-: Welcome once again as MIT Professor Paul Samuelson
discusses the current economic scene.
This series is produced by
Instructional Dynamics Incorporated.
-: March 9, 1976 represents
an important 200-year anniversary.
The anniversary of the first publication
of Adam Smith's Wealth of Nations.
This 200-year birthday party is
as important to the discipline of economics
as the bicentennial 200th-year anniversary
of the founding of the USA is to the citizenry
of the United States.
It is rare indeed that a scholarly discipline
can trace its beginning to a single recognizable time
and to a single recognizable author
and to a single recognizable credence.
But, I believe it is no exaggeration that
the vast majority of economists would agree
that Adam Smith represents so important a landmark,
so important a break with the previous
primitive developments in economics.
So important a difference in degree as to constitute
a difference in kind that Adam Smith can be regarded
as the founder of economics in the same sense
that George Washington can be regarded as the founder
of our country or that VI Lenin can be regarded
as the founder of the modern Soviet State.
Adam Smith, I believe, is a living force,
and I think that he is a rewarding writer
to talk about quite aside from any feelings of piety
because the matters which concerned him
still concern economists today,
and the precepts concerning the wealth of nations
which he wrote about have continuing application
into our times.
So, let me paint
something of the background of the 1776 Wealth of Nations,
and let me relate that work
to certain present day very lively debates.
Adam Smith, of course, was a Scot.
At the time of his youth
from the 1720s on
into the 1780s when he died,
Scotland seemed to be a reservoir of brains
for the British Isles.
Doctor Samuel Johnson liked to jest
about the Scots as if they were an eccentric,
impoverished, rather over-intellectual group of people.
But, I think the badinage of Doctor Samuel Johnson
with respect to his disciple James Boswell
and with respect to David Hume
the Scottish philosopher and historian and Adam Smith
is indicative of the envy and respect
which Englishmen of that time held
towards these Scottish thinkers.
Smith was a bachelor all his life.
I suppose the most romantic and exciting event in his life
happened to him at the age of five or six
when he was kidnapped by gypsies.
However, he was restored to the bosom
of his family in short order,
and he went on to become a student in Scotland
and a professor in Scotland and,
unlike so many modern-day professors of economics,
he was also a learned man of the world.
He wrote a history of astronomy.
He traveled on the continent.
He was the tutor to the son of a nobleman.
He had a sinecure in the civil service as a tax collector.
But, what we remember him for today is not
for his role as Mr. Chips, the lovable, genial,
Scottish lecturer nor for the convivial Adam Smith
who met with David Hume and other intellectuals
to discuss philosophy and history and economics.
We remember him for the founding
of the subject matter of economics.
Smith does not lack for admirers, but in some ways,
his follower and successor of some fifty years later,
David Ricardo, has tended to overshadow Smith
in the textbooks of the history of economic thought.
Smith is regarded as very early and very primitive,
and, if I may say so, not very fancy.
Any non-economist, any business man,
any self-educated laborer could pick up
Adam Smith's Wealth of Nations and read it with advantage.
There are in it no bristling equations or graphs or tables.
There are thousands, literally, of facts and observations.
Smith was much better acquainted with all there was to know
about industry in his time than your typical
run-of-the-mill associate or full professor today,
but at that time, economics was not a technical subject.
By contrast, if you pick up
the Principles of Economics of David Ricardo,
you find a style of writing
which is not very intelligible.
You find numerical tables.
It's anything but inviting fare for a non-economist.
It's much more like an advanced economics treatise of today
which no non-economist in his right mind
would every think of picking up.
Adam Smith is not only the father of economics
as seen by economists but, what is quite another thing,
he is also a very important figure in the history of ideas.
Those are by no means the same thing.
Alfred Marshall of the University of Cambridge
from, let us say, 1885 until he died in 1920
would probably have been revered as
the greatest economist of his time.
And yet, if you spend a lifetime, as I have done,
in reading intellectual history,
you will not be able to find more than one or two
or three references to the work of Alfred Marshall
outside of the technical field of economics.
Alfred Marshall thought that his 1890
Principles of Economics, which was an important best seller
in the field for many years, was written for businessmen,
but the evidence is remarkably lacking that businessmen ever
outside of command performances in school
bothered to read Alfred Marshall's Principles of Economics.
Not so with Adam Smith, any educated person
of his time and since could hope to dip into Adam Smith
not only with pleasure but with advantage.
What is the stereotype role in the history of ideas
that Adam Smith is thought to have played?
Well for once, the vulgar stereotype
comes very near the true mark.
Adam Smith came at a time when government
over-regulation of industry was on its way out,
and Smith was both an effect of that process
and, in his own right, an important cause.
He analyzes in great detail
the follies of government interference.
He extols the merits of freedom,
of laissez-faire, so by large the notion of Adam Smith
as the apologist for laissez-faire,
for the rising bourgeoisie class,
Smith as the critic of the dying futile order,
as no lover of the land owner,
I think that that particular stereotype is
a pretty faithful rendition of what it is
that is important about Adam Smith.
Now, nothing that I have said contradicts the notion
that Adam Smith was a humane, eclectic
and temperate man in his ideologies.
You can easily in an afternoon with The Wealth of Nations,
by they way, there's a very convenient edition
of The Wealth of Nations in the Modern Library Series
adapted by Edwin Cannan,
an English economist of the last generation or two,
you can cull passages from Adam Smith
which show him to be no reactionary,
no friend of the plutocratic interests.
I have in mind passages like this,
masters never meet even for the purposes
of innocent merriment and dinners
but what they plot against the public interest.
These could've been marvelous anticipations
of Judge Elbert Gary's famous dinners
in which he brought together executives
and tycoons in the steel industry,
and in the course of what was probably a very good meal,
they conspired on maintaining prices
above a competitive level.
Smith was also very much acquainted with the monopolies
which the budding trade union movement was trying to create.
Smith did have certain limited functions for government.
If somebody had said to Smith, should the government have
an anti-trust division to police departures
from perfect competition, Adam Smith would probably
have replied, in principle, monopoly is bad.
In principle, successful regulation which reduced
the degree of monopoly and achieved a greater approximation
to free competition would be good, but in practice,
now in 1776 or 1783 at the time of the second edition,
my considered opinion is that the government'll pry
make things worse if it tries to interfere in this matter.
Well, there's many an economist today,
prominent, respected economist, who has moved to
this new position or back to Adam Smith's old position.
I think it's fruitless to try to decide
where Adam Smith would fit in
in today's ideological spectrum
if he were brought back to life.
Given where he stood at the time of the 18th century,
it might well be the case that he would be
at exactly that golden central position
that I myself try to occupy.
But, it would be self-deception
and self-flattery to assert that to be the case,
and I'm sure that people both to the left of me
and to the right of me, when they engage
in their contrafactual reconstructions
of intellectual history and bring Adam Smith back to life,
they find that Adam Smith turns out, with all his wisdom,
to be almost precisely where they, with all their wisdom,
have decided it's best to be.
Now, I'm the more reminded of this centennial because
we are right now, in the economics profession,
along with the nation's bicentennial having
a whole series of commemorative symposia and meetings
to honor the memory of Adam Smith.
In Scotland in March, there will be a gathering
of Adam Smith experts from all over the world.
Professor George Stigler of the
University of Chicago will be there.
Professor Charles Kindleberger of MIT will be there.
And, at Harvard University February 27th and 28th,
there were held the John Diebold lectures
called New Challenges to the Role of Profit.
This was a Harvard series, the fourth series
of John Diebold lectures since the late 1960s,
addressed this time to the role of profit,
and it turned out that quoting Adam Smith and analyzing
and criticizing the positions of Adam Smith
with respect to the rate of profit was very widespread,
and I must say very appropriate.
I myself was the first of three major lecturers.
I spoke about the role of profits in a mixed economy,
changes in the perceived reality.
Well, that was my assigned title, but the title
that I chose actually to address myself to was
the views of profit as seen by the modern-day economist
and by non-economists, and a good deal of my discussion
could profitably begin from a discussion
of Adam Smith's division of the national income of society
into three or four major components, on the one hand
the wages of labor, on the other hand the interests,
interest rate, interest earnings on capital,
on produced inputs, the rent of land.
Then, as distinct from the sure thing,
safe competitive rate of interest,
there is a fourth component
which might be called differential profit.
Adam Smith, Smith himself said that the rate of interest
is about five or 6%, and the rate of profit
typically is about double that, about 12%.
Why this difference?
Part of it, obviously, was the wages
of scarce, valuable, managerial talent.
Part of it was a allowance for risk.
When you make a lot of money on one shipping venture,
you must realize that the pickings
aren't all that easy and certain,
and that on some other shipping venture,
people are losing money, so the average premium
for risk-taking over and above
the safe gilt-edge rate of interest would be much less,
one would suppose, than a doubling
of the gilt-edge rate of interest.
In Adam Smith's day, we didn't have to talk about pre-tax
and post-tax rates of profit because by and large,
although Smith himself was a tax collector part of his life,
the taxes to British Isles depended upon,
and other countries depended upon,
were largely excises and not income taxes.
In our own day, Frank Knight, famous professor
at the University of Chicago just recently dead
in his late 80s, argued that people are not risk adverse,
and that the premium for risk-taking
need not be a positive premium.
It might be zero or might even be negative
as people will pay for the privilege
of gaming and of taking risks.
I think the bulk of the data on the stock market,
when we come to analyze it, suggests that,
on the whole, people are risk takers
even though they do spend some weekends in Las Vegas.
Smith's general notion was that any excess profits
that couldn't be accounted for by some real cost
would in the longer run be competed away.
And, his view of the national income,
and indeed of the components of the price of any good,
was essentially a three-fold view.
The price of any good involves a return to labor
which is a needed compensation for the psychic sweat
or disutility of working.
The interest and profit component,
we can consider those to be the same if there
is no riskiness in the situation,
no probabilistic uncertainty.
Smith would have agreed with Nassau Senior
who came along some half a century later that
there was a certain amount of unpleasantness involved
in giving up today's current consumption
in return for future consumption.
If one gives up 100 chocolates
or 100 baskets of goods today, as compensation,
for the psychic disutility of doing so,
one must not only get back one's principle
of 100 chocolates next year or 100 baskets of goods
next year, but one must get some premium
for the psychic disutility of waiting or abstinence.
The third big component of price and of national income,
the return to land rent, which Smith,
like some of the earlier physiocrats
in casual moments seem to think there were three
major classes who got three different kinds of income,
he thought of these as 1/3, 1/3, 1/3,
just the way you might say on a typical farm.
1/3 goes to the landowner, 1/3 to the operator
and 1/3 to the labor, that was his view of the GNP.
Well, this third component Smith regarded
as an undeserved component.
The land itself is productive, yes.
It is indispensable for production, yes.
But, the landowner is not indispensable.
He's quite dispensable.
As Smith said, landlords like to reap
where other men have sown.
So, Smith would've been very much in the tradition
both of the physiocrats before him and of Henry George
and Ricardians after him of wishing to tax,
if you can identify it, the return to pure land,
the pure Ricardian rent, the return to the original,
inexhaustible, unaugmentable gift of nature.
Now, the return to land which had been improved
by draining and by investing of capital into it,
Smith would've regarded as interest much like
other interest, but this original return to raw land,
the pure rent component, he thought of
as not a necessary component of price.
Well, Smith was not only a statical economic theorist,
he also had a vision of progress
and of what was happening over time.
In his view, the future of the capitalistic order
in the century let's say after 1776, 1783,
would be a century of capital accumulation.
He believed that the rate of profit, the rate of interest
was lower in Holland than in the British Isles
because over past decades,
the Dutch had thriftily accumulated capital,
had used up all the high-profit opportunities
and now were reduced to building bridges and dikes
which would yield only a low profit,
and he thought the same thing would happen to Britain.
Smith was a believer in the doctrine
that it is better to travel than to arrive.
He thought the process of growth would be a happy state
in which wages would not be ground down to the minimum.
As long as an economy was progressing,
he believed the workers would be sharing
in a rising standard of living
higher than the bare minimum of subsistence.
But, once accumulation ceased, the remorseless
biological increase of population would,
in a fashion that Malthus later was to make popular
and which Ricardo was to analyze and detail,
would cause there to be a reduction in wages.
Now, I've commented that Smith was a very
well-informed person for his time,
but we must remind ourselves how little
the best informed man in the world
knew about what was actually happening.
Smith thought, for example, that India had had
a higher standard of living in the past
than was true at that time when he was writing
and higher than that in Western Europe.
Probably, both of those statements are questionable,
and one of them definitely untrue.
My colleague Professor Kindleberger is arguing in Glasgow
in March that although Smith lived
just as the industrial revolution was popping out all over
in its most acute takeoff form, he was remarkably unaware
of that industrial revolution,
and then most of the homely examples he gives
are taken from library books rather than from real life
and from earlier library books,
that is books of earlier date.
Smith thought that the tendency would be
for a falling rate of profit.
A view which was shared later by David Ricardo,
and curiously enough, by Karl Marx.
And which, at the John Diebold lectures,
many of the economists and discussants present,
I should say there were no less than nine discussants there,
they seemed on the whole to agree that
within the last decade or two, there has indeed been,
in the modern economic societies of the affluent West,
a downward trend in the rate of profit
even though the history of our times of the period
since 1776 has, on the whole, been a meandering
of the rate of real interest without much trend,
definite trend upward or downward.
How could one account for this?
Well, Smith would not have been greatly surprised because
Smith unlike David Ricardo put a great deal of emphasis
on technological change, on the division of labor,
and so what you've had is a Schumpeterian process,
a dialectical process in which innovation has tended
to raise the rate of profit and accumulation has tended
to lower it with more or less a Brownian vibration or wobble
of the rate of profits from time in the last 200 years.
How remarkable it is that one can profitably spend
half an hour in discussing the thinking of somebody
who died almost 200 years ago.
That, I think, is the real test
for seminal influence by a writer,
and Adam Smith passes that test with flying colors.
-: If you have any comments or questions
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