:00.700 --> 00:25:04.380
And yet his regrets were scarcely profound.

229
00:25:04.380 --> 00:25:10.740
In contrast to most historians who have treated Smith's customs post embarrassingly as virtually

230
00:25:10.740 --> 00:25:17.340
a no-show sinecure in reward for intellectual achievements, recent research has shown that

231
00:25:17.340 --> 00:25:24.340
Smith worked full-time at his post, often chairing the daily meetings of the Board of Customs Commissioners.

232
00:25:24.340 --> 00:25:31.340
Moreover, Smith sought the appointment and apparently found the position enjoyable and relaxing.

233
00:25:31.340 --> 00:25:38.340
It is true that Smith spent little time or energy on scholarship and writing after his appointment,

234
00:25:38.340 --> 00:25:44.340
but there were leaves of absence available which Smith showed no interest in pursuing.

235
00:25:44.340 --> 00:26:00.340
Furthermore, the groundwork for Smith's quest for the appointment was not so much his intellectual attainments as a reward for his advice as consultant on taxes and the budget to the British government since the mid-1760s.

236
00:26:03.340 --> 00:26:06.340
3. The Division of Labour

237
00:26:06.340 --> 00:26:22.340
It is appropriate to begin a discussion of Smith's Wealth of Nations with the Division of Labor, since Smith himself begins there, and since for Smith this division had crucial and decisive importance.

238
00:26:22.340 --> 00:26:35.340
His teacher, Hutchison, had also analyzed the importance of the Division of Labor in the developing economy, as had Hume, Turgot, Mandeville, James Harris and other economists.

239
00:26:35.340 --> 00:26:49.340
But for Smith, the division of labor took on swollen and gigantic importance, putting into the shade such crucial matters as capital accumulation and the growth of technological knowledge.

240
00:26:49.340 --> 00:27:00.340
As Schumpeter has pointed out, never for any economist before or since did the division of labor assume such a position of commanding importance.

241
00:27:00.340 --> 00:27:07.340
But there are more troubles in the Smithian division of labor than his exaggerating its importance.

242
00:27:07.340 --> 00:27:16.340
The older and truer perception of the motive power for specialization and exchange was simply that each party to an exchange,

243
00:27:16.340 --> 00:27:26.340
which is necessarily two party and two commodity, benefits, or at least expects to benefit, from the exchange.

244
00:27:26.340 --> 00:27:29.340
Otherwise the trade would not take place.

245
00:27:29.340 --> 00:27:49.340
But Smith unfortunately shifts the main focus from mutual benefit to an alleged irrational and innate propensity to truck, barter and exchange, as if human beings were lemmings, determined by forces external to their own chosen purposes.

246
00:27:49.340 --> 00:28:05.340
As Edwin Canan pointed out, Smith took this tack because he rejected the idea of innate differences in natural talents and abilities, which would naturally seek out different specialized occupations.

247
00:28:05.340 --> 00:28:25.340
Smith instead took the egalitarian environmentalist position, still dominant today in neoclassical economics, that all laborers are equal, and therefore the differences between them can only be the result, rather than a cause of the system of the division of labor.

248
00:28:25.340 --> 00:28:38.340
In addition, Smith failed to apply his analysis of the division of labor to international trade, where it would have provided powerful ammunition for his own free trade policies.

249
00:28:38.340 --> 00:28:46.340
It was to be left to James Mill to make such an application in his excellent theory of comparative advantage.

250
00:28:46.340 --> 00:28:54.340
Furthermore, domestically, Smith placed far too much importance on the division of labor within a factory or industry,

251
00:28:54.340 --> 00:29:01.460
Industry, while neglecting the more significant division of labor among industries.

252
00:29:01.460 --> 00:29:06.740
But if Smith had an undue appreciation of the importance of the division of labor, he

253
00:29:06.740 --> 00:29:13.640
paradoxically sowed great problems for the future by introducing the chronic modern sociological

254
00:29:13.640 --> 00:29:20.300
complaint about specialization that was picked up quickly by Karl Marx and has been advanced

255
00:29:20.300 --> 00:29:25.980
to a High Art by Socialist Gripers about alienation.

256
00:29:25.980 --> 00:29:31.500
There is no gainsaying the fact that Smith totally contradicted himself between book

257
00:29:31.500 --> 00:29:35.640
one and book five of The Wealth of Nations.

258
00:29:35.640 --> 00:29:42.760
In the former, the division of labor alone accounts for the affluence of civilized society,

259
00:29:42.760 --> 00:29:49.720
and indeed the division of labor is repeatedly equated with civilization throughout the book.

260
00:29:49.720 --> 00:29:55.420
And yet, while in Book One the division of labor is hailed as expanding the alertness

261
00:29:55.420 --> 00:30:02.420
and intelligence of the population, in Book Five it is condemned as leading to their intellectual

262
00:30:02.420 --> 00:30:08.420
as well as moral degeneration, to the loss of their intellectual, social and martial

263
00:30:08.420 --> 00:30:10.220
virtues.

264
00:30:10.220 --> 00:30:16.180
There is no way that this contradiction can be plausibly reconciled.

265
00:30:16.180 --> 00:30:22.580
Adam Smith, though himself a plagiarist of considerable dimensions, also had a Columbus

266
00:30:22.580 --> 00:30:28.580
complex, often accusing other people unfairly of plagiarizing him.

267
00:30:28.580 --> 00:30:36.640
In 1755 he actually laid claim to having invented the concept of laissez-faire, or the system

268
00:30:36.640 --> 00:30:41.900
of natural liberty, asserting that he had taught these principles since his Edinburgh

269
00:30:41.900 --> 00:30:45.260
lectures in 1749.

270
00:30:45.260 --> 00:30:51.860
may be, but the claim ignores previous such expressions by his own teachers, as well as

271
00:30:51.860 --> 00:30:57.920
by Grotius and Pufendorf, to say nothing of Bois-Gilbert and the other French laissez-faire

272
00:30:57.920 --> 00:31:01.440
thinkers of the late seventeenth century.

273
00:31:01.440 --> 00:31:08.940
In 1769, the contentious Smith levied a plagiarism charge against Principal William Robertson

274
00:31:08.940 --> 00:31:15.520
upon the occasion of the publication of the latter's History of the Reign of Charles V.

275
00:31:15.520 --> 00:31:20.960
It is not known what the topic of the literary theft was supposed to be and it is difficult

276
00:31:20.960 --> 00:31:28.240
to guess considering the remoteness from Smith's work of the theme of the Robertson book.

277
00:31:28.240 --> 00:31:34.120
The most famous plagiarism charge hurled by Smith was against his friend Adam Ferguson

278
00:31:34.120 --> 00:31:37.800
on the question of the division of labor.

279
00:31:37.800 --> 00:31:43.700
Professor Hamowy has shown that Smith did not break with his old friend, as had previously

280
00:31:43.700 --> 00:31:49.300
been thought, because of Ferguson's use of the concept of the division of labor in his

281
00:31:49.300 --> 00:31:54.960
essay on the history of civil society in 1767.

282
00:31:54.960 --> 00:32:00.000
In view of all the writers who had employed the concept earlier, this behavior would have

283
00:32:00.000 --> 00:32:03.680
been ludicrous, even for Adam Smith.

284
00:32:03.680 --> 00:32:09.840
The conjecture is that the break came in the early 1780s because of Ferguson's discussion

285
00:32:09.840 --> 00:32:16.120
at their club of what would later be published as part of his Principles of Moral and Political

286
00:32:16.120 --> 00:32:19.740
Science in 1792.

287
00:32:19.740 --> 00:32:25.600
For in the principles, Ferguson summed up the pin factory example that constituted the

288
00:32:25.600 --> 00:32:30.360
single most famous passage in The Wealth of Nations.

289
00:32:30.360 --> 00:32:36.560
Roth had pointed to a small pin factory where ten workers, each specializing in a different

290
00:32:36.560 --> 00:32:44.560
aspect of the work, could produce over 48,000 pins a day, whereas if each of these ten had

291
00:32:44.560 --> 00:32:51.700
made the entire pin on his own, they might not have made even one pin a day, and certainly

292
00:32:51.700 --> 00:32:53.980
not more than twenty.

293
00:32:53.980 --> 00:33:00.980
In that way, the division of labor enormously multiplied the productivity of each worker.

294
00:33:00.980 --> 00:33:07.780
In his Principles, Ferguson wrote, a fit assortment of persons, of whom each performs but a part

295
00:33:07.780 --> 00:33:14.500
in the manufacture of a pin, may produce much more in a given time than perhaps double the

296
00:33:14.500 --> 00:33:21.020
number, of which each was to produce the whole, or to perform every part in the construction

297
00:33:21.020 --> 00:33:24.060
of that diminutive article.

298
00:33:24.060 --> 00:33:30.620
When Smith upbraided Ferguson for not acknowledging Smith's precedence in the pin factory example,

299
00:33:30.620 --> 00:33:36.140
Ferguson replied that he had borrowed nothing from Smith, but indeed that both had taken

300
00:33:36.140 --> 00:33:41.700
the example from a French source where Smith had been before him.

301
00:33:41.700 --> 00:33:47.860
There is strong evidence that the French source for both writers was the article on pins in

302
00:33:47.860 --> 00:33:56.020
in the Encyclopedia, 1755, since that article mentions 18 distinct operations in making

303
00:33:56.020 --> 00:34:02.500
a pin, the same number repeated by Smith in the Wealth of Nations, although in English

304
00:34:02.500 --> 00:34:08.820
pin factories 25 was the more common number of operations.

305
00:34:08.820 --> 00:34:16.380
Thus Adam Smith broke up a long-standing friendship by unjustly accusing Adam Ferguson of plagiarizing

306
00:34:16.380 --> 00:34:29.820
The Rev. Carlisle's comment that Smith had some little jealousy in his temper seems a

307
00:34:29.820 --> 00:34:37.420
vast understatement, and we are informed by his obituary notice in the 1790 monthly review

308
00:34:37.420 --> 00:34:43.440
that Smith lived in such constant apprehension of being robbed of his ideas that if he saw

309
00:34:43.440 --> 00:34:50.440
Smith's use of an example of a small French pin factory, rather than a larger British one, highlights a curious fact about his celebrated wealth of nations.

310
00:35:13.440 --> 00:35:20.840
The renowned economist seems to have had no inkling of the Industrial Revolution going on all about him.

311
00:35:20.840 --> 00:35:26.640
Although he was a friend of Dr. John Roebuck, the owner of the Caron Iron Works,

312
00:35:26.640 --> 00:35:32.840
whose opening in 1760 marked the beginning of the Industrial Revolution in Scotland,

313
00:35:32.840 --> 00:35:36.840
Smith showed no indication that he knew of its existence.

314
00:35:36.840 --> 00:35:41.840
Although he was at least an acquaintance of the great inventor, James Watt,

315
00:35:41.840 --> 00:35:46.840
Smith displayed no knowledge whatever of some of Watt's leading inventions.

316
00:35:46.840 --> 00:35:53.840
He made no mention in his famous book of the canal boom, which had begun in the early 1760s,

317
00:35:53.840 --> 00:36:02.840
of the very existence of the burgeoning cotton textile industry, or of pottery, or of the new methods of making beer.

318
00:36:02.840 --> 00:36:10.840
There is no reference to the enormous drop in travel costs that the new turnpikes were bringing about.

319
00:36:10.840 --> 00:36:20.540
In contrast, then, to those historians who praised Smith for his empirical grasp of contemporary economic and industrial affairs,

320
00:36:20.540 --> 00:36:25.840
Adam Smith was oblivious to the important economic events around him.

321
00:36:25.840 --> 00:36:36.840
Much of his analysis was wrong, and many of the facts he did include in The Wealth of Nations were obsolete and gathered from books 30 years old.

322
00:36:36.840 --> 00:36:45.120
4. Productive vs. Unproductive Labor

323
00:36:45.120 --> 00:36:51.080
One of the physiocrats more dubious contributions to economic thought was their view that only

324
00:36:51.080 --> 00:36:59.640
agriculture was productive, that only agriculture contributed a surplus to the economy. Smith,

325
00:36:59.640 --> 00:37:06.720
heavily influenced by the physiocrats, retained the unfortunate concept of productive labor

326
00:37:06.720 --> 00:37:12.120
but expanded it from agriculture to material goods in general.

327
00:37:12.120 --> 00:37:18.800
For Smith, then, labor on material objects was productive, but labor on, say, consumer

328
00:37:18.800 --> 00:37:24.920
services on immaterial production was unproductive.

329
00:37:24.920 --> 00:37:30.360
Smith's bias in favor of material objects amounted to a bias in favor of investment

330
00:37:30.360 --> 00:37:36.900
in Capital Goods, since a stock of capital goods, by definition, has to be embodied in

331
00:37:36.900 --> 00:37:39.780
material objects.

332
00:37:39.780 --> 00:37:45.120
Consumer goods, on the other hand, either consist of immaterial services, or they get

333
00:37:45.120 --> 00:37:50.400
used up, consumed, in the process of consumption.

334
00:37:50.400 --> 00:37:56.300
Smith's imprimatur on material production, therefore, was an indirect way of advocating

335
00:37:56.300 --> 00:38:02.120
Amassing Investment in an Accumulation of Capital Goods as Against the Very Goal of

336
00:38:02.120 --> 00:38:07.360
Producing Capital Goods, Increased Consumption

337
00:38:07.360 --> 00:38:13.200
When discussing exports and imports, Smith realized full well that there was no point

338
00:38:13.200 --> 00:38:19.840
to amassing intermediate objects except that they eventually be consumed, that the only

339
00:38:19.840 --> 00:38:23.820
goal of production is consumption.

340
00:38:23.820 --> 00:38:29.380
But as Professor Roger Garrison has pointed out, and as we shall see further on the question

341
00:38:29.380 --> 00:38:36.220
of usury laws, Adam Smith's Presbyterian conscience led him to value the expenditure

342
00:38:36.220 --> 00:38:44.100
of labor per se for its own sake and led him to balk at free market time preferences between

343
00:38:44.100 --> 00:38:46.620
consumption and saving.

344
00:38:46.620 --> 00:38:52.980
Clearly, Smith wanted far more investment towards future production and less present

345
00:38:52.980 --> 00:38:57.020
consumption than the market was willing to choose.

346
00:38:57.020 --> 00:39:02.180
One of the contradictions of this position, of course, is that accumulating more capital

347
00:39:02.180 --> 00:39:08.060
goods at the expense of present consumption will eventually result in a higher standard

348
00:39:08.060 --> 00:39:15.060
of living, unless Smith prepared to counsel a perpetual and accelerated shift toward more

349
00:39:15.060 --> 00:39:20.020
More and More Never to be Consumed Means of Production

350
00:39:20.020 --> 00:39:27.500
In Book Two of The Wealth of Nations, Smith opines that labor on material objects is productive,

351
00:39:27.500 --> 00:39:33.860
while other labor is not, because it does not fix or realize itself in any particular

352
00:39:33.860 --> 00:39:40.140
subject, which endures after that labor is passed, and for which an equal quantity of

353
00:39:40.140 --> 00:39:44.340
labor could afterward be purchased.

354
00:39:44.340 --> 00:39:52.460
Included in immaterial and hence unproductive labor are servants, churchmen, lawyers, physicians,

355
00:39:52.460 --> 00:40:01.500
men of letters of all kinds, players, buffoons, musicians, opera singers, opera dancers, etc.

356
00:40:01.500 --> 00:40:07.980
To Smith, the important point was that the work of all unproductive laborers perishes

357
00:40:07.980 --> 00:40:31.980
Smith writes that productive labor adds to the value of the subject on which it is bestowed,

358
00:40:31.980 --> 00:40:35.420
whereas unproductive labor does not.

359
00:40:35.420 --> 00:40:41.420
Another way of putting the fact that labor on services is not embodied in any particular

360
00:40:41.420 --> 00:40:43.540
subject.

361
00:40:43.540 --> 00:40:50.380
Productive labor, moreover, allegedly creates a surplus for profit in manufacturing.

362
00:40:50.380 --> 00:40:56.460
Adam Smith's lingering physiocratic bias was also shown in his preposterous assertion that

363
00:40:56.460 --> 00:41:03.200
agriculture is a far more productive industry than manufacturing, because in agriculture

364
00:41:03.200 --> 00:41:12.400
Nature works alongside man and provides extra rent for landlords as well as profit for capitalists.

365
00:41:12.400 --> 00:41:17.960
In addition to other fallacies, Smith here failed to realize that nature in the form

366
00:41:17.960 --> 00:41:25.960
of ground land collaborates in all activities of man, not just agriculture, and that all

367
00:41:25.960 --> 00:41:33.400
Several activities, including manufacturing, will therefore yield ground rent to landowners.

368
00:41:33.400 --> 00:41:39.960
In his thorough and searching critique of Adam Smith, Edwin Cannon speculated that Smith,

369
00:41:39.960 --> 00:41:45.800
if pressed, would probably have admitted that the declamation, harangues and tunes have

370
00:41:45.800 --> 00:41:47.920
a value.

371
00:41:47.920 --> 00:41:54.580
Smith oddly identified the buildup of material capital goods with annual production.

372
00:41:54.580 --> 00:42:01.260
On the latter, as Kennan points out, the durability of the things produced by labor is in reality

373
00:42:01.260 --> 00:42:03.220
of no significance.

374
00:42:03.220 --> 00:42:08.940
The declamations, harangues and tunes are just as much a part of the annual produce

375
00:42:08.940 --> 00:42:11.660
as champagne or boots.

376
00:42:11.660 --> 00:42:19.420
Yet Smith, in Book II, excludes all production of immaterial services from the annual product,

377
00:42:19.420 --> 00:42:25.660
which is allegedly produced entirely by the productive laborers, who in turn maintain

378
00:42:25.660 --> 00:42:32.460
not only themselves, but all the unproductive classes of labor as well.

379
00:42:32.460 --> 00:42:36.580
In a witty and charming passage, Cannon then comments,

380
00:42:36.580 --> 00:42:42.380
People have always been rather apt to imagine that the class which they happen to think

381
00:42:42.380 --> 00:42:49.700
Ludwig the most important maintains all the other classes with which it exchanges commodities.

382
00:42:49.700 --> 00:42:57.100
The landowner, for instance, considers or used to consider his tenants as his dependents.

383
00:42:57.100 --> 00:43:03.520
All consumers easily fall into the idea that they are doing a charitable act in maintaining

384
00:43:03.520 --> 00:43:06.740
a multitude of shopkeepers.

385
00:43:06.740 --> 00:43:11.160
Employers of all kinds everywhere believe that the employed ought to be grateful for

386
00:43:11.160 --> 00:43:17.100
for their Wages, while the employed firmly hold that the employer is maintained entirely

387
00:43:17.100 --> 00:43:19.600
at their expense.

388
00:43:19.600 --> 00:43:26.160
So the physiocrats alleged that the husbandman maintained himself and all other classes,

389
00:43:26.160 --> 00:43:31.800
and Adam Smith alleged that the husbandman, the manufacturer and the merchant maintained

390
00:43:31.800 --> 00:43:35.000
themselves and all other classes.

391
00:43:35.000 --> 00:43:41.120
The physiocrats did not see that the husbandman was maintained by the manufacturing industries

392
00:43:41.120 --> 00:43:47.880
of thrashing, milling and baking, just as much as the millers or the tailors are maintained

393
00:43:47.880 --> 00:43:52.640
by the agricultural industries of plowing and reaping.

394
00:43:52.640 --> 00:43:58.200
Adam Smith did not see that the manufacturer and merchant are maintained by the menial

395
00:43:58.200 --> 00:44:04.320
services of cooking and washing, just as much as the cooks and laundresses are maintained

396
00:44:04.320 --> 00:44:09.880
by the manufacturer of bonnets and the import of tea.

397
00:44:09.880 --> 00:44:15.200
It is not just durable objects, however, that Adam Smith was interested in.

398
00:44:15.200 --> 00:44:18.640
It was durable capital goods.

399
00:44:18.640 --> 00:44:25.640
Durable consumer goods like houses were, again, for Smith, unproductive, although he grudgingly

400
00:44:25.640 --> 00:44:31.800
conceded that a house is no doubt extremely useful to the person who lives in it.

401
00:44:31.800 --> 00:44:38.640
But it is not productive, wrote Smith, because if it is to be let to a tenant for rent, as

402
00:44:38.640 --> 00:44:51.640
If the house itself can produce nothing, the tenant must always pay the rent out of some other revenue, which he derives either from labor or stock, capital or land.

403
00:44:51.640 --> 00:44:55.640
Again, Kennan provides the proper repost.

404
00:44:55.640 --> 00:45:08.640
It did not occur to Adam Smith to reflect that if a plow is let for rent, as a plow itself can produce nothing, the tenant must always pay the rent out of some other revenue.

405
00:45:08.640 --> 00:45:18.640
Adam Smith's bias against consumption and in favor of saving and investment is summed up in Professor Rima's analysis.

406
00:45:18.640 --> 00:45:27.640
It is clear from his third chapter in Book II on the accumulation of capital or of productive and unproductive labor,

407
00:45:27.640 --> 00:45:35.640
that he is concerned with the effect of using savings to satisfy the desire for luxuries by those who are prodigal,

408
00:45:35.640 --> 00:45:43.640
instead of channeling them into uses that will enhance the supply of fixed or circulating capital.

409
00:45:43.640 --> 00:45:58.640
He is in effect arguing that savings should be used in such a way that they will create a flow of income and new equipment, and that failure to use savings in this manner is an impediment to economic growth.

410
00:45:59.640 --> 00:46:11.640
Perhaps. But it also means that Smith was not content to abide by free market choices between growth on the one hand and consumption on the other.

411
00:46:11.640 --> 00:46:23.640
Professor Edwin West, a modern admirer of Smith, who generally portrays the Scotsman as an advocate of laissez-faire, admits Smith's bias.

412
00:46:23.640 --> 00:46:34.640
Yet Smith, like a prudent steward of a Scottish aristocrat's estate, could hardly disguise a strong personal preference for much private frugality

413
00:46:34.640 --> 00:46:40.640
and therefore for productive labor in the interests of the nation's future accumulation.

414
00:46:40.640 --> 00:46:52.140
He then proceeds to concede implicitly Professor Garrison's insight that Smith exhorted us to negative or at least zero time preference.

415
00:46:52.140 --> 00:47:06.140
Citing Smith's theory of moral sentiments, West notes that the virtue of frugality commands the esteem of Smith's alter ego, man's innate moral sense, the impartial spectator.

416
00:47:06.140 --> 00:47:08.540
Quoting from Smith,

417
00:47:08.540 --> 00:47:13.400
The spectator does not feel the solicitations of our present appetites.

418
00:47:13.400 --> 00:47:19.460
To him, the pleasure which we are to enjoy a week hence, or a year hence, is just as

419
00:47:19.460 --> 00:47:24.280
interesting as that which we are to enjoy this moment.

420
00:47:24.280 --> 00:47:31.180
We might note that the lofty refusal to discount future satisfactions in favor of the present,

421
00:47:31.180 --> 00:47:39.080
That is, the rejection of positive time preference is all too easy of any impartial spectator.

422
00:47:39.080 --> 00:47:45.560
But is the impartial spectator truly human, or is he simply a floating wraith who does

423
00:47:45.560 --> 00:47:53.120
not participate in the human condition and therefore whose insight can be brusquely dismissed?

424
00:47:53.120 --> 00:47:59.640
Adam Smith's Calvinistic scorn of consumption can be seen in his attack on dancing as primitive

425
00:47:59.640 --> 00:48:01.640
The Theory of Money and Credit

426
00:48:29.640 --> 00:48:33.280
together the powers of generation.

427
00:48:33.280 --> 00:48:39.560
Smith furthermore favored low and criticized high profits, because high profits induce

428
00:48:39.560 --> 00:48:46.680
capitalists to engage in excessive consumption, and since large capitalists set an influential

429
00:48:46.680 --> 00:48:53.000
example for others in society, it is all the more important for them to keep to the path

430
00:48:53.000 --> 00:48:55.560
of thrift and industry.

431
00:48:55.560 --> 00:49:02.000
Thus, besides all the bad effects to the country in general, which have already been mentioned

432
00:49:02.000 --> 00:49:08.840
as necessarily resulting from a high rate of profit, there is one more, fatal perhaps,

433
00:49:08.840 --> 00:49:14.720
than all these put together, but which, if we may judge from experience, is inseparably

434
00:49:14.720 --> 00:49:16.700
connected with it.

435
00:49:16.700 --> 00:49:22.940
The high rate of profit seems everywhere to destroy that parsimony which in other circumstances

436
00:49:22.940 --> 00:49:26.540
is natural to the character of the merchant.

437
00:49:26.540 --> 00:49:32.700
When profits are high, that sober virtue seems to be superfluous, and expensive luxury to

438
00:49:32.700 --> 00:49:37.700
suit better the affluence of his situation.

439
00:49:37.700 --> 00:49:43.560
Because of the influence of the example of the higher orders, Smith adds, if his employer

440
00:49:43.560 --> 00:49:49.480
is attentive and parsimonious, the workman is very likely to be so too.

441
00:49:49.480 --> 00:49:54.860
But if the master is dissolute and disorderly, the servant who shapes his work according

442
00:49:54.860 --> 00:50:00.580
to the pattern which his master prescribes to him will shape his life according to the

443
00:50:00.580 --> 00:50:04.140
example which he sets him.

444
00:50:04.140 --> 00:50:09.660
Accumulation is thus prevented in the hands of all those who are naturally the most disposed

445
00:50:09.660 --> 00:50:11.580
to accumulate.

446
00:50:11.580 --> 00:50:18.460
The capital of the country, instead of increasing, gradually dwindles away.

447
00:50:18.460 --> 00:50:24.760
But if Adam Smith was excessively in favor of capital investment as against consumption,

448
00:50:24.760 --> 00:50:32.180
he at least was sound in realizing that capital investment was important in economic development,

449
00:50:32.180 --> 00:50:38.340
and that saving was the necessary and sufficient condition of such investment.

450
00:50:38.340 --> 00:50:44.380
The only way to increase capital, then, is by private savings or thrift.

451
00:50:44.380 --> 00:50:51.020
Thus, Smith wrote, whoever saves money, as the phrase is, adds proportionately to the

452
00:50:51.020 --> 00:50:53.920
general mass of capital.

453
00:50:53.920 --> 00:51:00.720
The world can augment its capital only in one way, by parsimony.

454
00:51:00.720 --> 00:51:07.220
Savings and not labor is the cause of accumulation of capital, and such savings promptly puts

455
00:51:07.220 --> 00:51:12.800
into motion an additional quantity of industry, labor.

456
00:51:12.800 --> 00:51:20.120
The saver then spends as readily as the spendthrift, except that he does so to increase capital

457
00:51:20.120 --> 00:51:24.320
and eventually benefit the consumption of all.

458
00:51:24.320 --> 00:51:29.320
Hence every frugal man is a public benefactor.

459
00:51:29.320 --> 00:51:35.680
All this was a pale shadow of the scintillating and creative work of Turgot with his emphasis

460
00:51:35.680 --> 00:51:42.120
on time, the structure of production, and time preference, and it was probably cribbed

461
00:51:42.120 --> 00:51:44.520
from Torgot to Boot.

462
00:51:44.520 --> 00:51:51.620
But at least it was sound, and it stamped its imprint indelibly on classical economics.

463
00:51:51.620 --> 00:51:57.640
As Schumpeter put it, in discussing what he calls the Torgot-Smith theory of saving and

464
00:51:57.640 --> 00:52:06.060
investment, Torgot then must be held responsible for the first serious analysis of these matters,

465
00:52:06.060 --> 00:52:12.940
As A. Smith must, at the least, with having it inculcated into the minds of economists.

466
00:52:12.940 --> 00:52:20.860
Finally, apart from the Marxists, even the abject Smithians of today reject, or at least

467
00:52:20.860 --> 00:52:26.540
dismiss, the master's productive versus unproductive labor distinction.

468
00:52:26.540 --> 00:52:33.340
Characteristically, however, Smith was not even clear and consistent in his fallacies.

469
00:52:33.340 --> 00:52:38.900
His presentation in Book One of The Wealth of Nations contradicts Book Two.

470
00:52:38.900 --> 00:52:44.760
In Book One he properly states that every man is rich or poor according to the degree

471
00:52:44.760 --> 00:52:52.020
in which he can afford to enjoy the necessaries, conveniences, and amusements of human life,

472
00:52:52.020 --> 00:52:56.100
a phrase almost directly lifted from Catillon.

473
00:52:56.100 --> 00:53:02.440
But in that case, of course, there is no difference in productivity between material objects and

474
00:53:02.440 --> 00:53:10.520
and Immaterial Services, all of which contribute to such necessaries, conveniences and amusements.

475
00:53:10.520 --> 00:53:17.200
And indeed Smith's discussion of wages proceeds in Book 1 as if there were no distinction

476
00:53:17.200 --> 00:53:21.560
between productive and unproductive work.

477
00:53:21.560 --> 00:53:23.160
5.

478
00:53:23.160 --> 00:53:26.600
The Theory of Value

479
00:53:26.600 --> 00:53:33.760
From Smith's doctrine on value was an unmitigated disaster, and it deepens the mystery in explaining

480
00:53:33.760 --> 00:53:34.960
Smith.

481
00:53:34.960 --> 00:53:42.020
For in this case not only was Smith's theory of value a degeneration from his teacher Hutchison,

482
00:53:42.020 --> 00:53:48.380
and indeed from centuries of developed economic thought, but it was also a similar degeneration

483
00:53:48.380 --> 00:53:53.100
from Smith's own previous unpublished lectures.

484
00:53:53.100 --> 00:53:58.780
In Hutchison, and for centuries, from the late scholastics onward, the value and price

485
00:53:58.780 --> 00:54:05.780
of a product were determined first by its subjective utility in the minds of the consumers,

486
00:54:05.780 --> 00:54:12.200
and second by the relative scarcity or abundance of the good being evaluated.

487
00:54:12.200 --> 00:54:16.300
The more abundant any given good, the lower its value.

488
00:54:16.300 --> 00:54:20.260
The scarcer the good, the higher its value.

489
00:54:20.260 --> 00:54:25.160
All that this tradition needed to complete its explanation was the marginal principle

490
00:54:25.160 --> 00:54:33.960
of the 1870s, a focus on a given unit of the good, the unit actually chosen or not chosen

491
00:54:33.960 --> 00:54:35.760
on the market.

492
00:54:35.760 --> 00:54:39.680
But the rest of the explanation was in place.

493
00:54:39.680 --> 00:54:45.360
In his lectures, furthermore, Smith had solved the value paradox neatly, in much the same

494
00:54:45.360 --> 00:54:50.120
way as had Hutchison and other economists for centuries.

495
00:54:50.120 --> 00:54:57.600
Why is water so useful and yet so cheap, while a frippery like diamonds is so expensive?

496
00:54:57.600 --> 00:55:03.000
The difference, said Smith in his lectures, was their relative scarcity.

497
00:55:03.000 --> 00:55:09.960
It is only on account of the plenty of water that it is so cheap as to be got for the lifting,

498
00:55:09.960 --> 00:55:14.680
and on account of the scarcity of diamonds that they are so dear.

499
00:55:14.680 --> 00:55:22.120
Furthermore, with different supply conditions, the value and price of a product would differ drastically.

500
00:55:22.120 --> 00:55:33.720
Thus Smith points out in his lectures that a rich merchant, lost in the Arabian desert, would value water very highly, and so its price would be very high.

501
00:55:33.720 --> 00:55:43.520
Similarly, if the quantity of diamonds could, by industry, be multiplied, the price of diamonds on the market would fall rapidly.

502
00:55:43.520 --> 00:55:50.320
But in the wealth of nations, for some bizarre reason, all this drops out and falls away.

503
00:55:50.320 --> 00:55:59.120
Suddenly, only ten or a dozen years after the lectures, Smith finds himself unable to solve the value paradox.

504
00:55:59.120 --> 00:56:13.120
In a famous passage in Book 1, Chapter 4 of Wealth, Smith sharply and hermetically separates and sunders utility from value and price, and never the twain shall meet.

505
00:56:13.120 --> 00:56:28.620
The word value has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys.

506
00:56:28.620 --> 00:56:35.620
The one may be called value in use, the other value in exchange.

507
00:56:35.620 --> 00:56:51.120
The things which have the greatest value in use have frequently little or no value in exchange, and on contrary, those which have the greatest value in exchange have frequently little or no value in use.

508
00:56:51.120 --> 00:57:00.120
Nothing is more useful than water, but it will purchase scarce anything. Scarce anything can be had in exchange for it.

509
00:57:00.120 --> 00:57:07.000
A diamond, on the contrary, has scarce any value in use, but a very great quantity of

510
00:57:07.000 --> 00:57:12.600
other goods may frequently be had in exchange for it.

511
00:57:12.600 --> 00:57:15.000
And that is that.

512
00:57:15.000 --> 00:57:20.960
No mention of the solution of the value paradox by stressing relative scarcities.

513
00:57:20.960 --> 00:57:28.680
Indeed, scarcity, that concept so fundamental and crucial to economic theory, plays virtually

514
00:57:28.680 --> 00:57:32.080
have no role in the wealth of nations.

515
00:57:32.080 --> 00:57:38.500
And with scarcity gone as the solution to the value paradox, subjective utility virtually

516
00:57:38.500 --> 00:57:45.560
drops out of economics, as well as does consumption and consumer demand.

517
00:57:45.560 --> 00:57:52.220
Utility can no longer explain value and price, and the two-centered concepts will reappear

518
00:57:52.220 --> 00:57:59.220
in later generations as left-wingers and socialists happily prayed about the crucial difference

519
00:57:59.220 --> 00:58:06.340
between production for profit and production for use, the air of the Smithian emphasis

520
00:58:06.340 --> 00:58:13.780
on the alleged gulf between value in use and value in exchange.

521
00:58:13.780 --> 00:58:20.260
And since economic science was reborn after Adam Smith, since all previous economists

522
00:58:20.260 --> 00:58:43.260
were cast into limbo by prevailing fashions of thought, the entire tradition of subjective utility, scarcity as determinants of value and price, a tradition dominant since Aristotle and the medieval and Spanish scholastics, a tradition that had continued down through writers in 18th century France and Italy.

523
00:58:43.260 --> 00:58:55.260
That great tradition gets poured down the Orwellian memory hole by Adam Smith's fateful decision to discard even his own previous concepts.

524
00:58:55.260 --> 00:59:09.260
Although Samuel Bailey almost restored it, the great tradition was not to be fully resurrected until its independent rediscovery by the Austrians and other marginalists in the 1870s.

525
00:59:09.260 --> 00:59:14.260
Adam Smith has a lot to answer for at the bar of history.

526
00:59:15.260 --> 00:59:22.260
Paul Douglas put it eloquently in a commemorative volume for the Adam Smith sesquicentennial.

527
00:59:22.260 --> 00:59:30.260
Smith helped to divert the writers of English classical school into a cul-de-sac from which they did not emerge,

528
00:59:30.260 --> 00:59:35.260
in so far as their value theory was concerned, for nearly a century.

529
00:59:35.260 --> 00:59:48.260
And we can understand the anguish of Professor Emil Kauder when, after lamenting the sinking into oblivion of the great French and Italian economists of the 18th century, he wrote,

530
00:59:48.260 --> 01:00:01.260
Yet it was the tragedy of these writers that they wrote in vain. They were soon forgotten. No scholar appeared to make out of these thoughts the new science of political economy.

531
01:00:01.260 --> 01:00:09.260
Instead, the father of our economic science wrote that water has a great utility and a small value.

532
01:00:09.260 --> 01:00:17.260
With these few words, Adam Smith had made waste and rubbish out of the thinking of 2,000 years.

533
01:00:17.260 --> 01:00:28.260
The chance to start in 1776 instead of 1870, with a more correct knowledge of value principles, had been missed.

534
01:00:28.260 --> 01:00:32.260
How could Smith have made such a colossal blunder?

535
01:00:32.260 --> 01:00:40.260
In effect, he turned away from his almost sole emphasis on explaining market price in the lectures

536
01:00:40.260 --> 01:00:45.260
to another concept which for him took on overriding importance,

537
01:00:45.260 --> 01:00:52.260
the natural price, or what might be called the long-run normal price.

538
01:00:52.260 --> 01:01:07.260
This concept, similar to Cantillon's intrinsic value, or Hutchison's fundamental value, had appeared in the lectures, but occupied a minor role, as it did in the work of these other economists.

539
01:01:07.260 --> 01:01:23.260
But suddenly, the natural price and its alleged determinants now became more important, more truly real than the market price of the real world that had always been the prime focus of economists.

540
01:01:23.260 --> 01:01:42.260
Value and price theory shifts because of Adam Smith's unfortunate and drastic change of focus in the wealth of nations from prices in the real world to a mystical non-existent price in the never-never land of long-run equilibrium.

541
01:01:42.260 --> 01:01:51.260
But this alleged natural price is neither more real than nor equally real as the current market price.

542
01:01:51.260 --> 01:01:52.260
Price.

543
01:01:52.260 --> 01:01:55.980
It is, in fact, not real at all.

544
01:01:55.980 --> 01:01:59.780
Only the market price is the real price.

545
01:01:59.780 --> 01:02:06.540
At best, the long-run price is useful in providing a vital clue to the direction of price and

546
01:02:06.540 --> 01:02:10.300
production changes in the real world.

547
01:02:10.300 --> 01:02:16.700
But the long-run price is never reached, and never can be reached, for it keeps shifting

548
01:02:16.700 --> 01:02:22.660
as Underlying Supply and Demand Forces Continually Change.

549
01:02:22.660 --> 01:02:29.460
The long-run normal price is important but only for explaining the directional tendencies

550
01:02:29.460 --> 01:02:36.140
and the underlying architectonic structure of this economy, and also for analysis of

551
01:02:36.140 --> 01:02:42.660
how uncertainty affects real-world income and economic activity.

552
01:02:42.660 --> 01:02:50.600
The virtually exclusive classical and neoclassical absorption in the unreal long run to the neglect

553
01:02:50.600 --> 01:02:57.700
and detriment of analyzing real world prices and economic activity, shunted economic thought

554
01:02:57.700 --> 01:03:06.740
onto a long, fallacious and even tragic detour from which it has not yet fully recovered.

555
01:03:06.740 --> 01:03:12.260
Another terrible loss inflicted on economic thought by Adam Smith was his dropping out

556
01:03:12.260 --> 01:03:18.060
Out of the concept of the entrepreneur, so important to the contributions of Cantillon

557
01:03:18.060 --> 01:03:25.880
and Turgot, the entrepreneur disappeared from British classical thought, never to be resurrected

558
01:03:25.880 --> 01:03:31.100
until some of the continental thinkers and especially the Austrians.

559
01:03:31.100 --> 01:03:37.460
But the point is that there is no room for the entrepreneur if the focus is to be on

560
01:03:37.460 --> 01:03:43.620
from the Unchanging Certain World of Long-Run Equilibrium.

561
01:03:43.620 --> 01:03:49.340
Before the wealth of nations, economists had always concentrated on the market price and

562
01:03:49.340 --> 01:03:55.180
had seen readily that it was determined by the forces of supply and demand, and hence

563
01:03:55.180 --> 01:03:57.940
of utility and scarcity.

564
01:03:57.940 --> 01:04:05.300
Indeed, while David Hume knew nothing of utility and spoke of labor as the source of value,

565
01:04:05.300 --> 01:04:11.140
He was far sounder on value theory than his close friend Adam Smith.

566
01:04:11.140 --> 01:04:17.220
On receiving a copy of the newly published Wealth of Nations, Hume, on his deathbed,

567
01:04:17.220 --> 01:04:21.340
was able to write to his friend on one important criticism.

568
01:04:21.340 --> 01:04:28.500
I cannot think that the rent of farms make any part of the price of produce, but that

569
01:04:28.500 --> 01:04:34.300
the price is determined altogether by the quantity and the demand.

570
01:04:34.300 --> 01:04:42.860
In short, compared to Smith, Hume was in the continental tradition and almost proto-Austrian.

571
01:04:42.860 --> 01:04:48.780
But if Smith stressed the long run, what is supposed to determine the non-real concept

572
01:04:48.780 --> 01:04:53.780
of a natural or long-run normal price?

573
01:04:53.780 --> 01:04:59.260
Following up unfortunate hints of his 18th century predecessors, Smith concluded that

574
01:04:59.260 --> 01:05:07.260
The natural price is equal to, and determined by, costs of production, a concept that had

575
01:05:07.260 --> 01:05:15.540
only occupied a fitful and subordinate place in economic thought since the medieval scholastics.

576
01:05:15.540 --> 01:05:23.500
Not that the long-run normal price, or as we now call it the equilibrium price, is nonsense.

577
01:05:23.500 --> 01:05:29.260
The equilibrium price is the long-run tendency of the market price.

578
01:05:29.260 --> 01:05:36.060
As Adam Smith indeed saw, if the market price is higher than the long-run equilibrium, then

579
01:05:36.060 --> 01:05:42.580
extra gains will be made and resources will flow into this particular industry, until

580
01:05:42.580 --> 01:05:46.540
the market price falls to reach equilibrium.

581
01:05:46.540 --> 01:05:53.100
Conversely, if the market price is lower than equilibrium, the resulting losses will drive

582
01:05:53.100 --> 01:06:00.100
The Equilibrium Concept is highly useful in pointing to the direction in which the market will move, but equilibrium will only be reached, in reality, if the data of the market are magically frozen, that is, if the values, resources and technological knowledge on the market continue to remain precisely the same.

583
01:06:23.100 --> 01:06:46.460
Cost of production is defined by Adam Smith as total expenses paid to factors of production,

584
01:06:46.460 --> 01:06:50.340
that is, wages, profits and rent.

585
01:06:50.340 --> 01:06:56.100
More specifically, in what was to become the famous classical triad, Smith reasoned that

586
01:06:56.100 --> 01:07:03.320
there were three types of factors of production, labor, land and capital.

587
01:07:03.320 --> 01:07:11.660
Labor receives wages, land earns rent and capital earns profits, actually long run rather

588
01:07:11.660 --> 01:07:19.440
than short run rates of return, or what might be called the natural rate of interest.

589
01:07:19.440 --> 01:07:25.160
In equilibrium, which Smith seems to have believed was more real and hence far more

590
01:07:25.160 --> 01:07:32.160
important than the actual market price, the wage rate equals the average or the natural

591
01:07:32.160 --> 01:07:39.660
rate, and the other returns similarly equal the natural rent and the long-run average

592
01:07:39.660 --> 01:07:42.580
rate of profit.

593
01:07:42.580 --> 01:07:48.760
There is one striking fallacy in his analysis of cost that Adam Smith shared, though in

594
01:07:48.760 --> 01:07:52.920
in an aggravated fashion with earlier writers.

595
01:07:52.920 --> 01:08:00.240
Whereas market price is changeable and ephemeral, cost is somehow determined objectively and

596
01:08:00.240 --> 01:08:07.320
exogenously, that is, from outside the world of market economic activity.

597
01:08:07.320 --> 01:08:10.680
But cost is not intrinsic or given.

598
01:08:10.680 --> 01:08:16.980
On the contrary, it itself is determined, as the Austrians were later to point out,

599
01:08:16.980 --> 01:08:22.420
by the value foregone in using resources in production.

600
01:08:22.420 --> 01:08:28.340
This value, in turn, is determined by the subjective valuations that consumers place

601
01:08:28.340 --> 01:08:30.780
on those products.

602
01:08:30.780 --> 01:08:38.820
In brief, rather than cost in some fundamental sense determining value, cost at any and all

603
01:08:38.820 --> 01:08:47.420
Times is itself determined by the subjective value or expected value that consumers place

604
01:08:47.420 --> 01:08:50.140
on the various products.

605
01:08:50.140 --> 01:08:56.100
So that, even if we might say that prices will equal cost of production in long-run

606
01:08:56.100 --> 01:09:03.900
equilibrium, there is no reason to assume that such costs determine long-run price.

607
01:09:03.900 --> 01:09:10.740
On the contrary, expected consumer valuation determines what the value of costs will be

608
01:09:10.740 --> 01:09:12.980
on the market.

609
01:09:12.980 --> 01:09:19.780
Cost is strictly dependent on utility, in the short and long runs, and never the other

610
01:09:19.780 --> 01:09:22.460
way around.

611
01:09:22.460 --> 01:09:28.840
Another grave problem with all cost of production theory is that it necessarily abandons any

612
01:09:28.840 --> 01:09:35.160
Any attempt to explain the pricing of goods and services that have no cost because they

613
01:09:35.160 --> 01:09:42.440
are not produced, goods that are simply there or were produced in the past but are unique

614
01:09:42.440 --> 01:09:50.280
and not reproducible, such as artworks, jewelry, archaeological discoveries, etc.

615
01:09:50.280 --> 01:09:57.160
Similarly, immaterial consumer services such as the prices of entertainment, concerts,

616
01:09:57.160 --> 01:10:05.860
Physicians, domestic servants, etc. can scarcely be accounted for by costs embodied in a product.

617
01:10:05.860 --> 01:10:12.920
In all these cases, only subjective demand can explain the pricing or the fluctuations

618
01:10:12.920 --> 01:10:15.400
in those prices.

619
01:10:15.400 --> 01:10:21.520
But this analysis scarcely exhausts Smith's sins in discussing the central concept in

620
01:10:21.520 --> 01:10:25.080
economics, the theory of value.

621
01:10:25.080 --> 01:10:31.640
For side by side with the standard cost of production analysis as equaling wages plus

622
01:10:31.640 --> 01:10:39.480
rents plus profits, another new and far more bizarre theory was set forth.

623
01:10:39.480 --> 01:10:45.240
In this alternative view, the relevant cost of production that determines equilibrium

624
01:10:45.240 --> 01:10:51.680
price is simply the quantity of labor embodied in its production.

625
01:10:51.680 --> 01:10:57.720
It was, indeed, Adam Smith, who was almost solely responsible for the injection into

626
01:10:57.720 --> 01:11:04.720
economics of the labor theory of value, and hence it was Smith who may plausibly be held

627
01:11:04.720 --> 01:11:11.800
responsible for the emergence and the momentous consequences of Marxism.

628
01:11:11.800 --> 01:11:18.560
Side by side and unintegrated with Smith's cost of production theory of the natural price

629
01:11:18.560 --> 01:11:27.820
Lay His New Quantity of Labor Pain Theory Thus, the real price of everything, what everything

630
01:11:27.820 --> 01:11:35.740
really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.

631
01:11:35.740 --> 01:11:41.540
What everything is really worth to the man who has acquired it and who wants to dispose

632
01:11:41.540 --> 01:11:46.820
To use of it or exchange it for something else is the toil and trouble which it can

633
01:11:46.820 --> 01:11:52.660
save to himself and which it can impose upon other people.

634
01:11:52.660 --> 01:11:59.420
What is bought with money or with goods is purchased by labor, as much as what we acquire

635
01:11:59.420 --> 01:12:02.460
by the toil of our own body.

636
01:12:02.460 --> 01:12:08.980
They contain the value of a certain quantity of labor which we exchange for what is supposed

637
01:12:08.980 --> 01:12:15.260
at the time to contain the value of an equal quantity.

638
01:12:15.260 --> 01:12:23.400
Thus goods exchange on the market for equal quantities which they contain of labor hours,

639
01:12:23.400 --> 01:12:28.980
at least in their real long-run prices.

640
01:12:28.980 --> 01:12:33.900
Immediately Smith recognized that he faced a profound difficulty.

641
01:12:33.900 --> 01:12:39.940
If labor quantity is the source and measure of all value, how can the mere quantity of

642
01:12:39.940 --> 01:12:47.220
labor hours be equated to the quantity of labor pain or labor toil?

643
01:12:47.220 --> 01:12:50.300
Surely they are not automatically equal.

644
01:12:50.300 --> 01:12:56.540
As Smith himself admitted, in addition to labor time, the different degrees of hardship

645
01:12:56.540 --> 01:13:03.460
endured or ingenuity exercised must likewise be taken into account.

646
01:13:03.460 --> 01:13:09.540
Yet such equating is not easy, for indeed there may be more labor in an hour's hard

647
01:13:09.540 --> 01:13:16.420
work than in two hours easy business, or in an hour's application to a trade which it

648
01:13:16.420 --> 01:13:25.540
cost ten years labor to learn than in a month's industry at an ordinary and obvious employment.

649
01:13:25.540 --> 01:13:29.800
How does this crucial equating take place?

650
01:13:29.800 --> 01:13:35.200
According to Smith, by the higgling and bargaining of the market, bringing them into a rough

651
01:13:35.200 --> 01:13:37.820
sort of equality.

652
01:13:37.820 --> 01:13:42.600
Yet here, Smith fell into an iron trap of circular reasoning.

653
01:13:42.600 --> 01:13:50.380
For, like Ricardo and Marx after him, he attempted to explain prices and values by the quantity

654
01:13:50.380 --> 01:13:56.680
of labor, and then appealed to the settling of values on the market to determine what

655
01:13:56.680 --> 01:14:05.680
The quantity of labor is, by weighting it by differences in the degree of labor hardship and toil.

656
01:14:05.680 --> 01:14:15.680
Smith tried to escape such circularity by his egalitarian assumption, still held in orthodox neoclassical economics,

657
01:14:15.680 --> 01:14:23.680
that all laborers are equal, and that hence wages, at least in the natural long run, will all be equal,

658
01:14:23.680 --> 01:14:29.680
or rather will be equal for equal quantities of labor toil among all the workers.

659
01:14:29.680 --> 01:14:38.680
According to Smith, competition on the market will tend to equate wages per unit of sacrifice or labor toil.

660
01:14:38.680 --> 01:14:45.680
As Douglas put it, Smith believed he had established the fact that equal units of labor

661
01:14:45.680 --> 01:14:53.600
in the sense of disutility were at any one time compensated for by equal amounts of money wages.

662
01:14:55.120 --> 01:15:02.720
Thus Smith opined in an 18th century egalitarian way that the difference between the most dissimilar

663
01:15:02.720 --> 01:15:09.600
characters, between a philosopher and a common street porter, seems to arise not so much from

664
01:15:09.600 --> 01:15:14.480
from Nature as from Habit, Custom and Education.

665
01:15:14.480 --> 01:15:20.900
There are no unique individuals and irreducible differences between people.

666
01:15:20.900 --> 01:15:26.960
In this reductionist view, now active again in the 20th century, the mind of a human being

667
01:15:26.960 --> 01:15:33.640
is merely a tabula rasa on which external environment fills in the content.

668
01:15:33.640 --> 01:15:52.880
Hence, according to Smith, skilled labor earns more than unskilled merely to compensate for years of apprenticeship and training, when earnings were much lower, so that their labor hours and toil, and hence wages, would be equalized over a lifetime.

669
01:15:52.880 --> 01:16:05.380
Wages in occupations which are active in only part of the year should be higher to compensate for the fewer days of work, so that annualized incomes would be equal.

670
01:16:05.380 --> 01:16:17.880
Other things being equal, furthermore, workers in unpleasant or dangerous occupations would receive higher wages to compensate them for the higher labor sacrifice,

671
01:16:17.880 --> 01:16:25.880
while prestigious occupations would receive lower wages since their sacrifice or unpleasantness is lower.

672
01:16:25.880 --> 01:16:34.380
While all these distinctions make some sense and have to be taken into account in any theory of wages,

673
01:16:34.380 --> 01:16:42.380
they founder on the a priori assumption that every person's mind is a uniform tabula rasa.

674
01:16:42.380 --> 01:16:59.380
Once enter the realistic assumption of innate differences in talent, and the egalitarian leveling of wage rates to equal units of sacrifice, assuming, of course, that the latter could be measured, falls to the ground.

675
01:16:59.380 --> 01:17:14.380
As it is, Smith ran into considerable difficulty in explaining why prestigious occupations, far from earning low wages in the real world, actually earn higher wages than the average.

676
01:17:14.380 --> 01:17:24.380
When discussing the high income physician or attorney, for example, he lamely fell back on the implication that they were positions of great trust,

677
01:17:24.380 --> 01:17:33.380
and, therefore, presumably faced onerous and painful responsibilities to their clients and were compensated thereby.

678
01:17:33.380 --> 01:17:46.380
His other attempt to rationalize the high incomes of attorneys was to make the dubious assumption that the average income in such occupations was lower than in others,

679
01:17:46.380 --> 01:17:55.780
Since a flood of people are attracted by the glittering prizes of very high incomes, accruing to the few top people in the profession.

680
01:17:57.300 --> 01:18:10.500
Adam Smith, in addition, muddied the waters still further by putting forward, side by side with the labor cost theory of value, the very different labor command theory.

681
01:18:10.500 --> 01:18:26.500
The labor command theory states that the value of a good is determined not by the quantity of labor units contained in it, the labor theory of value, but by the amount of labor that can be purchased by the good.

682
01:18:26.500 --> 01:18:37.500
Thus, the value of any commodity to the person who possesses it is equal to the quantity of labor which it enables him to purchase or command.

683
01:18:37.500 --> 01:18:45.940
If in the real world the price of every commodity precisely equaled the amount of labor units

684
01:18:45.940 --> 01:18:53.060
contained in its production, then the two quantities, the labor cost and the labor command

685
01:18:53.060 --> 01:18:57.020
of a good, would indeed be identical.

686
01:18:57.020 --> 01:19:04.660
But if rents and profits, that is, interest, are included in cost, then the price or relative

687
01:19:04.660 --> 01:19:10.740
Purchasing power of each good would not be equal to the labor cost.

688
01:19:10.740 --> 01:19:16.180
Labor cost and labor command for each good would differ.

689
01:19:16.180 --> 01:19:22.220
In his typically purblind way, Adam Smith did not perceive the contradiction between

690
01:19:22.220 --> 01:19:28.060
these two labor theories in a world where rent and profits exist.

691
01:19:28.060 --> 01:19:33.080
As indeed, he did not seem to see the difference between the labor and the cost of production

692
01:19:33.080 --> 01:19:35.720
and Theories of Value.

693
01:19:35.720 --> 01:19:42.400
Ricardo was to see the problem and struggle with it in vain, while Marx tried to resolve

694
01:19:42.400 --> 01:19:50.160
it by his theory of surplus value going to the non-workers in the form of rent and profits,

695
01:19:50.160 --> 01:19:57.280
a theory that foundered on Marx's attempt to reconcile two contradictory propositions,

696
01:19:57.280 --> 01:20:04.360
The Labor Cost or Quantity of Labor Theory of Value and the Acknowledged Tendency Toward

697
01:20:04.360 --> 01:20:08.800
an Equalization of Profit Rates on the Market.

698
01:20:08.800 --> 01:20:16.160
For as we shall see further in the Treatment of Marx, chapters 9 through 13 in volume 2,

699
01:20:16.160 --> 01:20:22.360
the surplus value of profits out of labor should be greater in labor intensive than

700
01:20:22.360 --> 01:20:30.120
in Capital Intensive Industries, and yet profits tend to equalize everywhere.

701
01:20:30.120 --> 01:20:36.600
Paul Douglas, properly and with rare insight, noted that Marx was, in this matter, simply

702
01:20:36.600 --> 01:20:43.160
a Smithian-Ricardian trying to work out the theory of his masters.

703
01:20:43.160 --> 01:20:50.240
Marx has been berated by two generations of orthodox economists for his value theory.

704
01:20:50.240 --> 01:20:55.240
The most charitable of the critics have called him a fool, and the most severe have called

705
01:20:55.240 --> 01:21:01.480
him a knave for what they deem to be transparent contradictions of his theory.

706
01:21:01.480 --> 01:21:08.840
Curiously enough, these very critics generally commend Ricardo and Adam Smith very highly.

707
01:21:08.840 --> 01:21:15.680
Yet the sober facts are that Marx saw more clearly than any English economist the differences

708
01:21:15.680 --> 01:21:22.120
was between the labor cost and the labor command theories, and tried more earnestly than anyone

709
01:21:22.120 --> 01:21:28.840
else to solve the contradictions which the adoption of a labor cost theory inevitably

710
01:21:28.840 --> 01:21:30.320
entailed.

711
01:21:30.320 --> 01:21:36.200
He failed, of course, but with him Ricardo and Smith failed as well.

712
01:21:36.200 --> 01:21:42.280
The failure was a failure not of one man, but of a philosophy of value, and the roots

713
01:21:42.280 --> 01:21:49.160
Parts of the ultimate contradiction made manifest in the third volume of Das Kapital lie embedded

714
01:21:49.160 --> 01:21:54.320
in the first volume of The Wealth of Nations.

715
01:21:54.320 --> 01:22:00.760
Adam Smith also gave hostage to the later emergence of socialism by his repeatedly stated

716
01:22:00.760 --> 01:22:07.080
view that rent and profit are deductions from the produce of labor.

717
01:22:07.080 --> 01:22:13.840
In the primitive world, he opined, the whole produce of labor belongs to the laborer.

718
01:22:13.840 --> 01:22:21.240
But as soon as stock, capital, is accumulated, some will employ industrious people in order

719
01:22:21.240 --> 01:22:25.520
to make a profit by the sale of the materials.

720
01:22:25.520 --> 01:22:33.320
Smith indicates that the capitalist, the undertaker, reaps profits in return for the risk and for

721
01:22:33.320 --> 01:22:39.000
interest on the investment for maintaining the workers until the product is sold, so

722
01:22:39.000 --> 01:22:43.960
that the capitalist earns profit for important functions.

723
01:22:43.960 --> 01:22:50.140
He adds, however, that, in this state of things, the whole produce of labor does not always

724
01:22:50.140 --> 01:22:52.460
belong to the laborer.

725
01:22:52.460 --> 01:22:59.120
He must, in most cases, share it with the owner of the stock who employs him.

726
01:22:59.120 --> 01:23:06.120
By using such phrases and by not making clear why laborers might be happy to pay capitalists

727
01:23:06.120 --> 01:23:13.400
for their services, Smith left the door open for later socialists who would call for restructuring

728
01:23:13.400 --> 01:23:19.880
institutions so as to enable workers to capture their whole product.

729
01:23:19.880 --> 01:23:26.040
This hostage to socialism was aggravated by the fact that Smith, unlike the later Austrian

730
01:23:26.040 --> 01:23:33.120
in School did not demonstrate logically and step by step how industrious and thrifty people

731
01:23:33.120 --> 01:23:36.760
accumulate capital out of savings.

732
01:23:36.760 --> 01:23:43.400
He was content simply to begin with the alleged reality of a minority of wealthy capitalists

733
01:23:43.400 --> 01:23:51.800
in society, a reality which later socialists were, of course, not ready to endorse.

734
01:23:51.800 --> 01:23:59.120
Roth was even less kindly to the role of landlords, where he recognized no economic function whatever

735
01:23:59.120 --> 01:24:01.460
that they might perform.

736
01:24:01.460 --> 01:24:07.580
In pungent passages he writes that, as soon as the land of any country has all become

737
01:24:07.580 --> 01:24:14.520
private property, the landlords like to reap where they never sowed, and demand a rent

738
01:24:14.520 --> 01:24:17.600
even for its natural produce.

739
01:24:17.600 --> 01:24:24.080
And again, as soon as the land becomes private property, the landlord demands a share of

740
01:24:24.080 --> 01:24:30.160
almost all the produce which the laborer can either raise or collect from it.

741
01:24:30.160 --> 01:24:35.880
There is no hint of recognition here that the landlord performs the vital function of

742
01:24:35.880 --> 01:24:39.960
allocating the land to its most productive use.

743
01:24:39.960 --> 01:24:47.580
Instead, these passages were to become understandable red meat for socialists and for Henry Georgists

744
01:24:47.580 --> 01:24:51.680
in Calls for the Nationalizing of Land.

745
01:24:51.680 --> 01:24:58.040
As we shall see further below, Smith's labor theory of value did inspire a number of English

746
01:24:58.040 --> 01:25:06.480
socialists before Marx, generally named Ricardian but actually Smithian socialists, who decided

747
01:25:06.480 --> 01:25:12.840
that if labor produced the whole product and rent and profit are deductions from labor's

748
01:25:12.840 --> 01:25:19.080
Produce, then the entire value of the product should rightfully go to its creators, the

749
01:25:19.080 --> 01:25:20.960
laborers.

750
01:25:20.960 --> 01:25:27.280
Douglas justly concluded that it is then from the Whiggish Pages of the Wealth of Nations

751
01:25:27.280 --> 01:25:33.160
that the doctrines of the English Socialists, as well as the theoretical exposition of Karl

752
01:25:33.160 --> 01:25:35.720
Marx, spring.

753
01:25:35.720 --> 01:25:41.640
The history of social thought furnishes many instances where theories elaborated by one

754
01:25:41.640 --> 01:25:48.100
Modern writers have been taken over by others to justify social doctrines antagonistic to

755
01:25:48.100 --> 01:25:53.160
those to which the promulgator of the theory gave adherence.

756
01:25:53.160 --> 01:25:59.360
But had the gift of pre-vision been granted to those men, few would have been more startled

757
01:25:59.360 --> 01:26:09.140
than Adam Smith in seeing himself as the theoretical founder of the doctrines of 19th century socialism.

758
01:26:09.140 --> 01:26:16.440
Human writers have tried to salvage the unsalvageable labor theory of value of Adam Smith by asserting

759
01:26:16.440 --> 01:26:22.480
that in a sense he did not really mean what he was saying, but was instead seeking to

760
01:26:22.480 --> 01:26:29.700
find an invariable standard by which he could measure value and wealth over time.

761
01:26:29.700 --> 01:26:35.660
But to the extent that this search was true, Smith simply added another fallacy on top

762
01:26:35.660 --> 01:26:37.560
of all the others.

763
01:26:37.560 --> 01:26:45.080
For since value is subjective to each individual, there is no invariant measure or yardstick

764
01:26:45.080 --> 01:26:51.900
of value, and any attempts to discover them can, at best, distort the enterprise of economic

765
01:26:51.900 --> 01:26:56.960
theory and send it off chasing an impossible chimera.

766
01:26:56.960 --> 01:27:04.880
At worst, the entire structure of economic theory is permeated with fallacy and error.

767
01:27:04.880 --> 01:27:27.680
Professors Robertson and Taylor, indeed, go so far as to call the admitted failure of Adam Smith a grand and noble failure, and one which they assert to be far more inspiring in its essential bankruptcy than if Adam Smith had continued in the subjective value tradition of his forebears.

768
01:27:27.680 --> 01:27:33.500
In a bizarre passage, Robertson and Taylor acknowledge the correctness of Professor Cowder's

769
01:27:33.500 --> 01:27:41.380
anguished critique of Smith as leading economic theory into a century-long blind alley.

770
01:27:41.380 --> 01:27:46.360
But they still laud Smith for his very failure.

771
01:27:46.360 --> 01:27:52.240
If a true explanation is given here of the reasons for Adam Smith turning from scarcity

772
01:27:52.240 --> 01:27:56.440
and Utility to a Labor Theory of Value.

773
01:27:56.440 --> 01:28:03.080
Did he not, in fact, do more for the progress of economics by a grand failure in an impossible

774
01:28:03.080 --> 01:28:05.400
but fundamental task?

775
01:28:05.400 --> 01:28:11.400
Then he would have done, had he been content to add a seventh rung, or even to strengthen

776
01:28:11.400 --> 01:28:17.480
some of the existing steps in the rickety ladder of subjective value theory?

777
01:28:17.480 --> 01:28:23.800
Such as, according to Dr. Couter, it appeared in 1776.

778
01:28:23.800 --> 01:28:30.640
Is it hopelessly banal to counter that truth is always superior to fundamental error in

779
01:28:30.640 --> 01:28:34.440
advancing a scientific discipline?

780
01:28:34.440 --> 01:28:40.240
There is a more fundamental and convincing reason for Adam Smith's throwing over centuries

781
01:28:40.240 --> 01:28:46.960
of sound economic analysis, his abandonment of utility and scarcity, and his turn to the

782
01:28:46.960 --> 01:28:51.440
the erroneous and pernicious labor theory of value.

783
01:28:51.440 --> 01:28:57.360
This is the same reason that Smith dwelled on the fallacious doctrine of productive versus

784
01:28:57.360 --> 01:28:59.680
unproductive labor.

785
01:28:59.680 --> 01:29:06.600
It is the explanation stressed by Amell Couter and partially by Paul Douglas, Adam Smith's

786
01:29:06.600 --> 01:29:09.040
dour Calvinism.

787
01:29:09.040 --> 01:29:15.280
It is Calvinism that scorns man's consumption and pleasure and stresses the importance of

788
01:29:15.280 --> 01:29:18.640
of Labor virtually for its own sake.

789
01:29:18.640 --> 01:29:25.080
It is the dour Calvinist who made the extravagant statement that diamonds had scarce any value

790
01:29:25.080 --> 01:29:26.800
in use.

791
01:29:26.800 --> 01:29:32.360
And perhaps it is also the dour Calvinist who scorned, in the words of Robertson and

792
01:29:32.360 --> 01:29:40.720
Taylor, real world market values which depended on monetary whims and fashions on the market,

793
01:29:40.720 --> 01:29:47.600
turned his attention instead to the long-run price, where such fripperies played no part,

794
01:29:47.600 --> 01:29:55.560
and the grim eternal verities of labor toil seemingly played the decisive economic role.

795
01:29:55.560 --> 01:30:02.320
Surely this is a far more realistic view of Adam Smith than the quixotic romantic in quest

796
01:30:02.320 --> 01:30:07.480
of the impossible dream of an invariable measure of value.

797
01:30:07.480 --> 01:30:14.320
And while Smith's most famous follower, David Ricardo, was not a Calvinist, his leading

798
01:30:14.320 --> 01:30:21.400
immediate disciple, Dugald Stewart, was a Scottish Presbyterian, and the leading Ricardians,

799
01:30:21.400 --> 01:30:27.800
John R. McCullough and James Mill, were both Scottish and educated in Dugald Stewart's

800
01:30:27.800 --> 01:30:30.500
University of Edinburgh.

801
01:30:30.500 --> 01:30:37.100
The Calvinist connection continued to dominate British, and hence classical, economics.