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- | Welcome once again as MIT Professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This series is produced by | 0:08 | |
Instructional Dynamics Incorporated. | 0:09 | |
- | March 9, 1976 represents | 0:13 |
an important 200-year anniversary. | 0:17 | |
The anniversary of the first publication | 0:23 | |
of Adam Smith's Wealth of Nations. | 0:25 | |
This 200-year birthday party is | 0:30 | |
as important to the discipline of economics | 0:35 | |
as the bicentennial 200th-year anniversary | 0:40 | |
of the founding of the USA is to the citizenry | 0:46 | |
of the United States. | 0:50 | |
It is rare indeed that a scholarly discipline | 0:52 | |
can trace its beginning to a single recognizable time | 0:56 | |
and to a single recognizable author | 1:02 | |
and to a single recognizable credence. | 1:06 | |
But, I believe it is no exaggeration that | 1:11 | |
the vast majority of economists would agree | 1:14 | |
that Adam Smith represents so important a landmark, | 1:17 | |
so important a break with the previous | 1:22 | |
primitive developments in economics. | 1:26 | |
So important a difference in degree as to constitute | 1:30 | |
a difference in kind that Adam Smith can be regarded | 1:35 | |
as the founder of economics in the same sense | 1:39 | |
that George Washington can be regarded as the founder | 1:42 | |
of our country or that VI Lenin can be regarded | 1:45 | |
as the founder of the modern Soviet State. | 1:51 | |
Adam Smith, I believe, is a living force, | 1:57 | |
and I think that he is a rewarding writer | 2:01 | |
to talk about quite aside from any feelings of piety | 2:06 | |
because the matters which concerned him | 2:12 | |
still concern economists today, | 2:17 | |
and the precepts concerning the wealth of nations | 2:21 | |
which he wrote about have continuing application | 2:26 | |
into our times. | 2:31 | |
So, let me paint | 2:34 | |
something of the background of the 1776 Wealth of Nations, | 2:40 | |
and let me relate that work | 2:47 | |
to certain present day very lively debates. | 2:53 | |
Adam Smith, of course, was a Scot. | 2:59 | |
At the time of his youth | 3:03 | |
from the 1720s on | 3:07 | |
into the 1780s when he died, | 3:10 | |
Scotland seemed to be a reservoir of brains | 3:14 | |
for the British Isles. | 3:17 | |
Doctor Samuel Johnson liked to jest | 3:20 | |
about the Scots as if they were an eccentric, | 3:25 | |
impoverished, rather over-intellectual group of people. | 3:30 | |
But, I think the badinage of Doctor Samuel Johnson | 3:39 | |
with respect to his disciple James Boswell | 3:46 | |
and with respect to David Hume | 3:50 | |
the Scottish philosopher and historian and Adam Smith | 3:54 | |
is indicative of the envy and respect | 3:57 | |
which Englishmen of that time held | 4:02 | |
towards these Scottish thinkers. | 4:05 | |
Smith was a bachelor all his life. | 4:09 | |
I suppose the most romantic and exciting event in his life | 4:12 | |
happened to him at the age of five or six | 4:16 | |
when he was kidnapped by gypsies. | 4:19 | |
However, he was restored to the bosom | 4:22 | |
of his family in short order, | 4:24 | |
and he went on to become a student in Scotland | 4:28 | |
and a professor in Scotland and, | 4:36 | |
unlike so many modern-day professors of economics, | 4:40 | |
he was also a learned man of the world. | 4:44 | |
He wrote a history of astronomy. | 4:49 | |
He traveled on the continent. | 4:50 | |
He was the tutor to the son of a nobleman. | 4:52 | |
He had a sinecure in the civil service as a tax collector. | 4:57 | |
But, what we remember him for today is not | 5:04 | |
for his role as Mr. Chips, the lovable, genial, | 5:10 | |
Scottish lecturer nor for the convivial Adam Smith | 5:16 | |
who met with David Hume and other intellectuals | 5:23 | |
to discuss philosophy and history and economics. | 5:26 | |
We remember him for the founding | 5:30 | |
of the subject matter of economics. | 5:33 | |
Smith does not lack for admirers, but in some ways, | 5:39 | |
his follower and successor of some fifty years later, | 5:46 | |
David Ricardo, has tended to overshadow Smith | 5:51 | |
in the textbooks of the history of economic thought. | 5:57 | |
Smith is regarded as very early and very primitive, | 6:05 | |
and, if I may say so, not very fancy. | 6:10 | |
Any non-economist, any business man, | 6:14 | |
any self-educated laborer could pick up | 6:18 | |
Adam Smith's Wealth of Nations and read it with advantage. | 6:23 | |
There are in it no bristling equations or graphs or tables. | 6:27 | |
There are thousands, literally, of facts and observations. | 6:34 | |
Smith was much better acquainted with all there was to know | 6:40 | |
about industry in his time than your typical | 6:45 | |
run-of-the-mill associate or full professor today, | 6:49 | |
but at that time, economics was not a technical subject. | 6:53 | |
By contrast, if you pick up | 6:58 | |
the Principles of Economics of David Ricardo, | 7:01 | |
you find a style of writing | 7:05 | |
which is not very intelligible. | 7:11 | |
You find numerical tables. | 7:13 | |
It's anything but inviting fare for a non-economist. | 7:17 | |
It's much more like an advanced economics treatise of today | 7:23 | |
which no non-economist in his right mind | 7:29 | |
would every think of picking up. | 7:33 | |
Adam Smith is not only the father of economics | 7:39 | |
as seen by economists but, what is quite another thing, | 7:45 | |
he is also a very important figure in the history of ideas. | 7:50 | |
Those are by no means the same thing. | 7:57 | |
Alfred Marshall of the University of Cambridge | 7:59 | |
from, let us say, 1885 until he died in 1920 | 8:03 | |
would probably have been revered as | 8:08 | |
the greatest economist of his time. | 8:11 | |
And yet, if you spend a lifetime, as I have done, | 8:16 | |
in reading intellectual history, | 8:21 | |
you will not be able to find more than one or two | 8:29 | |
or three references to the work of Alfred Marshall | 8:31 | |
outside of the technical field of economics. | 8:36 | |
Alfred Marshall thought that his 1890 | 8:40 | |
Principles of Economics, which was an important best seller | 8:43 | |
in the field for many years, was written for businessmen, | 8:47 | |
but the evidence is remarkably lacking that businessmen ever | 8:53 | |
outside of command performances in school | 8:58 | |
bothered to read Alfred Marshall's Principles of Economics. | 9:04 | |
Not so with Adam Smith, any educated person | 9:09 | |
of his time and since could hope to dip into Adam Smith | 9:12 | |
not only with pleasure but with advantage. | 9:17 | |
What is the stereotype role in the history of ideas | 9:24 | |
that Adam Smith is thought to have played? | 9:30 | |
Well for once, the vulgar stereotype | 9:34 | |
comes very near the true mark. | 9:37 | |
Adam Smith came at a time when government | 9:41 | |
over-regulation of industry was on its way out, | 9:46 | |
and Smith was both an effect of that process | 9:50 | |
and, in his own right, an important cause. | 9:55 | |
He analyzes in great detail | 9:58 | |
the follies of government interference. | 10:02 | |
He extols the merits of freedom, | 10:06 | |
of laissez-faire, so by large the notion of Adam Smith | 10:13 | |
as the apologist for laissez-faire, | 10:22 | |
for the rising bourgeoisie class, | 10:26 | |
Smith as the critic of the dying futile order, | 10:32 | |
as no lover of the land owner, | 10:39 | |
I think that that particular stereotype is | 10:43 | |
a pretty faithful rendition of what it is | 10:47 | |
that is important about Adam Smith. | 10:50 | |
Now, nothing that I have said contradicts the notion | 10:54 | |
that Adam Smith was a humane, eclectic | 10:59 | |
and temperate man in his ideologies. | 11:03 | |
You can easily in an afternoon with The Wealth of Nations, | 11:11 | |
by they way, there's a very convenient edition | 11:17 | |
of The Wealth of Nations in the Modern Library Series | 11:21 | |
adapted by Edwin Cannan, | 11:26 | |
an English economist of the last generation or two, | 11:29 | |
you can cull passages from Adam Smith | 11:35 | |
which show him to be no reactionary, | 11:38 | |
no friend of the plutocratic interests. | 11:41 | |
I have in mind passages like this, | 11:46 | |
masters never meet even for the purposes | 11:51 | |
of innocent merriment and dinners | 11:55 | |
but what they plot against the public interest. | 11:57 | |
These could've been marvelous anticipations | 12:03 | |
of Judge Elbert Gary's famous dinners | 12:09 | |
in which he brought together executives | 12:13 | |
and tycoons in the steel industry, | 12:15 | |
and in the course of what was probably a very good meal, | 12:17 | |
they conspired on maintaining prices | 12:22 | |
above a competitive level. | 12:28 | |
Smith was also very much acquainted with the monopolies | 12:32 | |
which the budding trade union movement was trying to create. | 12:38 | |
Smith did have certain limited functions for government. | 12:47 | |
If somebody had said to Smith, should the government have | 12:54 | |
an anti-trust division to police departures | 12:56 | |
from perfect competition, Adam Smith would probably | 13:02 | |
have replied, in principle, monopoly is bad. | 13:06 | |
In principle, successful regulation which reduced | 13:12 | |
the degree of monopoly and achieved a greater approximation | 13:16 | |
to free competition would be good, but in practice, | 13:20 | |
now in 1776 or 1783 at the time of the second edition, | 13:28 | |
my considered opinion is that the government'll pry | 13:35 | |
make things worse if it tries to interfere in this matter. | 13:37 | |
Well, there's many an economist today, | 13:44 | |
prominent, respected economist, who has moved to | 13:48 | |
this new position or back to Adam Smith's old position. | 13:53 | |
I think it's fruitless to try to decide | 13:59 | |
where Adam Smith would fit in | 14:03 | |
in today's ideological spectrum | 14:08 | |
if he were brought back to life. | 14:12 | |
Given where he stood at the time of the 18th century, | 14:17 | |
it might well be the case that he would be | 14:19 | |
at exactly that golden central position | 14:26 | |
that I myself try to occupy. | 14:33 | |
But, it would be self-deception | 14:38 | |
and self-flattery to assert that to be the case, | 14:42 | |
and I'm sure that people both to the left of me | 14:48 | |
and to the right of me, when they engage | 14:50 | |
in their contrafactual reconstructions | 14:53 | |
of intellectual history and bring Adam Smith back to life, | 14:56 | |
they find that Adam Smith turns out, with all his wisdom, | 15:00 | |
to be almost precisely where they, with all their wisdom, | 15:05 | |
have decided it's best to be. | 15:09 | |
Now, I'm the more reminded of this centennial because | 15:17 | |
we are right now, in the economics profession, | 15:24 | |
along with the nation's bicentennial having | 15:28 | |
a whole series of commemorative symposia and meetings | 15:31 | |
to honor the memory of Adam Smith. | 15:39 | |
In Scotland in March, there will be a gathering | 15:43 | |
of Adam Smith experts from all over the world. | 15:49 | |
Professor George Stigler of the | 15:53 | |
University of Chicago will be there. | 15:54 | |
Professor Charles Kindleberger of MIT will be there. | 15:55 | |
And, at Harvard University February 27th and 28th, | 16:02 | |
there were held the John Diebold lectures | 16:11 | |
called New Challenges to the Role of Profit. | 16:18 | |
This was a Harvard series, the fourth series | 16:22 | |
of John Diebold lectures since the late 1960s, | 16:28 | |
addressed this time to the role of profit, | 16:36 | |
and it turned out that quoting Adam Smith and analyzing | 16:38 | |
and criticizing the positions of Adam Smith | 16:43 | |
with respect to the rate of profit was very widespread, | 16:46 | |
and I must say very appropriate. | 16:54 | |
I myself was the first of three major lecturers. | 16:57 | |
I spoke about the role of profits in a mixed economy, | 17:05 | |
changes in the perceived reality. | 17:08 | |
Well, that was my assigned title, but the title | 17:10 | |
that I chose actually to address myself to was | 17:13 | |
the views of profit as seen by the modern-day economist | 17:16 | |
and by non-economists, and a good deal of my discussion | 17:21 | |
could profitably begin from a discussion | 17:29 | |
of Adam Smith's division of the national income of society | 17:32 | |
into three or four major components, on the one hand | 17:38 | |
the wages of labor, on the other hand the interests, | 17:42 | |
interest rate, interest earnings on capital, | 17:47 | |
on produced inputs, the rent of land. | 17:51 | |
Then, as distinct from the sure thing, | 17:59 | |
safe competitive rate of interest, | 18:03 | |
there is a fourth component | 18:06 | |
which might be called differential profit. | 18:11 | |
Adam Smith, Smith himself said that the rate of interest | 18:15 | |
is about five or 6%, and the rate of profit | 18:19 | |
typically is about double that, about 12%. | 18:22 | |
Why this difference? | 18:26 | |
Part of it, obviously, was the wages | 18:29 | |
of scarce, valuable, managerial talent. | 18:32 | |
Part of it was a allowance for risk. | 18:39 | |
When you make a lot of money on one shipping venture, | 18:43 | |
you must realize that the pickings | 18:48 | |
aren't all that easy and certain, | 18:51 | |
and that on some other shipping venture, | 18:53 | |
people are losing money, so the average premium | 18:55 | |
for risk-taking over and above | 19:00 | |
the safe gilt-edge rate of interest would be much less, | 19:03 | |
one would suppose, than a doubling | 19:09 | |
of the gilt-edge rate of interest. | 19:12 | |
In Adam Smith's day, we didn't have to talk about pre-tax | 19:15 | |
and post-tax rates of profit because by and large, | 19:18 | |
although Smith himself was a tax collector part of his life, | 19:22 | |
the taxes to British Isles depended upon, | 19:27 | |
and other countries depended upon, | 19:29 | |
were largely excises and not income taxes. | 19:31 | |
In our own day, Frank Knight, famous professor | 19:38 | |
at the University of Chicago just recently dead | 19:42 | |
in his late 80s, argued that people are not risk adverse, | 19:48 | |
and that the premium for risk-taking | 19:52 | |
need not be a positive premium. | 19:57 | |
It might be zero or might even be negative | 19:59 | |
as people will pay for the privilege | 20:01 | |
of gaming and of taking risks. | 20:04 | |
I think the bulk of the data on the stock market, | 20:07 | |
when we come to analyze it, suggests that, | 20:13 | |
on the whole, people are risk takers | 20:16 | |
even though they do spend some weekends in Las Vegas. | 20:18 | |
Smith's general notion was that any excess profits | 20:26 | |
that couldn't be accounted for by some real cost | 20:32 | |
would in the longer run be competed away. | 20:39 | |
And, his view of the national income, | 20:44 | |
and indeed of the components of the price of any good, | 20:46 | |
was essentially a three-fold view. | 20:50 | |
The price of any good involves a return to labor | 20:53 | |
which is a needed compensation for the psychic sweat | 20:58 | |
or disutility of working. | 21:01 | |
The interest and profit component, | 21:05 | |
we can consider those to be the same if there | 21:11 | |
is no riskiness in the situation, | 21:14 | |
no probabilistic uncertainty. | 21:20 | |
Smith would have agreed with Nassau Senior | 21:25 | |
who came along some half a century later that | 21:30 | |
there was a certain amount of unpleasantness involved | 21:34 | |
in giving up today's current consumption | 21:38 | |
in return for future consumption. | 21:41 | |
If one gives up 100 chocolates | 21:44 | |
or 100 baskets of goods today, as compensation, | 21:46 | |
for the psychic disutility of doing so, | 21:51 | |
one must not only get back one's principle | 21:54 | |
of 100 chocolates next year or 100 baskets of goods | 21:57 | |
next year, but one must get some premium | 22:04 | |
for the psychic disutility of waiting or abstinence. | 22:08 | |
The third big component of price and of national income, | 22:16 | |
the return to land rent, which Smith, | 22:21 | |
like some of the earlier physiocrats | 22:24 | |
in casual moments seem to think there were three | 22:26 | |
major classes who got three different kinds of income, | 22:31 | |
he thought of these as 1/3, 1/3, 1/3, | 22:34 | |
just the way you might say on a typical farm. | 22:37 | |
1/3 goes to the landowner, 1/3 to the operator | 22:40 | |
and 1/3 to the labor, that was his view of the GNP. | 22:42 | |
Well, this third component Smith regarded | 22:48 | |
as an undeserved component. | 22:51 | |
The land itself is productive, yes. | 22:54 | |
It is indispensable for production, yes. | 22:57 | |
But, the landowner is not indispensable. | 23:00 | |
He's quite dispensable. | 23:03 | |
As Smith said, landlords like to reap | 23:05 | |
where other men have sown. | 23:10 | |
So, Smith would've been very much in the tradition | 23:13 | |
both of the physiocrats before him and of Henry George | 23:18 | |
and Ricardians after him of wishing to tax, | 23:21 | |
if you can identify it, the return to pure land, | 23:25 | |
the pure Ricardian rent, the return to the original, | 23:31 | |
inexhaustible, unaugmentable gift of nature. | 23:35 | |
Now, the return to land which had been improved | 23:40 | |
by draining and by investing of capital into it, | 23:42 | |
Smith would've regarded as interest much like | 23:47 | |
other interest, but this original return to raw land, | 23:51 | |
the pure rent component, he thought of | 23:56 | |
as not a necessary component of price. | 23:59 | |
Well, Smith was not only a statical economic theorist, | 24:05 | |
he also had a vision of progress | 24:08 | |
and of what was happening over time. | 24:12 | |
In his view, the future of the capitalistic order | 24:15 | |
in the century let's say after 1776, 1783, | 24:20 | |
would be a century of capital accumulation. | 24:26 | |
He believed that the rate of profit, the rate of interest | 24:33 | |
was lower in Holland than in the British Isles | 24:36 | |
because over past decades, | 24:38 | |
the Dutch had thriftily accumulated capital, | 24:41 | |
had used up all the high-profit opportunities | 24:47 | |
and now were reduced to building bridges and dikes | 24:53 | |
which would yield only a low profit, | 24:55 | |
and he thought the same thing would happen to Britain. | 24:58 | |
Smith was a believer in the doctrine | 25:06 | |
that it is better to travel than to arrive. | 25:08 | |
He thought the process of growth would be a happy state | 25:11 | |
in which wages would not be ground down to the minimum. | 25:16 | |
As long as an economy was progressing, | 25:22 | |
he believed the workers would be sharing | 25:25 | |
in a rising standard of living | 25:28 | |
higher than the bare minimum of subsistence. | 25:30 | |
But, once accumulation ceased, the remorseless | 25:35 | |
biological increase of population would, | 25:41 | |
in a fashion that Malthus later was to make popular | 25:45 | |
and which Ricardo was to analyze and detail, | 25:48 | |
would cause there to be a reduction in wages. | 25:51 | |
Now, I've commented that Smith was a very | 25:57 | |
well-informed person for his time, | 25:59 | |
but we must remind ourselves how little | 26:01 | |
the best informed man in the world | 26:04 | |
knew about what was actually happening. | 26:06 | |
Smith thought, for example, that India had had | 26:09 | |
a higher standard of living in the past | 26:12 | |
than was true at that time when he was writing | 26:15 | |
and higher than that in Western Europe. | 26:18 | |
Probably, both of those statements are questionable, | 26:21 | |
and one of them definitely untrue. | 26:26 | |
My colleague Professor Kindleberger is arguing in Glasgow | 26:29 | |
in March that although Smith lived | 26:37 | |
just as the industrial revolution was popping out all over | 26:40 | |
in its most acute takeoff form, he was remarkably unaware | 26:44 | |
of that industrial revolution, | 26:49 | |
and then most of the homely examples he gives | 26:52 | |
are taken from library books rather than from real life | 26:55 | |
and from earlier library books, | 26:58 | |
that is books of earlier date. | 27:00 | |
Smith thought that the tendency would be | 27:04 | |
for a falling rate of profit. | 27:08 | |
A view which was shared later by David Ricardo, | 27:11 | |
and curiously enough, by Karl Marx. | 27:15 | |
And which, at the John Diebold lectures, | 27:19 | |
many of the economists and discussants present, | 27:24 | |
I should say there were no less than nine discussants there, | 27:28 | |
they seemed on the whole to agree that | 27:31 | |
within the last decade or two, there has indeed been, | 27:35 | |
in the modern economic societies of the affluent West, | 27:38 | |
a downward trend in the rate of profit | 27:43 | |
even though the history of our times of the period | 27:47 | |
since 1776 has, on the whole, been a meandering | 27:52 | |
of the rate of real interest without much trend, | 27:57 | |
definite trend upward or downward. | 28:02 | |
How could one account for this? | 28:07 | |
Well, Smith would not have been greatly surprised because | 28:08 | |
Smith unlike David Ricardo put a great deal of emphasis | 28:12 | |
on technological change, on the division of labor, | 28:17 | |
and so what you've had is a Schumpeterian process, | 28:20 | |
a dialectical process in which innovation has tended | 28:24 | |
to raise the rate of profit and accumulation has tended | 28:27 | |
to lower it with more or less a Brownian vibration or wobble | 28:31 | |
of the rate of profits from time in the last 200 years. | 28:38 | |
How remarkable it is that one can profitably spend | 28:45 | |
half an hour in discussing the thinking of somebody | 28:50 | |
who died almost 200 years ago. | 28:56 | |
That, I think, is the real test | 29:00 | |
for seminal influence by a writer, | 29:02 | |
and Adam Smith passes that test with flying colors. | 29:06 | |
- | If you have any comments or questions | 29:11 |
for Professor Samuelson, address them to | 29:13 | |
Instructional Dynamics Incorporated, | 29:15 | |
450 East Ohio Street Chicago, Illinois 60611. | 29:17 |
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