pstau001176001.wav / Tape 195 - The 200th anniversary of Adam Smith's "The Wealth of Nations" / Duke Digital Repository

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Welcome once again as MIT Professor Paul Samuelson

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discusses the current economic scene.

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This series is produced by

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Instructional Dynamics Incorporated.

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March 9, 1976 represents

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an important 200-year anniversary.

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The anniversary of the first publication

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of Adam Smith's Wealth of Nations.

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This 200-year birthday party is

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as important to the discipline of economics

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as the bicentennial 200th-year anniversary

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of the founding of the USA is to the citizenry

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of the United States.

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It is rare indeed that a scholarly discipline

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can trace its beginning to a single recognizable time

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and to a single recognizable author

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and to a single recognizable credence.

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But, I believe it is no exaggeration that

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the vast majority of economists would agree

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that Adam Smith represents so important a landmark,

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so important a break with the previous

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primitive developments in economics.

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So important a difference in degree as to constitute

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a difference in kind that Adam Smith can be regarded

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as the founder of economics in the same sense

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that George Washington can be regarded as the founder

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of our country or that VI Lenin can be regarded

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as the founder of the modern Soviet State.

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Adam Smith, I believe, is a living force,

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and I think that he is a rewarding writer

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to talk about quite aside from any feelings of piety

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because the matters which concerned him

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still concern economists today,

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and the precepts concerning the wealth of nations

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which he wrote about have continuing application

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into our times.

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So, let me paint

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something of the background of the 1776 Wealth of Nations,

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and let me relate that work

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to certain present day very lively debates.

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Adam Smith, of course, was a Scot.

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At the time of his youth

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from the 1720s on

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into the 1780s when he died,

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Scotland seemed to be a reservoir of brains

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for the British Isles.

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Doctor Samuel Johnson liked to jest

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about the Scots as if they were an eccentric,

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impoverished, rather over-intellectual group of people.

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But, I think the badinage of Doctor Samuel Johnson

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with respect to his disciple James Boswell

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and with respect to David Hume

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the Scottish philosopher and historian and Adam Smith

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is indicative of the envy and respect

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which Englishmen of that time held

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towards these Scottish thinkers.

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Smith was a bachelor all his life.

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I suppose the most romantic and exciting event in his life

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happened to him at the age of five or six

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when he was kidnapped by gypsies.

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However, he was restored to the bosom

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of his family in short order,

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and he went on to become a student in Scotland

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and a professor in Scotland and,

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unlike so many modern-day professors of economics,

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he was also a learned man of the world.

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He wrote a history of astronomy.

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He traveled on the continent.

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He was the tutor to the son of a nobleman.

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He had a sinecure in the civil service as a tax collector.

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But, what we remember him for today is not

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for his role as Mr. Chips, the lovable, genial,

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Scottish lecturer nor for the convivial Adam Smith

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who met with David Hume and other intellectuals

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to discuss philosophy and history and economics.

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We remember him for the founding

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of the subject matter of economics.

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Smith does not lack for admirers, but in some ways,

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his follower and successor of some fifty years later,

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David Ricardo, has tended to overshadow Smith

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in the textbooks of the history of economic thought.

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Smith is regarded as very early and very primitive,

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and, if I may say so, not very fancy.

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Any non-economist, any business man,

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any self-educated laborer could pick up

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Adam Smith's Wealth of Nations and read it with advantage.

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There are in it no bristling equations or graphs or tables.

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There are thousands, literally, of facts and observations.

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Smith was much better acquainted with all there was to know

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about industry in his time than your typical

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run-of-the-mill associate or full professor today,

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but at that time, economics was not a technical subject.

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By contrast, if you pick up

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the Principles of Economics of David Ricardo,

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you find a style of writing

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which is not very intelligible.

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You find numerical tables.

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It's anything but inviting fare for a non-economist.

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It's much more like an advanced economics treatise of today

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which no non-economist in his right mind

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would every think of picking up.

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Adam Smith is not only the father of economics

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as seen by economists but, what is quite another thing,

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he is also a very important figure in the history of ideas.

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Those are by no means the same thing.

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Alfred Marshall of the University of Cambridge

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from, let us say, 1885 until he died in 1920

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would probably have been revered as

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the greatest economist of his time.

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And yet, if you spend a lifetime, as I have done,

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in reading intellectual history,

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you will not be able to find more than one or two

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or three references to the work of Alfred Marshall

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outside of the technical field of economics.

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Alfred Marshall thought that his 1890

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Principles of Economics, which was an important best seller

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in the field for many years, was written for businessmen,

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but the evidence is remarkably lacking that businessmen ever

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outside of command performances in school

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bothered to read Alfred Marshall's Principles of Economics.

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Not so with Adam Smith, any educated person

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of his time and since could hope to dip into Adam Smith

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not only with pleasure but with advantage.

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What is the stereotype role in the history of ideas

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that Adam Smith is thought to have played?

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Well for once, the vulgar stereotype

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comes very near the true mark.

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Adam Smith came at a time when government

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over-regulation of industry was on its way out,

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and Smith was both an effect of that process

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and, in his own right, an important cause.

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He analyzes in great detail

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the follies of government interference.

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He extols the merits of freedom,

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of laissez-faire, so by large the notion of Adam Smith

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as the apologist for laissez-faire,

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for the rising bourgeoisie class,

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Smith as the critic of the dying futile order,

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as no lover of the land owner,

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I think that that particular stereotype is

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a pretty faithful rendition of what it is

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that is important about Adam Smith.

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Now, nothing that I have said contradicts the notion

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that Adam Smith was a humane, eclectic

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and temperate man in his ideologies.

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You can easily in an afternoon with The Wealth of Nations,

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by they way, there's a very convenient edition

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of The Wealth of Nations in the Modern Library Series

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adapted by Edwin Cannan,

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an English economist of the last generation or two,

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you can cull passages from Adam Smith

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which show him to be no reactionary,

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no friend of the plutocratic interests.

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I have in mind passages like this,

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masters never meet even for the purposes

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of innocent merriment and dinners

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but what they plot against the public interest.

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These could've been marvelous anticipations

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of Judge Elbert Gary's famous dinners

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in which he brought together executives

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and tycoons in the steel industry,

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and in the course of what was probably a very good meal,

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they conspired on maintaining prices

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above a competitive level.

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Smith was also very much acquainted with the monopolies

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which the budding trade union movement was trying to create.

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Smith did have certain limited functions for government.

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If somebody had said to Smith, should the government have

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an anti-trust division to police departures

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from perfect competition, Adam Smith would probably

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have replied, in principle, monopoly is bad.

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In principle, successful regulation which reduced

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the degree of monopoly and achieved a greater approximation

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to free competition would be good, but in practice,

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now in 1776 or 1783 at the time of the second edition,

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my considered opinion is that the government'll pry

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make things worse if it tries to interfere in this matter.

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Well, there's many an economist today,

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prominent, respected economist, who has moved to

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this new position or back to Adam Smith's old position.

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I think it's fruitless to try to decide

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where Adam Smith would fit in

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in today's ideological spectrum

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if he were brought back to life.

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Given where he stood at the time of the 18th century,

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it might well be the case that he would be

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at exactly that golden central position

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that I myself try to occupy.

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But, it would be self-deception

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and self-flattery to assert that to be the case,

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and I'm sure that people both to the left of me

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and to the right of me, when they engage

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in their contrafactual reconstructions

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of intellectual history and bring Adam Smith back to life,

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they find that Adam Smith turns out, with all his wisdom,

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to be almost precisely where they, with all their wisdom,

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have decided it's best to be.

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Now, I'm the more reminded of this centennial because

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we are right now, in the economics profession,

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along with the nation's bicentennial having

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a whole series of commemorative symposia and meetings

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to honor the memory of Adam Smith.

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In Scotland in March, there will be a gathering

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of Adam Smith experts from all over the world.

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Professor George Stigler of the

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University of Chicago will be there.

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Professor Charles Kindleberger of MIT will be there.

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And, at Harvard University February 27th and 28th,

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there were held the John Diebold lectures

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called New Challenges to the Role of Profit.

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This was a Harvard series, the fourth series

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of John Diebold lectures since the late 1960s,

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addressed this time to the role of profit,

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and it turned out that quoting Adam Smith and analyzing

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and criticizing the positions of Adam Smith

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with respect to the rate of profit was very widespread,

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and I must say very appropriate.

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I myself was the first of three major lecturers.

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I spoke about the role of profits in a mixed economy,

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changes in the perceived reality.

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Well, that was my assigned title, but the title

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that I chose actually to address myself to was

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the views of profit as seen by the modern-day economist

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and by non-economists, and a good deal of my discussion

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could profitably begin from a discussion

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of Adam Smith's division of the national income of society

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into three or four major components, on the one hand

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the wages of labor, on the other hand the interests,

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interest rate, interest earnings on capital,

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on produced inputs, the rent of land.

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Then, as distinct from the sure thing,

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safe competitive rate of interest,

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there is a fourth component

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which might be called differential profit.

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Adam Smith, Smith himself said that the rate of interest

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is about five or 6%, and the rate of profit

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typically is about double that, about 12%.

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Why this difference?

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Part of it, obviously, was the wages

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of scarce, valuable, managerial talent.

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Part of it was a allowance for risk.

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When you make a lot of money on one shipping venture,

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you must realize that the pickings

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aren't all that easy and certain,

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and that on some other shipping venture,

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people are losing money, so the average premium

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for risk-taking over and above

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the safe gilt-edge rate of interest would be much less,

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one would suppose, than a doubling

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of the gilt-edge rate of interest.

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In Adam Smith's day, we didn't have to talk about pre-tax

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and post-tax rates of profit because by and large,

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although Smith himself was a tax collector part of his life,

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the taxes to British Isles depended upon,

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and other countries depended upon,

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were largely excises and not income taxes.

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In our own day, Frank Knight, famous professor

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at the University of Chicago just recently dead

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in his late 80s, argued that people are not risk adverse,

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and that the premium for risk-taking

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need not be a positive premium.

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It might be zero or might even be negative

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as people will pay for the privilege

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of gaming and of taking risks.

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I think the bulk of the data on the stock market,

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when we come to analyze it, suggests that,

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on the whole, people are risk takers

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even though they do spend some weekends in Las Vegas.

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Smith's general notion was that any excess profits

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that couldn't be accounted for by some real cost

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would in the longer run be competed away.

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And, his view of the national income,

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and indeed of the components of the price of any good,

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was essentially a three-fold view.

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The price of any good involves a return to labor

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which is a needed compensation for the psychic sweat

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or disutility of working.

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The interest and profit component,

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we can consider those to be the same if there

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is no riskiness in the situation,

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no probabilistic uncertainty.

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Smith would have agreed with Nassau Senior

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who came along some half a century later that

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there was a certain amount of unpleasantness involved

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in giving up today's current consumption

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in return for future consumption.

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If one gives up 100 chocolates

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or 100 baskets of goods today, as compensation,

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for the psychic disutility of doing so,

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one must not only get back one's principle

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of 100 chocolates next year or 100 baskets of goods

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next year, but one must get some premium

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for the psychic disutility of waiting or abstinence.

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The third big component of price and of national income,

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the return to land rent, which Smith,

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like some of the earlier physiocrats

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in casual moments seem to think there were three

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major classes who got three different kinds of income,

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he thought of these as 1/3, 1/3, 1/3,

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just the way you might say on a typical farm.

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1/3 goes to the landowner, 1/3 to the operator

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and 1/3 to the labor, that was his view of the GNP.

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Well, this third component Smith regarded

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as an undeserved component.

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The land itself is productive, yes.

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It is indispensable for production, yes.

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But, the landowner is not indispensable.

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He's quite dispensable.

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As Smith said, landlords like to reap

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where other men have sown.

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So, Smith would've been very much in the tradition

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both of the physiocrats before him and of Henry George

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and Ricardians after him of wishing to tax,

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if you can identify it, the return to pure land,

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the pure Ricardian rent, the return to the original,

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inexhaustible, unaugmentable gift of nature.

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Now, the return to land which had been improved

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by draining and by investing of capital into it,

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Smith would've regarded as interest much like

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other interest, but this original return to raw land,

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the pure rent component, he thought of

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as not a necessary component of price.

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Well, Smith was not only a statical economic theorist,

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he also had a vision of progress

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and of what was happening over time.

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In his view, the future of the capitalistic order

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in the century let's say after 1776, 1783,

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would be a century of capital accumulation.

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He believed that the rate of profit, the rate of interest

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was lower in Holland than in the British Isles

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because over past decades,

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the Dutch had thriftily accumulated capital,

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had used up all the high-profit opportunities

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and now were reduced to building bridges and dikes

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which would yield only a low profit,

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and he thought the same thing would happen to Britain.

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Smith was a believer in the doctrine

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that it is better to travel than to arrive.

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He thought the process of growth would be a happy state

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in which wages would not be ground down to the minimum.

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As long as an economy was progressing,

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he believed the workers would be sharing

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in a rising standard of living

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higher than the bare minimum of subsistence.

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But, once accumulation ceased, the remorseless

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biological increase of population would,

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in a fashion that Malthus later was to make popular

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and which Ricardo was to analyze and detail,

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would cause there to be a reduction in wages.

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Now, I've commented that Smith was a very

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well-informed person for his time,

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but we must remind ourselves how little

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the best informed man in the world

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knew about what was actually happening.

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Smith thought, for example, that India had had

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a higher standard of living in the past

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than was true at that time when he was writing

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and higher than that in Western Europe.

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Probably, both of those statements are questionable,

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and one of them definitely untrue.

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My colleague Professor Kindleberger is arguing in Glasgow

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in March that although Smith lived

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just as the industrial revolution was popping out all over

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in its most acute takeoff form, he was remarkably unaware

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of that industrial revolution,

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and then most of the homely examples he gives

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are taken from library books rather than from real life

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and from earlier library books,

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that is books of earlier date.

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Smith thought that the tendency would be

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for a falling rate of profit.

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A view which was shared later by David Ricardo,

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and curiously enough, by Karl Marx.

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And which, at the John Diebold lectures,

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many of the economists and discussants present,

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I should say there were no less than nine discussants there,

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they seemed on the whole to agree that

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within the last decade or two, there has indeed been,

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in the modern economic societies of the affluent West,

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a downward trend in the rate of profit

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even though the history of our times of the period

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since 1776 has, on the whole, been a meandering

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of the rate of real interest without much trend,

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definite trend upward or downward.

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How could one account for this?

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Well, Smith would not have been greatly surprised because

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Smith unlike David Ricardo put a great deal of emphasis

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on technological change, on the division of labor,

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and so what you've had is a Schumpeterian process,

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a dialectical process in which innovation has tended

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to raise the rate of profit and accumulation has tended

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to lower it with more or less a Brownian vibration or wobble

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of the rate of profits from time in the last 200 years.

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How remarkable it is that one can profitably spend

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half an hour in discussing the thinking of somebody

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who died almost 200 years ago.

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That, I think, is the real test

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for seminal influence by a writer,

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and Adam Smith passes that test with flying colors.

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If you have any comments or questions

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for Professor Samuelson, address them to

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Instructional Dynamics Incorporated,

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450 East Ohio Street Chicago, Illinois 60611.

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