1776: The Ideas that Made the Modern World, Part 9: The Nature and Causes of Wealth

Episode Topic: The Nature and Causes of Wealth

What are the fundamental mechanics behind global prosperity? Navigate the intellectual landscape of 1776 to witness how revolutionary ideas birthed modern economics.

Featured Speakers:

• James Otteson, University of Notre Dame

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This podcast is a part of the ThinkND Series titled 1776: The Ideas that Made the Modern World.

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Transcript

Welcome

Speaker 0:08

Well, ladies and gentlemen, welcome back We've had a bit of a, uh, gap. Hope you had a good break in whatever else you did in the last few weeks. In case you've forgotten, let me reintroduce myself. Good to see you, Father Bill. Thank you for coming. Um, let me reintroduce myself. My name is James Otteson. I'm a professor of business ethics in the Mendoza College of Business. I'm also honored to serve as the Business Honors Program faculty director. Welcome to the second half of our course, where we're gonna talk about Adam Smith. So we talked about the Declaration of Independence. The course is called... Let me go back to that, "1776: The Ideas That Made the Modern World." Well, one of those ideas that has made the modern world is, uh, we derive from the Declaration of Independence. What I'd like to do starting today is talk about a second set of ideas, this from Adam Smith. So also in 1776, we had the publication of The Wealth of Nations. We just missed it. It was on March ninth, uh, was the actual day on which the, um, the two hundred and fiftieth happened just a couple of weeks ago. Um, and what we're gonna talk about today is that book, and I get three sessions, three one-hour sessions, to cover a one thousand-page book, so we're gonna march. You guys ready to march? We're gonna go through a lot of stuff today. I gave you just a few readings, just a f- the number of pages wasn't very much for today, uh, but there's a lot of ideas in this. We're gonna talk about a lot of ideas. And the motivating part of it is, um, why should we care about something that some Scottish philosopher wrote two hundred and fifty years ago? Well, historically speaking, that book has had an enormous amount of influence, so that's one reason. If we wanna understand much of what goes on in the modern world with regard to what we would call or what he called political economy, what we might think of as political and economic policy, well, a lot of it got its start in, uh, in the eighteenth century from Adam Smith. So whatever we think about that policy, that's where a lot of it got its start. So just to understand the modern world, I think it's important to know what, um, what Smith had to say about it. But I'm also gonna try to make an argument by the end of the third week we have together, so Tues- this Tuesday, and then we have two more. By the end of that, I wanna try to make an argument that the two things we talked about in this course, the Declaration and some of the other aspects of the, uh, founding documents and what we get from The Wealth of Nations, actually do integrate in an interesting way and maybe have, um, in two, come together to influence a lot of what we see today, including everything from economic policy to political policy, um, to some of our moral sentiments. So that'll be the argument I'm gonna try to make. But today, we wanna talk about the, um, The Wealth of Nations. First, let me tell you a little bit about who Adam Smith was if you didn't know. So he lived during a time of remarkable human achievement. Interestingly enough, maybe surprisingly enough, a lot of the great innovations that were being made am- along many margins of human, uh, inquiry were happening in, of all places, Scotland. Now, that's a very strange thing. If you know anything about the history of Scotland, if you know what was going on in the seventeenth century, the sixteenth century, the fif- 15th century, you might not have predicted that there would be a lot of great learning going on in the 18th century in Scotland, but there was. And here are some of the areas in which the leading thinkers were all in this tiny little country of Scotland. Um, and much of the, um, what we think of as the beginnings of, uh, things like geology, innovations in chemistry, medicine, all happening in Scotland. Um, we call this period roughly 1710 to 1790 or so in Scotland. We now call it the Scottish Enlightenment. But the figures, the leading figures, the luminaries of the time also had a sense that this was the place to be. This was the intellectual hotbed they thought of themselves and sometimes even called it, um, their, their little town of Edinburgh, they called it North Athens. It was the re- the reinvention of what was going on in the Golden Age of Athens, and that's what they thought of themselves as doing. Two of the luminaries, two of the stars in the constellation of stars of the Scottish Enlightenment were David Hume, perhaps the, um, greatest English-speaking philosopher, one of my personal philos- philosophical heroes, um, and of course, Adam Smith. Interestingly enough, they were both personal friends. Uh, Hume was a little bit older than Adam Smith, but they, uh, came to know each other, spent a lot of time together, and really developed their ideas, um, to a certain extent in tandem with one another So what was Smith?

Economics Before Economics

Speaker 4:38

Well, Smith was, is often referred to as the father of economics. He's sometimes called the father of capitalism, uh, but that's a bit of a misnomer, not only because the word capitalism has a lot of baggage that probably doesn't apply to Adam Smith, but also because that word was never used in the 18th century by anybody, including Adam Smith. So the word capitalism, capitalist, n-neither of those words appear anywhere in Smith's works. Smith talked about capital. He talked about capitals. These are things you might own or save or invest. You have capital, not capitalism. That was a term that was developed in the subsequent century. Does anybody wanna take a guess who was the figure who really popularized that term? Yes, go ahead. Karl Marx. That was used as a term of denigration to those people like Adam Smith who were talking about capital. So he was, uh, so if you wanna call him the father of anything, maybe the father of economics, I think that's a fair thing to call him. There was no discipline of economics in the 18th century. There weren't really-- There were people who had talked about economic things, but if we wanna think about economics as a discipline today, where it got its beginning, there probably isn't any better s-source to look at than Adam Smith's Wealth of Nations. I think of him more as a father of social science. So economics got separated out as a, as its own independent discipline later in the 19th century. Um, what Smith was really trying to understand is human social behavior. Can we approach and understand the way humans behave the way, for example, Newton was trying in a previous century to understand the motion of very disparate kinds of objects? So Newton was looking at the motion of things in the, um, in, on the Earth and things in the heaven, trying, heavens, trying to describe them with a few simple rules. Smith and everybody else was very impressed with his achievements with, uh, at, uh, at trying to account for mu-- uh, greatly disparate, uh, data with just a few rules, uh, regularities. Smith, Hume, and some others, but we'll focus on Smith, tried to see if we could have what they called a science of man. Could we understand human behavior in the same sort of way? View it empirically, maybe measure it, maybe come up with rules and protocols we could make recommendations or predictions. His official title was Professor of Moral Philosophy. That's what he was called. Um, not a professor of economics. There was no such thing, no such title at the time. Uh, but professor of moral philosophy just means there were only two kinds of professors in Scotland, in the British Kingdom, um, the United Kingdom. Uh, at the time, you were either a professor of moral philosophy or a professor of natural philosophy. That was it. Those were the only two categories. Newton was a professor of natural philosophy. N- the professors of natural philosophy studied all the things in the natural world. Professors of moral philosophy studied everything having to do with human beings and human behavior. He was a professor of moral philosophy. Here's an interesting fact before we move on to the actual text. He was read by the American founders. So The Wealth of Nations was in the libraries of Washington, Jefferson, Franklin, Madison. They all had that book, which is interesting. So I'll leave to you to think about to what extent you think, um, there might have actually been some influence. We know they had the book. They were reading it, um, and they were talking about it Okay, so why should we read Adam Smith today? And I suppose I should make a case for this. Um, you re-recall from the very first day when I made my little introduction for just a few minutes, I showed you that. Do you remember that? I want you to never forget that. Um, so what did we have for thousands of years? We had a whole lot of nothing, and then all of a sudden something spectacular happened. So I won't give you all of the data. I call this the hockey stick of prosperity. Um, now you might notice about when in human history did that uptick begin. Now you just think about that and see if there might be some connection to the topic of this course This is just the last two hundred years, and this is per capita now. So now you see the per capita increase. So again, it's quite precipitant, and I give you some of the numbers. Interestingly, you may have heard that someone named, uh, Paul Ehrlich died recently. Maybe you've heard of him, the population bomb. Um, so one of the-- I point this out not only because he died. He was a very influential American, uh, scientist, appeared on Johnny Car-- Who's old enough to remember Johnny Carson? Okay, Dennis, yeah, okay. Uh, he appeared on Johnny Carson, I don't know, a dozen times or twenty times, something unbelievable, Stanford ecologist. Uh, but, uh, Paul Ehrlich was one of many people who argued that, uh, growth in population was inversely correlated with prosperity. More people, less prosperity because human beings consume more things. So the more human beings you have, the more consumption of resources you have. So you shouldn't have what we see there, which is the increase of prosperity happening at the same time that population is increasing. That's an interesting thing just to keep in mind. So something big happened. Human beings have been on the planet for approximately two hundred and fifty thousand years. As far as we can tell, there was absolutely no economic growth whatsoever for hundreds of thousands of years. And then in just the last tiny little sliver, we had a lot. So here are a couple of questions, and I said these on the very first day, so I'll just repeat them now before we turn to Adam Smith's text. Something happened. What is it? What happened? That's the first question. Related to that is why did it happen so dramatically and so recently? So if you have an idea, and maybe some of you do, what might help explain that uptick, one of the questions I would challenge you to think about is whatever you have in mind, whatever it is you would identify as some elements that played a role, why didn't those same things happen earlier in human history? Why didn't they happen elsewhere on the planet? Why did it begin? Why did wealth begin increasing only when it did and only where it did, as opposed to any other time that there had been anatomically modern human beings for a very long time on our, on our planet? Then one philosophical question, if you'll indulge me. Is money the only thing that matters? What's the answer to that question? Oh, I see some of you nodding, yes. Okay, well, that's not what I was anticipating. What's the answer to that question Can we all answer that together? Is money the only thing that matters? No. Okay, thank you very much. Well, that's certainly my, uh, my answer to that question. But here's an argument I would make that, uh, for your consideration. Money's not the only thing that matters, but what money can do or what wealth can do is enable us to pursue the things that do matter in life. If we're desperately poor, if we aren't sure whether we can eat today or whether our children can eat today, then we're not thinking about, well, where are we gonna go on vacation, or am I gonna write the great American novel, or are my kids gonna go to Notre Dame? We're thinking about, can we eat today? So what wealth can do is enable us to address the more pressing basic needs of human life so that we can begin to turn our attention to the progressively more important things that go into making out a flourishing life of meaning and purpose. So wealth isn't the only thing, but it's a pretty important thing. Okay, so let's turn to the book. An inquiry note the full title, An Inquiry into the Nature and Wealth, uh, and, uh, Causes of the Wealth of Nations. It's often called just The Wealth of Nations, but I would like you to note the full title because the other parts of it are important. An inquiry into the nature, first of all. What actually constitutes wealth? Smith is giving us a theory about what wealth really is. And then what are the causes? Why is there wealth in some places? What enables it or causes it to rise? Why do some pl-- are some places getting wealthier, some places are stagnating, other places are declining? He wants to know. Okay, a couple of facts about the book itself. So I mentioned it is I think I mentioned, it's his second book. So he wrote a book, an earlier book called The Theory of Moral Sentiments, which came out in 1759. This book came out in what year? 1776. Okay, you pass for today. You get your gold star. It's about 1,000 pages, all written by hand. I mean, remember, he's writing in the 17-- in the 18th century. No computers, no internet, no electricity. Um, imagine trying to write a book like that by hand. How long did it take him? Well, we know that he was working on it for at least 20 years. He might have been l- working on it longer than that. The final six years leading up to the publication of it, he was in virtual seclusion. So he's preparing for over 20 years. Last six years, he became something of a hermit. Wouldn't see people. Not even his friend, David Hume, would he see very often. They couldn't get him out, and all sorts of weird stories. Maybe you can hear them. If you don't-- If you've heard them or if you wanna look and all, you can. All these weird stories about him suddenly appearing outside of his quarters in his dressing gown and not knowing where he was and because he was basically going crazy trying to finish this book. In 1774, he wrote a, uh, a letter to his friend, David Hume, and he said, "I, I don't think I can do it. I think I ca-- I just can't complete it. It's exhausted me. I have nothing left. I can't bring this thing to fruition." And Hume encouraged him and said, "No, you're basically already done. Why don't you just end it now and just turn it into the publisher?" And he said, "Well, I can't do that. All right, I'll work on it a little more." So he worked on it a little more. It finally got published in 1776.

How Smith Built Evidence

Speaker 14:12

Why would we call it the beginning of economics? Well, imagine this kind of methodology. If you're a student of economics or you know something about economics, this might seem really obvious to you. Wasn't obvious in the 18th century. We wanna try to figure out why some places are getting wealthy and other places aren't. What Smith thought was, "Well, maybe we could do a little historical investigation." Suppose I could get, I, Adam Smith, could get, let's say, the production of wheat in the northern region of France for every year for the last ten years or hundred years or five hundred years. Suppose I could get that. How many bushels? Some years it's up, some years it's down, but I get all of that. Now, what I wanna do is look at what kinds of laws are in place regarding things like currency, trade And let's see if there's any correlation. What are the laws that are in place when the, um, when you see the, uh, the bushels, the production going up? What are the laws that are in place when the production's going down? Okay, so that's interesting. Suppose you see that there are some correlations. Now let's look at other goods throughout all of France. Let's see if we can get all of that. Now let's do the same thing for Germany. We'll do the same thing for Italy, for Spain, for Portugal, for England, Wales, Scotland. Let's see if we can get information about India. Think about what it would take to get information about India. Let's get information about China. Smith got information about China. Didn't speak Chinese. There were no phones. How do you think he got that information? I mean, the short-- I'll tell, I'll let you in on a secret. What he did was, he didn't know anybody there, so what he did was he went to Glasgow, which was the port city of Scotland, and he wrote lots of letters, and the letters said, "Dear Sir," in English, "Dear Sir, could you please provide me with the following information?" And he just listed a bunch of questions. Sincerely, Adam Smith. Gave it to the captains of merchant ships and said, "If you go to China, give this to somebody." And that's what they did. So they took hundreds of these letters and just took them away, and he would wait months, years. Most of the time he got nothing back, but occasionally he'd get something back because a letter would go to somebody, who-- to somebody else, to somebody else. Somebody would be able to read it. Somebody knew somebody who had some information. They would fill it out and write him a letter, and it would come back. Eighteen months later, he'd get a letter back. So he got information about all of these European countries, about India, about China, and he also had some information, early information, about the American colonies. Okay, so once you start getting all this information, now, if there are patterns, that begins to look interesting. If production goes up when the same kinds of laws are in place, that begins to look like you're onto something. If production goes down when certain kinds of laws are in place, again, it look, begins to look like you're onto something, and that's what he found. So the conclusions he gives to his argument, what we get at the beginning of The Wealth of Nations, it's a thousand pages, but he thankfully put all this, most of his conclusions at the beginning of the book, so you don't have to read the entire thing, are based on what he thought were the very robust patterns that c- that he discovered that kept getting repeated again and again, country after country, year after year, century after century. So that means that this is an empirical argument. When you were reading that little excerpt that you had from Adam Smith, did you notice that he didn't talk about natural law, natural rights? He doesn't talk about our right to property. There's no a priori principle about what we ought to be entit- we're entitled to our bodies and to what we mix our labor with or anything like that. There's nothing like that. What he's interested to know is what works. This is the empirical thrust of what would become economics. Let's look at the data, see if we can infer some principles, maybe make some predictions, test the predictions against future data, refine our predictions and principles over time, and if we get something robust that seems to be happening or repeating again and again, then it seems we're onto something. That's what he was doing Again, if that seems obvious to you, he was probably the first person to do anything like that. So if you're learning something like that in your history of economic thought or history of economics or in your microeconomics principles, you can thank Adam Smith. So what was the goal of the overall book? It was this, alleviation of poverty. Poverty was a great, um, afflicter of human well-being. Still is to some extent, not nearly as bad as it was in the 18th century. Um, but Smith thought that this was something of a moral mandate. If we can figure out how to enable more and more people to rise out of the miseries of poverty, then we ought to do so. That's what he was interested in. Wasn't interested in figuring out how to let kings and the barons and the lords get more, and the pharaohs and the emperors get more money. They figure out a way to get theirs on their own. He was interested in raising the overall prosperity for the enti- for an entire country or for an entire people. And what would the antidote to poverty be? Note the title of the book. The book is not an inquiry into the nature and causes of the poverty of nations. Why not? Maybe you have an idea about this. Why isn't it an, uh, an inquiry into poverty? Well, maybe you have your own views about this. What's Smith's view? Smith's view is that's a really easy one. We don't need to study that. What do you have to do to be poor? If you wanna have a poor, if you wanna be poor, if you wanna have a poor country, what do you have to do? Literally nothing. You sit still and do nothing, you will be poor. That's not the, that's not the hard thing to explain. The hard thing to explain is how did wealth ever get created? How can more wealth be created? That's the hard thing. So what's the antidote to poverty? Prosperity. Wealth. That's why he called it that Okay, so what are the questions we would like to address? I showed you that hockey stick, so two Smithian questions I'd like to talk about today are these: What explains this hockey stick of prosperity? And can we get more of it? And as I mentioned, for Smith, these are not just empirical questions or of historical curiosity. These are moral questions because poverty is a difficult thing. Poverty creates, real poverty, creates miseries for human beings, and it has historically meant that many human beings live at the level of subsistence and probably don't live for very long. Many of them-- He did some field work. He said that the women in the highlands of Scotland would often have between twenty and thirty pregnancies, and they might get two of them to make it to adulthood. That's poverty. So it was not uncommon for families, clans in the highlands, to have to decide when they have children, which of their children to expose so that the other ones can eat. That's the poverty he's addressing. That's what he's thinking about. If we can figure out a way to enable people to rise out of that level of poverty, then we morally ought to do so. So these weren't just empirical questions for him or of historical curiosity. Okay, so Smith's answer to the first question. The first question is, what explains it? The rise of commercial enterprise. Can we get any more of it? Yes, and I'll tell you how. That's what the book is about. So that's the explanation and telling you how to get more of it. So let me back up for a second. Do you know what the answer to this is? You know, if we had an essay test right now and you had to write an essay about this, this is the kind of question that seems obvious until you start to think about it. The minute you start to think about it, it's a little bit more difficult. Where does wealth come from? It's a much more challenging question than you might initially think, because one way you might think about wealth is, well, if somebody has something and you take it, well, you become wealthier. But where did it come from in the first place? Where does prosperity get generated? How does it get generated in the first place? Not as easy to answer that question as you might initially think. And with apologies to Professor Munoz and the founders, I have this, well, it's the ve- the venerable Benjamin Franklin. Can you see that? Franklin said in 1769, uh, "There seem to be but three ways for a nation to acquire wealth. The first is by war, as the Romans did in plundering their conquered neighbors." This is robbery The second is by commerce, which is generally cheating. The third, by agriculture, the only honest way wherein a man receives a real increase of the seed thrown into the ground in a kind of continual miracle wrought by the hand of God and His favor as a reward for his innocent life and virtuous industry. That was a very common view. Why do people or did people look down on traders, on people engaged in commerce? Because they thought it was cheating. How is it possible that you buy from one person and sell to another person, it's the same good, and yet you make a profit? How did that happen? Seems a little like alchemy. So what exactly is wealth? I asked how wealth is created. What exactly is wealth? Well, here is the answer in the thir- in the 18th century. Uh, that's AI's imagination of King George III. What did everybody think wealth was? Wealth was gold. That's what melth- wealth was. In fact, the, the consensus theory about wealth was what's now called mercantilism. The more gold, the more wealth. The less gold, the less wealth. That was it. So to become wealthy meant to actually have physical gold. Not what you could do with the gold, but to have the physical gold. Now imagine for a second that you had that theory, that that was your view of what gold was. What kind of trade policy would you have if you were the king? Well, what do you wanna ha- You want your country to be wealthy, so you want gold to come in, but not to go out. What does the King of France want? Same thing. Gold to come in, not to go out. So what does the King of Britain wanna do? Well, we want, um, everybody to buy our goods, and we want us to buy none of anybody else's goods. So what do we do? We put trade barriers up, tariffs on foreign goods, which makes it more expensive to buy goods from others. Well, the same thing is going on in France and every other country in Europe. So what do you have? You have all these little fiefdoms of anti-trade, where nobody is trading with anybody because everybody's trying to hoard gold. Well, here's one of Smith's big innovations. Gold is not wealth. It's not wealth. Gold can do a lot of stuff. You can't eat it. You can't make a dress out of it, I don't think. I don't know. Somebody probably can. Um, what the, is the actual utility of gold? Gold itself is not wealth. So there are things it can do. It can allow you to trade. It can be y- it can be a store of a, of value, a unit of account. All of those things are true, but it itself is not wealth. Here's his definition of wealth. Every man is rich or poor according to the degree to which he can fi- he can afford the necessaries, conveniencies, and amusements of human life. That's the definition of wealth. What's the relation between that and gold? Well, gold can enable transactions, exchanges, partnerships, accounting so that people can ach- achieve more of the necessaries and conveniences, et cetera, of life. The gold is a tool. It's a token. It enables trade. It can facilitate transactions, but it is not itself wealth, and here's a little thought experiment we get from, um, both Hume and Adam Smith. Suppose we overnight doubled our, the amount of gold we had in our country. Would we then become twice as rich? No. Um, this is a very hard thing for people to understand. When both, uh, H- David Hume wrote about this and Adam Smith wrote about it. Um, if you had, if we had twice as much gold in the United States tomorrow as we do today, would we be twice as rich? No. If that were our currency, no, we wouldn't be because what would happen to prices? You probably know. They would go up, too. So you would... There might be a time lag, but eventually, you, it would just go right up to the level you had before so the, the actual goods you had would just double in pr- or the, the prices of goods would just double in terms of the currency. So the level of currency itself is not the wealth. The stuff you wanna get with the currency, that's the wealth.

Wealth As Human Ingenuity

Speaker 26:54

The stuff you wanna do with it, that's the wealth So where does it come from? Couple other myths that Smith wants to dispel. It doesn't happen by magic Doesn't happen just naturally, and I wanna emphasize this. Natural resources are not really resources, Smith thinks. Why aren't they resources? What did God give us? Abundance, a lot of stuff, not resources. Think about that black tar-like substance that's under the sands of Saudi Arabia and under, um, West Texas. That's been there an awfully long time, hasn't it? When did that become a resource? It was there a long time before humans were there. When did it become a resource? When human beings figured out something to do with it. That's when it becomes a resource. So where does wealth come from? It must be produced by human beings. God gives us abundance. God gives us plenty, yes, but n- we can't do anything with it until somebody does something with it. So what's the necessary ingredient? Human beings have to do something with it. What's the really important resource, maybe the ultimate resource? Human beings, human ingenuity. What human beings can figure out, that's the number one natural resource. So how does that work exactly? Here is Smith, and now we finally get to your actual reading Recognize that picture? What's that a picture of? That is a Go ahead, boys, guys. What is it? It's a pin factory. Smith's very famous example. Okay, so what's the answer to how we get more wealth? Imagine you were writing this book in the 18th century, there might be any number of things you might consider. Maybe as you're write- thinking about it now, if you hadn't thought about it before, what are the things you might think might help distinguish why some places get wealthy and other places don't? You might think of, well, geography, climate, et cetera. Um, what's the natural flora and fauna? Might be any number of other things you might consider. Well, Smith considered all of those, and he thought, turns out those don't actually cause wealth. Why not? Because it's human beings who cause wealth, not those things. If we have those kinds of things, favorable things, then human beings might be able to do more with them. But without them, you still get no wealth. So think about in your own, in your own minds, what you know now about the world. Are there places in the world today that are rich in natural resources but are actually poor? Sure. Are there some places that are poor in natural resources but are actually rich? Yes. What's the difference? So that, to Smith, means, okay, that can't be the determining factor. Same thing with geography. Are there some places that have very favorable geography but are nevertheless poor? Yes. Are there some places that don't have very good geography and are nevertheless rich? Yes. That can't be it either. So what could it be? What's the big answer? He worked for 20 years thinking about this. What's the big answer? It's the title of the first chapter of the first book of The Wealth of Nations. What is it? You have it in front of you. What is it? What's the big answer? Gotta turn the page. Somebody tell us Dope. We met, we didn't read the title of the chapter. It is, dun, dun, dun, The Division of Labor Doesn't that seem kind of underwhel- underwhelming? Really? That's it? Smith says, "Yep, that's it." You wanna know what will lead to universal opulence. So opulence in the 18th century just meant wealth. Um, now it has a kind of negative connotation that it didn't have for Adam Smith. Universal opulence just means general plenty, general wealth. Smith's answer to how do we get it is not any of those things, geography, climate, et cetera. It's division of labor. Okay. How is that supposed to work? And we get this very famous example, and it is extremely famous. People have been talking about it ever since, for approximately 250 years. He gives an example of a pin factory. So this is a real thing, so think about it for e- you know, pins are these things you get when you buy a shirt or something. What do you do when you get, buy a shirt and you get pins in it? What do you do with the pins? I'll bet you just throw them away. Do you just throw them away? Yeah, it's a useless sort of thing. In the 18th century, that was a luxury item. Very few people had pins. Who had pins? The king. The king had pins. Everybody else, not so much. Why? Because it took an enormous amount of human labor to produce one pin. So Smith does a little field work for us, and he gives us the data right at the beginning, the numbers. How many pins can a person, can a single worker make in a day? Well, he says most of them will make about one. It'll take you a full day to make one pin. You gotta pull the wire, cut the wire, straighten the wire. I mean, remember, pins have to be approximately the same size. You have to sharpen one end, put the head on the other to make them all relatively similar. If you're a normal worker, it'll take, you'll make about one a day. That's a lot of labor to go into a single pin. Smith says if you're pretty good, if you're experienced, if you're an experienced worker, you might make 10 a day. Okay. If you're a master craftsman, the best that exists in the British Empire, how many might you make? 20. So how many could you make? Maybe 20. Okay, but suppose you had a pin factory like this, and this is a plate taken from Diderot's encyclopedia, which was created around the same time. This actually articulates many of the different operations that went on in an 18th century pin factory. You see the fire in the back. You see... I don't know what these guys are doing exactly. Somebody's-- Well, whatever. I don't know exactly what those are. Smith articulates about 10 different operations. He says some, some of these shops will have up to 20 different operations. Some of them only have 10. So you have, uh, one person who's firing the metal, one person who's pulling the wire, one person who's cutting, straightening, et cetera. How many pins can a 10-person shop make if they divide the labor? Okay, here's the big reveal. So if we had 10 people doing it all, um, from start to finish by themselves, the most you could hope for is 20 times 10, 200 a, a day. How many do you get if you have 10 people dividing the labor? 48,000 That's not a small increase. That's a huge increase, 48,000. Does anybody wanna do the math? Not you guys who've been in my Y business class. Anybody wanna do that? But what's the percentage increase that is? How about a finance student who can crank this out in your head right now? What's the percentage increase Dean Kremers? Just kidding. I won't put you on the spot. I'm sorry. That's a 23,900% increase Remember, you have to subtract the 200, the 200 from the 48,000. That's a 23,900% increase. That's a huge increase. Now Smith-- Now maybe you think maybe he was off, you know, he didn't get, get the numbers right. Even if he's off by half, it's still a huge increase. So it's a tremendous increase. Okay, so what does that mean? This little example, he himself calls it a trifling example. It's a silly thing, pins, maybe you think it's trifling. This is emblematic, he thinks, of what can go on in every industry in a commercial society. Wherever there's division of labor in any, in the production of any good, any product, you can get a similar or some kind of dramatic increase like this. And when you understand this, now you begin to understand what it takes to increase prosperity. Okay, why do you get such a big increase? Three reasons, he says. These are the three reasons. One is because the more anybody-- the more you work on any one thing, the better at it you get. That's true for basically anything. Playing the piano, shooting a free throw, making the head of a pin. The more you do it, the better you get at it. You just develop a skill. That's the first thing. Second thing is, and this is particularly important in this digital age when we stop to check our instant messages and our reels, et cetera, you save time when you focus on just one thing and don't let yourself be distracted. Think how much time you lose when you switch from doing the homework for one class, and you're going to study for another class, and in between, you check your reels, or maybe you see what your friends are doing, or your instant messages. It's only ten minutes, right? And then you look, and it's actually ninety minutes you lost. Add that up over the course of a day, over the course of a week, a month, a year. How much time is that? A lot. So when you're focused for a long period of time, for an extended period of time on one task, you don't get distracted, you save time. And then finally, he thought, this was really the most important, that's why I made it bold. The most important factor is that when you're doing something over and over again, especially if you have expectations, somebody says, "I need four thousand pins out of you," you're gonna figure out new ways to do it that are better. You're incentivized to figure out some new way to do it, because you're constantly thinking about, "Can I save my energy? Can I save time? I'd really rather be doing something else. I'm gonna figure out, come up with some new way to do it." So who are the people Smith thought actually came up with new inventions, new machinery, who came up with innovations? It was the people actually doing the work. Not the people who are imagining, the engineers who are constructing the idea. It's the people actually doing the work. They come up with new ways of doing things. Put those three things together, and what do you get? Here's the recipe. You ready for the secret? Here's the secret recipe. If you want your country to be wealthy, here's what you do. Step one is you allow the division of labor. Okay, what happens if you allow the division of labor? What happens to production? As we see from the pin example, what happens to the production of whatever it is you're making? What does it do? You point it for me. What does it do? It goes up. Production goes up. Okay, what's step three? What happens to prices? What happens to the price per unit, other things being equal, for whatever it is you're making? Think about the prices of pins if you're go- making 20 a day as opposed to 48,000 a day, or 200 a day versus 48,000. What's gonna happen to those price of pins? I can see many of you pointing in this right direction. Prices are gonna go down And if prices go down, ladies and gentlemen, and as this process gets repeated in different industries with different products throughout an economy, what happens to the overall standard of living of your society? Which direction does it go? It goes up 10 paragraphs in to the thousand-page-long book, we get the conclusion. We get the summary of it. Here it is. I'm showing you. This is the magic. "The great multiplication of the productions of all the different arts, in consequence of the division of labor, which occasions in a well-governed society that universal opulence which extends itself to the lowest ranks of the people."

Who Benefits Most

Speaker 38:08

Before I continue, who is he most concerned about? Enabling the wealthy to become wealthier? Extends itself to the lowest ranks of the people. "Every workman has a great quantity of his own work to dispose of." I can't use 48,000 p- pins a day. What am I gonna do with them? "To dispose of beyond what he himself has occasion for, and every other workman being in exactly the same situation, he's enabled to exchange a great quantity of his own goods for a great quantity of theirs. He supplies them abundantly with what they..." Them meaning c- customers, consumers, people who want or need pins. "Abundantly with what they have occasion for. They accommodate him as amply with what he has occasion for, and a general plenty suf- diffuses itself throughout all the different ranks of society." 10 paragraphs into the book, we get the conclusion. That's it. So if you understand there are various pieces of that, so I invite you to go back and look at that text again, and you see the various pieces. Notice that he says, "A well-governed society." What's a well-governed society? Oh, okay, we'll come back to that. Only happens in a well-governed society. If it's not well-governed, this isn't gonna happen. Universal opulence, and down at the bottom, general plenty, I think those are interchangeable terms for him. He's thinking about expanding wealth for more and more people. Who are the primary beneficiaries of this process? As the price of pins comes down, who gets to afford them? Poorer people. Poorer people can afford more and more of the necessaries, conveniencies, and enjoyments of life as the prices of those things come down. That's the recipe. That's it. You want your country to become wealthier? That's what you do. Those steps, so I want you to commit those to memory, remember them for the rest of your lives. Never forget those steps, because that's all you have to do. Who are the primary beneficiaries? The working poor, and they were the vast majority of people at the time, so that's why it's universal, because it's the vast majority. And Smith made a rather audacious prediction. So this prediction comes in a part of the book that I didn't ask you to read, but you can-- I'll give you the exact citation if you wanna check and see whether I'm right about this. This is what he says. The argument that you read s- just from The Wealth of Nations so far, in any well-governed society, division of labor will lead to increasing prosperity that compounds over time, redounding especially to the benefit of the poorest. One of the things that's great about a claim like this is that it's impure-- it's empirically verifiable. We've had two hundred and fifty years since Smith made this claim. We can look. We can think about which countries over that period of time have more closely approximated exactly what he describes, and what has happened to prosperity in those countries. Which countries have been further away from what he described, and what's happened to the prosperity of those countries? So we actually can m- make some headway in judging whether this is right or wrong. Not whether we like the idea or not, but whether the prediction actually turned out to be true. But this was his claim in 1776. He thinks this is regardless of geography. Doesn't matter what your geography is, doesn't matter what your climate is, doesn't matter what kinds of crops and animals you have. It also, ladies and gentlemen, doesn't matter what your people are Now I need to stop for a second. Now we're gonna go to the-- from the G to the PG r- version of our course. Um, use your historical imagination. Suppose you were one of the people in the 18th century who might be reading a book like this. So you're an English gentleman, and you're a man of leisure on your estate in your library reading this new book that came out from the venerable Dr. Smith. You're reading this book. Before you even open it, you realize that the subject of the book is why are some places getting wealthier and other places are getting poorer, and why are some places stagnating, et cetera. You would have already known what the answer was. You didn't even need to read the book Does anybody wanna venture a guess what the answer that everybody would have thought? Yeah. Don't raise your hand. It speaks very well of you that you didn't wanna answer what that But I'll tell you. Um, people would have thought it was race. The different races are the reason. There are some races that are naturally superior, some races that are naturally inferior. Every Englishman knew that. Not a big mystery. Then you actually open this book, and you read Smith saying that this will work in any country, any geography, with any inhabitants. Holy cow. First big radical claim. Any inhabitants? Smith says yes. So you will not I think it speaks very well, and kind of historically extraordinarily well for Smith, that that doesn't, that the race of the inhabitants does not enter anywhere in any of his discussions. Because he finds the same pattern recurring everywhere he looks. Every country, every continent he gets information about, every language, every religion. Why? Because human beings, he concludes, are basically the same. There's not any real difference among the fundamental motivations, capabilities, interests of human beings. They're all basically the same. This is before Darwin. He's writing the century before Darwin. He didn't have any evolutionary theory to rely on, but that's his claim. And he also made a claim about America. Now, what's the claim he made about the United States? When was the book published? March 9th, 1776. What was going on in the American colonies? Well, you have a pretty good idea, thanks to Professor Munoz and others. You have a pretty good idea what was going on. He was certainly aware of what was going on. He wrote a lot about the American colonies. One thing he argued was, you know, what would be in Britain's best interest would be, he actually made this claim, just let them go. Let them go and have free trade with them, and we'll all get richer together. Nobody listened to that. But he did make a prediction about America. What did the British gentry, the British aristocrats think about the Americans? What are the terms they used to describe the Americans? The barbarians and savages with pitch- pitchforks, this sort of thing. Smith in March, on, published on March 9th, 1776, said, "You know, if you look at what those Americans are doing, it looks like they might actually be figuring this stuff out. It's possible that one day America might actually surpra- surpass England." Holy cow Imagine somebody saying that. Smith would later say, years later, he would report that that one claim caused him more heat that he got from people that he knew than his entire thousand-page-long attack on the economic system of Britain. That the Americans could one day be... This is the British Empire. Who was the wealthiest, most powerful empire on Earth at the time? Them. Those savage farmers with the pitchforks are one day gonna be wealthier than the Amer- than, uh, the British Empire? Well, what has the subsequent 250 years shown? Dun, dun, dun. Okay All right, I'm gonna address, uh, raise two questions and then we'll end for today. Two last questions. Could Smith's recipe really work anywhere? And how exactly would that work? Smith gives us the answer to both of those in just those few pages that you read So the first question, could it really work anywhere? Smith's answer, affirmative. And now you know why. Because wealth comes not from natural resources, it comes from human ingenuity. That's where it comes from. Human beings create wealth, and where are there human beings? In every country. You let them create wealth, they'll do so. Give them the right conditions, the right environment, in particular, if you protect them in their pursuit of creating more, they will do so. Humans are humans, so Smith was quite emphatic about this point. All humans have these two interests. The first of all, they all truck, barter, and exchange. Truck is that's, you know, trading. All humans truck, barter, and ex-- Is that true? If these are empirically true claims, then you should be able to observe them too. Have any of you gone to developing countries just to visit? And maybe you're not from one, maybe you visited one. Have you ever gone to the town center? What do you find in every town center of every city in every country in the world? Markets. What goes on in those markets? Trucking, bartering, exchanging. All humans do it. So Smith thinks this is a fixed feature of human nature. All human beings do it. What else are humans able to do that other animals can't? They have reason and speech. Human beings are relatively weak relative to other animals, so we don't have fur, we don't have claws, we don't have wings or fangs. Individually, we're quite weak. Almost every other animal on Earth could best us. How is it that we're able to actually achieve anything? Because we have reason and speech. We can coordinate. We can talk to one another. We can say, "You do this, and I'll do that." We can even say things like, "I'll do this for you today, and in a month, you do this for me." We can plan for the future. That's what gives us our ability to succeed in the world, because we can use our reason and speech to coordinate, plan, and create joint projects. No other creature can do that. Which human beings can do that? Smith says all of them. All human beings can do that. When don't they do it? When they're not allowed to do it. Now we get to a bit of an interesting question. When are they not allowed to do it? But if you allow them to do it, they will.

Natural Equality Talents

Speaker 48:21

So that means for Smith, there's a rough natural equality among all human beings, even the philosopher and the street porter, he says. By the way, when he says philosopher, who's he thinking of? Himself. That's him. Even the highest status person and the lowest status person in society, there's a rough n-- Now, it's not exact equality. We're not exactly the same. But even the street porter and the philosopher, what can they do? Well, they're interested in truck, bartering, and exchanging, and they also have reason and speech. So in those fundamental ways, they're very similar. Now, does that mean they're exactly alike? No. They have different interests. They have different talents. And if they focus on those talents, why would they focus on some of their talents? Why do you focus on developing some talents and not others? The division of labor. It gives rise to expertise. You realize, you know, there are many things I could do. And could anybody in this room, literally anybody in this room, become an accountant if you wanted to? Notice I said if you wanted to. Could you do it? Sure. Yeah, you could. Could you own a car dealership? Yeah, you could probably do that too. Could you own an HVAC business? Probably. How many things are there you could do? I don't know, but it's a lot. Which of them should you do? That's the development of talents. So as you're going through your education as an undergraduate student, as you continue your education as an adult, what do you do? You say no to some things and you say yes to other things. You walk through some doors and let others close. What are you doing? You're developing your talents. Why do you-- do different people develop different talents? Because it makes us useful to one another. If we were all the same and all had the same talents, we wouldn't be of any use to one another. Smith says this is a great, beautiful thing, human diversity arising from basically the same fundamental material, roughly similar by nature. Now, he does say, should I actually quote it? I mean, he does say one ridiculous thing. Uh, can I call your attention, if you have your books, please turn to page 17 of the packet. It's chapter two of The Wealth of Nations. You know, just in fairness, maybe you think I'm just, you know, everything Smith said was true, or he got it all right. Nobody gets everything right, even Adam Smith, even the great Adam Smith. On page 17, this is where he's talking about the difference of natural talents. You see the paragraph, the second paragraph there. The difference of natural talents in different men is in reality much less than we're aware of. So now, if you're thinking, by the way, that, well, he's exaggerating that, people are actually very different by nature. He says, well, wait a minute. Compare the differences between an- any two randomly human beings, uh, chosen human beings, and the different species of dogs. Look at a mastiff and a poodle. That's a big difference. Any two randomly chosen human beings are gonna be much closer than that, okay? So then if you skip a sentence, he says, "The difference between the most dissimilar characters, between a philosopher and a commerce reporter, for example, seems to rise not so much from nature as from habit, custom, education." Do you see the next s-- That's what I have up here. Do you see the next sentence? Okay. He says, "When they came into the world, and for the first six or eight years of their existence, they were perhaps very much alike," meaning children, "and neither their parents nor their playfellows could perceive any remarkable difference." Okay. You see what-- You catch what he's saying there? Children are basically indistinguishable for the first six or eight years of their lives. Only someone who's never had children could possibly say anything like that. He did never have children. He never married, never had any children, uh, apparently never met a child. Um, okay. So he didn't quite get everything right, and maybe he takes this, the natural equality a little bit far. But do you see how this answers this question? The question is, could it work anywhere? The answer is anywhere there are human beings, because human beings are, for the most part, alike Here's question number two. Why would the division of labor in a well-governed society enable growing prosperity? Here he actually gives us three different arguments. We won't cover all of them today, just the first one. Okay? He gives us three arguments. They're in your readings, and I'll give you the passage so you can see exactly what it is. I call them the local knowledge argument, the economizer argument, and of course, the very famous invisible hand argument. Save the best for last. but in some ways, I think the local knowledge argument is actually more important. So I'm gonna give you that argument, and then we'll end for today. Okay, what's the local knowledge argument? It's in his text, and I'll give you the exact citation. Here's my presentation of it in the form of a syllogism. Major premise, minor premise, conclusion. Here's the major premise of his argument, and I want you to see whether you agree with each of these things. First premise, people's local situations, including their own values, their purposes, their opportunities and obligations, are known best by the individuals themselves. Who knows your own values, purposes, opportunities, obligations better than you do? Most likely, you know yours better than anybody else knows yours. Fair enough. Premise one. What's premise two? To be made wisely, decisions about allocating our scarce, meaning our limited resources. We have limited resources. No matter how wealthy you are, you don't have infinite wealth. You don't have infinite time, so allocating your time and your treasure, time, talent, and treasure. To be m-- to make those decisions wisely, your decisions must reflect your local situation, value, purpose, opportunities, and obligations. Notice that's the same series of things in both premises. Okay? With me so far? What do you think the conclusion is? Therefore, the person best positioned to make wise decisions is who? What follows? Look at the argument again. What follows? Who should make those decisions? Dave? You. Does that seem right to you? Now, I want you to think about that argument, because if that seems plausible to you, maybe even compelling to you, then a whole lot of Adam Smith's argument about economics is al-- he's probably already made nine-tenths of the case. Because a lot of what goes on in economic policy, then and today in many parts of the world, is people who are denying that argument, who are thinking, "You know, I really know better than you do what's best for you. We experts know better for you than what you do." What Smith is doing is turning that entire tradition of political economy from Plato on down on its head. Why is one reason why so many people got mad at Adam Smith? Because he's saying to all of those very distinguished philosophers, "Go home and get a real job. Stop trying to boss other people around because, yes, you're very smart, but what you don't know is anybody else's situation. You don't know what's right for people whom you don't know, whose situations you don't know, whose preferences and trade-offs you don't know, whose access to resources you don't know, and by the way, that are constantly changing all the time. You don't know them." So what happens instead, what peop-- what people who put themselves in charge of, say, economic systems instead do is they just assume that everybody else out there is exactly like me. Your preferences should be my preferences, or my preferences should be your preferences, and whatever's good for me will be good for you, and if you don't realize it, don't worry. In time, we'll get there. What Smith is saying is we should stop trying to insuperintend the economic lives of other people because we simply don't know, and it's not because we're evil, not because we're ba-badly intended or something. It's because we simply don't know other people's situations. This is a very deep argument for Adam Smith, a very important argument for Adam Smith. I said there were three: the local knowledge argument, the economizer argument, and the invisible hand argument. But in some ways, this is perhaps the most important, and it recurs throughout the entire wealth of nations.

Trust Everyday People

Speaker 56:40

What it effectively says is, and let me leave you with this point, the implication of this argument is a tremendous amount of trust placed in the everyday individual Smith is saying, "You know, everyday people are not as bad as you think. They have reason. They can communicate their thoughts through speech. They truck, they barter, they exchange. They all want to improve their lives. If you just let them, they will." So what's the first conclusion Smith would reach about h- enabling poor people to rise out of poverty? Don't think about what you can give them. First, stop doing bad things to them. Let them lead their lives, and they might just surprise you with what they're able to do. That's a pretty optimistic vision. Maybe you think it's naively optimistic. We will pick up there next time, so we'll see you then.