Is Everyone Getting Adam Smith Wrong? - ft. Glory Liu

Smith sees economic life not as these abstract

and impersonal market forces,

but really about contests and power

and how power in institutions structure who gets what?

I'm Bethany McLean.

Did you ever have a moment of doubt about capitalism

and whether greed's a good idea?

And I'm Lucia Zingales.

We have socialism for the very rich,

rugged individualism for the poor.

And this is capitalism to a podcast

about what is working in capitalism.

First of all, tell me, is there some society

you know that doesn't run on greed?

And most importantly, what isn't?

We ought to do better by the people that get left behind.

I don't think we should have killed the capital system

in the process.

In 1776, a Scottish philosopher named Adam Smith

published a sprawling, and we mean sprawling,

book about how nations become wealthy.

The appropriately named wealth of nations

ran more than 1,000 pages

and ranged across everything from the origins of money

to the economics of apprenticeship

to the fall of the Roman Empire.

Today, most people associate Adam Smith

with a single phrase, the invisible hand.

The crazy thing is that that phrase, the invisible hand,

appears only a handful of times in his entire body of work.

And Smith wasn't actually a gun hoe apostle of free trade.

Glory Lu, who is an assistant professor at Georgetown,

writes in her book, Adam Smith's America,

intellectual historians have long complained

distorted notions of self-interest, free markets,

and the invisible hand have eclipsed

Smith's moral philosophy, jurisprudence, and more.

Which raises some interesting questions.

How did such a complicated thinker

become reduced to a slogan or to absolutist?

Along the way, there were other hospitals

misthinking that got marginalized.

He thought deeply about inequality.

He worried about chronic capitalists.

He actually advocated strong government

invention were necessary.

And all those things make not only a fascinating figure

from the past, but one who's thinking

is critical important to where we are today.

Why everybody ends up using Adam Smith

to make his own point?

Because they can use David Riccardo,

they could use saye, they could use a lot of other people.

But at least reading your book

seems that everybody is obsessed with Adam Smith, why?

Yeah, well, have you read Riccardo?

It's impenetrable.

I would say that people quote Adam Smith

because he's such a recognizable authority

and because his authority is malleable.

His authority is malleable so that you

can make Smith stand for not really anything you want,

but he's a really, really useful device

to articulate a specific view, kind of like what

you think the economy should look like.

The course of your research, did you start to feel close

to Smith and perhaps even protective of him?

And how do you think he would have felt

about seeing his words twisted in the way that they have?

Did you get a sense of that as you researched him?

You know, I would say I actually got less attached to Smith

when I was doing the research on the reception.

And I think part of it is because doing reception history

requires you to distance yourself from that particular object.

But I actually found myself having to reattach to Smith

and come up with my own version of Smith

after writing the book.

And I think that's because people were really asking for it.

So what is your own, hadn't thought of that.

So what is your own view of Smith?

So I see Smith as a theorist of power

and specifically a theorist of power in the economy.

I think Smith really sees economic life

as overlapping systems of power.

And he sees the ways in which organized groups

and people with varying levels of access to power

can shape, distort, and kind of work

to change their economic status.

So one key example of this is how he

talks about the difference in power

that he says masters and workmen or employers employers have.

We have a whole description of kind of how wages are set.

But then he says, look, the difference

in interests between workers and their employers

is very stark.

Workers have an interest in raising their wages.

And employers or masters have an interest

in pushing down those wages as much as possible.

The key difference is that the lies

often on the side of the masters,

they do everything in their power

to prevent the combination or prevent unionization

of the workers, but they make it possible

for employers to combine.

And then he kind of concludes this section.

This is in book one of the wealth of nations by saying,

this is why any law that's in favor of the workmen

is often just and equitable because usually

the law is being weaponized by people

who have disproportionate power to oppress others.

So that's kind of one pretty early and very strong example,

I think, of how Smith sees economic life

not as these abstract and impersonal market forces,

but really about contests and power

and how power in institutions structure who gets what.

Do you think it's too simplistic to say them

if at the core of Smith is power that his view

is absolute power corrupts, absolutely.

And I was thinking of this famous line of his

that Luigi loves that people of the same trade

sell to meet together even for marriage or diversion,

but the conversation ends in a conspiracy against the public.

And I'm wondering how then this modern framing of him

just ignored his deep suspicion of monopolies

and consolidated corporate power.

Smith is so attuned to changing forms of power

and new forms of power and new kind of interest group

organization, if you will, to use modern parlance

that were happening in his time

that were disrupting older forms of power and institutions

that typically govern economic life.

In the mid to late 18th century,

you have the rise of a whole new class of people,

not the like nobility of the Ancien regime,

not the working poor and not these artisans

and light manufacturers,

but a whole new class of people

whose source of power is wealth.

And it's wealth that's coming from things

like capital investments and ventures.

They're people whose wealth is generated

by a world increasingly connected by commerce.

It's these merchants and capitalists

who are using their wealth as a lever of political power

in a new way.

The lottery of birth doesn't matter anymore.

Like you could just take over a village

or you could take over and plunder another country

and suddenly your wealth and that becomes a source

of political authority.

And this is outlined in his lectures on jurisprudence,

which is set of lectures that he gave in the 1760s

that has now been a resource for thinking

about Smith's views on politics.

So we're gonna have to understand that Smith has this

interesting theory of where sources of power come from.

And so when he's looking at the commercial system

of Great Britain in his own time, 1776,

he's noticing that you have this whole class of people

who have disproportionate wealth

and a disproportionate ability to organize

and articulate their interests to legislators

and convince legislators that their private interests

as merchants who are organizing

is also serving the country's interest.

And that's what I find so illuminating about Smith

is that he's able to kind of disclose that dynamic

about how certain classes of people

are able to use their economic resources

to gain political advantage.

And thereby have this, again, disproportionate effect

on the distribution of resources

and power in society as a whole.

So I find your interpretation of Smith as a theorist of power

particularly intriguing in light of the embracement

of Smith by the Chicago School.

Because the staff you describe in the book

was not a big surprise to me in the sense

that in the middle of the Cold War,

economists finally can prove what is known

as a first wafer theorem, which is the idea

that under a number of assumptions

by a competitive equilibrium is some notable property

we call Pareto Eficius in a notable property.

So they get enamel with the invisible end.

And so it's normal that because of the recent discovery

and because of the Cold War,

there is this big push for the invisible end.

And it's also understandable because a big part

of the United States intellectual

were sympathetic to the Soviet economy

and to the Soviet way of our locating resources.

So I understand all this as a reaction.

However, I don't know how familiar you are,

but the Chicago School in that particular period

in economics does everything possible to eliminate

the world power from the vocabulary of economists.

Literally, they try to reiterate it

because the only notion of power

that economists understand is market power.

And even that is basically brought to zero

by the Chicago School.

But in general, by that time they are UCLA,

but Arsene and Demsett are two very famous economists.

They have this line about a firm saying that the firm

has no power whatsoever except the market

that being an employee of a firm

is no different than being a customer of the firm

that you can fire your provider.

They go to an extreme that is for a normal human being

is ridiculous because no normal human being

think that firms, especially today's firms,

so how can they possibly embrace myth

without kind of some lobotomy

or at least the bottom of Adam Smith brain

in which half of it is taken and half of it is disposed?

That is a very gross image, Luigi.

Thank you for that.

This is so fun.

So the Chicago School is by no means unique

in economizing Smith in this way

and ignoring power in the way that I was talking about,

whether it's about the relationship between masters

and workmen or the mercantile system,

but you get this slow scraping away of Smith

as this multidimensional thinker

who cared about power and groups and sympathy,

right, the other book, The Theory of Moral Sentiments

about history and about institutions

and that starts much earlier than the Chicago School.

I mean, you can trace this back

to kind of post 1860s political economy

and the transformation to economics

really with the marginal revolution.

What I do think the Chicago School had again,

like disproportionate influence in propagating

was this idea that Smith,

the economist of the invisible hand in the market

is the Smith, right?

That is like the timeless true Smith

that has explanatory power for everything.

And I think that that's why the Chicago School Smith

is so important to understand and to unpack.

I like the idea of kind of denaturalizing

the Chicago Smith as a version of Smith

because it really is based on a selective reading.

Now, I will say that having written this book

and heard different reactions to it,

like some people were like, oh my gosh,

I can't believe how charitable you were

to the Chicago School.

And then other people were like,

you're a crazy, lefty activist.

You're like, it felt too critical

to historicize a past reading of Smith

was itself an assault on Smith.

We've been talking a little bit uncapitalism

about how maybe one of the things that kept capitalism

in check was just this sense of morality

that couldn't be legislated, went beyond lawns and regulations,

but just was a built in sense of morality

and that the more global the world has gotten

and the more disconnected people have gotten

and the more it's been possible for an owner of capital

not to have to meet a worker at anything in the local community.

That morality has sort of disappeared.

And I was thinking that Smith's sort of in a way

is emblematic of this because there's this balance

between the theory of moral sentiments

and then Smith the economist in the wealth of nations,

even though that's too simplistic, obviously,

there's a lot of nuance in the wealth of nations too.

But I'm wondering if this sort of stripping

by the academic discipline of economics

kind of stripping morality out of Smith's economic framework

kind of mirrors this progression of capitalism in a way.

That's a really interesting way to put it.

I think it's also deeper than just stripping out morality

from economics.

I would put it slightly differently,

which is that economics has its own value system.

And to see economics as somehow value neutral

or value free is to kind of misunderstand

what economics is today and what it has been in the past.

A lot of that has to do with the rise of the mathematician

of economics and that the mathematicians

and all makes it value neutral.

And also this idea that values of efficiency

are somehow not in the same category of values

as say interpersonal relations or equity

or humanism, democracy, all these other things.

Like we can put those all as values

and somehow we don't like to see economics

as having an overlapping set of values

that would put us more in the realm of Smith

thinking about the human lives that make up the thing

that we call the economy.

Smith doesn't use the term the economy,

doesn't use the term capitalism,

but it's very clear that the way he describes economic life,

it's about people and what they're doing

and who they're interacting with

and how they're negotiating and how they're creating institutions

and how they're trying to solve problems.

And that's a very different view of economics

and the value of studying economics

and the values embedded with economics

than what I think most people who study economics

today, whether you're taking Econ 101

or whether you're getting a PhD in economics today.

It's a different set of methodological tools

but I also think a different understanding of human values.

No, no, I'm sorry that I used a lobotomy analogy

but it was not completely coincidental

because the worth of nation is 1,000 pages, okay?

So it's a big volume.

Glouyam, I'm pretty sure you know

that Joe Stieglier created a bridge version

of the worth of nation where he cut out some part

and he cut out the parts he didn't like.

So I think that was really kind of a lobotomy

than with intention.

What I found super interesting is some of the ideas

of Stieglier on regulatory capture

other than already that was Smith.

Going back to the overarching theme of Smith

as a theorist of power, Smith is so,

he's such a careful reader of history

and a careful analyzer of history

that he sees this tendency towards capture

over and over and over again, right?

Not just in trade policy,

but in things like the creation of a tax regime

or the creation of certain land regulation laws

and even things like the emergence

of independent judiciary, right?

He talks about these things in book five

of the wealth of nations.

Given that there's this tendency towards capture

in a modern country whose internal organization

and mode of external organization is commerce,

how do you create institutions

that aren't as susceptible to the rich and powerful

just using them for their advantage?

So he thinks about like, okay,

think back into medieval times when we decided

that it was maybe a good idea to have an independent judge

rather than one guy being in charge of everything,

like writing the laws and also executing them

and being the judge for things like, okay,

give rise to the independent magistrate.

This was a good development,

but then what happens when the magistrate

is also collecting court fees

in order to dispense justice?

Well, then you get the corruption of justice

because what happens is that even though we had

this good development of an independent judiciary,

justice is dispensed based on what people's ability to pay

rather than those who are actually in need of justice

that's the right phrase to use.

So he sees the evolution of these institutions

and modern society and he's so attuned

to how institutions can be created,

they can be advancements,

but you have to be aware of how they can be captured

by those who have a vested interest in them

or those who have outsized ability to corrupt them.

So I think that's another way in which,

again, it's not specifically its idea

of regulatory capture the way that Stegler is talking about it,

but it is a form of capture

and what I call like a state capacity deficit

that Smith is so attuned to.

So how do you think that begs the obvious question?

What do you think he would think

if he could see where the US is right now?

Would he see modern lobbying,

incorporate political influence as,

see, I told you so, or do you think I think,

oh, I warned you,

but I never thought it could be this bad.

Or do you think it,

or do you think he'd look at some of the systems

we've put in place to try to mitigate it

like an independent judiciary and say,

hey, you guys are trying.

Oh, man, you know, I think it's the second one.

Like I tried to warn you

and I do think that it is about the concentration of wealth

in certain sectors of the economy

and how certain sectors of the economy

can kind of have disproportionate influence

on the political system in order to kind of perpetuate

these cycles of deep and persistent inequality

in ways that renders meaningful political

and economic change extremely difficult.

He was well aware of the difficulty of political change.

He talks about free trade and his system of natural liberty,

but he says to think that this would happen

in my lifetime as a utopia.

The fact that we did get

an incredible liberalization of international trade policy

by the 20th century is, you know,

Smith probably would have been astounded that that happened

during the kind of moment of post-Brightened Woods institutions

and stuff, but I do think that with regards

to whatever you want to call it,

corporate capture and the vast disparities,

I'm speaking from an American point of view here,

vast disparities in kind of wealth and income inequality,

he probably would have had the same reaction.

So I love your interpretation of Smith

as a theorist of power.

So let me try one interpretation and feel free

to say I'm completely wrong.

And then after my interpretation,

I have a question from him.

So the interpretation is Smith talks about the commercial society

as maybe what we would talk now about capitalism

is what's the new system.

And he sees the commercial society

as something liberating man, humankind,

from a lot of the restrictions and the limitations

of freedom that a feudal society was bringing about.

And why is because at the end of the day,

if you could cultivate your peace of land,

you could be an independent producer, et cetera,

you had much more freedom that if you had,

as a serve or as a whatever.

However, as you correctly pointed out,

capitalism has evolved a lot since then.

Now we have corporations everywhere,

the only corporations that wear the time

were the East India company and Smith ate them.

But now, corporations have a lot of power over us

with all due respect for my late colleagues.

And so is it true that capitalism brings more freedom

to individuals and what will Smith say is about that?

Did you just ask me if capitalism will bring us more freedom?

Yeah.

Did that think question?

Yeah.

And what does Smith say about that?

OK, I'm going to start with what would Smith say about that.

So again, with the large footnote that Smith

doesn't talk about capitalism, he usually

talks about commercial societies,

but commercial societies are very under-specified.

And so he's really interested in the forms of power

that come into being within a society primarily organized

by commerce.

OK, that's the footnote.

What are the possibilities for freedom

in these new societies that are primarily commercial?

Smith did see that commerce had this emancipatory potential,

that when you organize people's needs

based on free exchange, that I can go by my bread from the baker

and the baker is not under these kind of really, really

oppressive regulations about the kinds of flour

that he asked you is on the specific weight

and dimensions of the bread, et cetera, et cetera.

We are no longer constrained by these really archaic

and impersonal and sometimes very personal forms of domination.

Think about the ways in which marriage was regulated.

You had to get approval from the Lord

in order to have your daughter married off to somebody

or some chouerry laws, on Wednesdays, you cannot wear pink.

I says the version of some chouerry laws.

So Smith did see this new society in which

the kind of arbitrary power of the old aristocracy

was slowly being eroded.

And that people could meet their needs

through free exchange and commerce

rather than relationships of dependency.

That is an radical and emancipatory force.

And to the extent that that has like moral valence to it,

it is a form of political and personal freedom

that Smith saw unrivaled in his time.

And I think something that is really, really core

and important to recognize in his thought.

The question of whether capitalism has created

more freedom today is really tricky.

And here is where I feel like Smith is no longer

the most useful thinker for us to answer that question.

We need to think with marks too

and we need to think of critics after marks.

Because again, I think that the nature of work has changed.

The nature of commerce has changed

and the nature of finance has changed.

We're like, I certainly see myself as freer

in the broadest sense of the term

than if I were to take myself in my embodied form

and put myself in like 1776 and Great Britain.

I think the quality of my life right now

is probably on almost all metrics, freer and better.

But that doesn't mean that by no means

follows that capitalism has kind of created freedom.

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Do you think that even though people were trying

to simplify Adam Smith because they saw

that a simplified Adam Smith,

a caricature of Adam Smith,

could serve their interests more?

That actually that was a mistake

and that the original rich and nuanced Adam Smith

would actually provide more legitimacy

to capitalism now today.

In other words, should the people like Friedman and Stegler

who were trying to legitimize things?

Did they actually make a mistake?

Did they make their own turn in that moment?

I don't think so at the time,

I think it's wrong now.

It says at the time,

that was probably the best way to sell capitalism

and that's what they use

and it's always difficult to do the counter-factor in history

but especially Milton Friedman,

he was a phenomenal debater.

So I think he picked his bottle very cleverly

and this is no exception.

However, today I think we are in a different situation

and we do need a more complex myth.

Is it too late?

Do you think we can bring back this more nuanced version

of Smith?

I mean, we've talked on this podcast before about

and I thought her way of phrasing it is economics

being stripped of everything but the math

in a way that's not precisely what she said

but we've talked about that too.

Can you, is this a two-way street?

Can you go back in the other direction

or once you've taken all of that out of it?

Is it just down to the bone?

I think you can.

I think it's uncomfortable in the most academic environments

because they are so used to only use a certain language.

However, academics need to justify what they do

to the outside world.

If they fail to have a bigger,

moral justification for capitalism,

they might end up losing the battle.

So it is important not to just to prove

the efficiency of capitalism

but also try to have some moral foundation for it.

Yeah, I thought that was something really interesting

that she said was that Adam Smith was also possible

in his time because there was this lack

of disciplinary boundaries.

And as these disciplinary boundaries have grown up

and become really, really, really hard lines,

that's what also has led to in some ways

this simplified version of Smith

stripping some of the moral elements out of him.

And I thought we have to really reach for that now

and break down those boundaries

so that we can have those lack of boundaries again

that is if those boundaries have become too strict

and too severe, right?

But I think that was my favorite thing

about the podcast was her calling Smith a theorist of power.

I thought that was incredibly illuminating, did you?

So any so novel and unexpected

that I think that is a big result of our conversation?

What I got from her is that he understands

that now wealth can be very powerful

in changing economic policy

and he's thinking about how to organize society

in light of that fact.

To be fair, up to his time,

political ramp was dominated by kings and novels

and people that had more titles and traditions

than necessarily money.

England at the time is the first commercial society

where merchants were very powerful.

Actually, there was the exceptions to some Italian

and from that area, Venice was like that

but was by that time declining

and the Netherlands were a bit like this

but certainly England is the ultimate commercial power.

These merchants are influential in how things work

and he lived at a time where the East India Company

was driving half another entire British parliament

to get the way he wanted.

I guess I would say it more simply

and I would say that the accumulation of capital leads

to the accumulation of power.

And then that very accumulation of power

has an effect on everything on the institutions

that we've set up to safeguard power works

because the power accumulates in such a way

that it undermines some of the institutions

that we've set up in order to safeguard

the disbursement of power.

So maybe another version of it,

I'd asked her that absolute power corrupts

absolutely but certainly power crops, everything attaches.

But Luigi, you think my answer is too simplistic?

No, I think that it may be true later on.

Remember, we have before the explosion

of the industrial revolution.

So it's not that people have huge building,

huge machinery, huge firms.

This is more a commercial society.

Well, yes, of course you have some working capital

that you need but mostly are the opportunities

that you can achieve that drives your power.

So it's not that capital correlated

is the fact that you know how to get the spices

in the right place, go in the right position

to import, carton and so on and so forth.

These are more, kind of,

if you want, there is more knowledge

than capital accumulation in an American type of society.

I don't think so, I don't agree.

Well, it could be both,

but for sure part of what he warned about

is the accumulation of wealth

and the admiration of wealth

and how that becomes a corrupting force

both throughout the moral code of man

and the way in which institutions work.

So I think it is directly tied to the accumulation

of capital and that the accumulation of capital

is the accumulation of wealth becomes power.

Yeah, I know there is definitely the element

of a combination of wealth,

but when you say capital,

what was the capital that they had?

They had some wealth that they used to buy.

I'm using, maybe that's where we're getting tied up

business and politics

because I'm using capital as wealth,

the accumulation of money.

So maybe that's where we're getting tied up.

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