Was Adam Smith Really a Right-Winger? (Update)

15:01Mariana Mazzucato:One place to start is to ask, okay, well, what were the problems and complexities in the earlier versions of Smith? So this brings us to kind of early Chicago school. The figures that I look at are people like Jacob Viner and Frank Knight, and they are these like heavyweights. The University of Chicago doesn't have the reputation that it does today when Jacob Viner and Frank Knight were around in like the 1930s. They teach Smith as an early theorist of price. So teaching Smith as an early theorist of price and somebody who gives scientific value and a kind of objectivity to economics is really important for building intellectual credibility, let's call it, of Chicago's way of doing economics.

15:49Russ Roberts:But then Viner and Knight go away. They, whatever, they move, they die, right?

15:55Mariana Mazzucato:Yeah, yeah.

15:55Russ Roberts:Then there's the new generation. Here's what you write about them. You write that by reworking Smithian concepts like individualism, self-interest, and the invisible hand, a new set of thinkers like Friedrich Hayek, George Stigler, and Milton Friedman transformed Smith into an original way of thinking about an individualistic, market-oriented society that was justifiable on social, scientific grounds. So, wowzer, that's an incredibly powerful sentence. And again, much to be unpacked.

16:27Mariana Mazzucato:Let's start with self-interest. Self-interest in old Chicago school view is not just rational utility maximizing individualism. It's a human motivation among many, and there are extreme versions of self-interest that are dangerous. We lose that texture when we get to somebody like George Stigler, who looks to Smith as the Prometheus of economics. Self-interest has the most explanatory power.

17:01Russ Roberts:Did Stigler view Smith that way because Stigler felt that way and looked for support? Or was he persuaded of that view by Smith's writing itself?

17:12Mariana Mazzucato:I think it was both. And the reason why I say this is because Stigler loved the history of economic thought. And so I don't want to treat Stigler

17:21Russ Roberts:like this kind of a fanboy, a fanboy who's just cherry picking.

17:26Mariana Mazzucato:But I do think that it was this symbiotic relationship where like Stigler loved reading Smith and he also happened to find the perfect mascot that coincided with his own views of what economics should be and how to think about economics in relation to the politics of deregulation.

17:53Russ Roberts:In Glory Lu's book, there is a photograph of a grinning George Stigler wearing a t-shirt that says Adam Smith's best friend. Where did that come from? As the story goes, Stigler liked to play a game with the very young children in his family where he would offer a million dollars if they could answer a tough question. One day he asked, who is Adam Smith's best friend? The answer Stigler was looking for was David Hume. The answer he got was, you are, Uncle George. It was a pretty good answer. Good enough to go on a T-shirt, at least. Stigler and a few other Chicago economists had had a tremendous impact on the reputation of a man who by then had been dead nearly 200 years.

18:39Dennis Rasmussen:Okay, so the Chicago school picked up a few aspects of Smith's thought and made it the whole of Smith's thought.

18:48Russ Roberts:That is Dennis Rasmussen, another Smith scholar. He is a political scientist at Syracuse University.

18:53Dennis Rasmussen:They picked out the phrase the invisible hand, which he uses just two or three times in his writings, and made that the central feature of who Smith was. To me, that's unfortunate.

19:04Russ Roberts:The phrase the invisible hand appears exactly once in The Wealth of Nations. It is in a section about whether local businessmen would be tempted to use foreign trade to enrich themselves at the expense of their nation. Smith's argument was that no, they wouldn't. Why not? Here is Smith's reasoning.

19:51Mariana Mazzucato:intention.

19:52Russ Roberts:Whether Smith was actually right in this regard and whether his reasoning holds up today, that is a matter of debate. During the past few decades of economic globalization, there's plenty of evidence to the contrary. In any case, Smith's phrase, the invisible hand, has come to mean something different. Yeah. It's a lovely phrase and nobody can deny that. And that's Craig Smith, yet another Adam Smith scholar. He is at the University of Glasgow.

20:19Eamonn Butler:One of the problems with it is that it's come to mean a particular set of modern ideas, a shorthand for a particular conception of how markets operate, that's not quite the same as the uses that Smith puts it to in his work. So if you look at the uses that Smith puts it to, it's a kind of metaphor for an unintended consequences explanation. So he explains how something is produced out of social interaction without it being the intention of any of the actors.

20:50Russ Roberts:But the unintended consequences being what economists call positive externalities versus any negative externalities, correct? Indeed.

20:59Eamonn Butler:But you can also look elsewhere in his work and find unintended consequence arguments with negative outcomes. And it just so happens that the invisible hand has a nice phrase, has become associated with positive cases of unintended consequences. And that's led to it then becoming associated with a whole range of different arguments.

21:17Russ Roberts:What Craig Smith is saying here is that the phrase the invisible hand today is used to imply that economic markets will operate perfectly well if you just let them be. Even though that's not what Adam Smith was saying. Here is Dennis Rasmussen again.

21:34Dennis Rasmussen:I think one of the most valuable and interesting aspects of Smith's thought is precisely that he recognized the real potential drawbacks and dangers of commercial society. The ways that commerce can produce great inequalities, the ways that wealthy merchants and manufacturers collude against the public interest, and above all, the way that the desire for wealth often leads people to submit to endless toil and anxiety in the pursuit of just frivolous material goods that will produce only fleeting satisfaction. And so I think too many of the Chicago school thinkers, even today's self-proclaimed Smithians, read him as a mere apologist for commercial society, whereas I think he was anything but.

22:13Dennis Rasmussen:It's not that Smith didn't ultimately defend commercial society. He absolutely did. He's absolutely convinced that commercial society's faults, though real and important, are not nearly as numerous or as great as those of other forms of society. That the security and liberty and prosperity that commercial societies make possible constitutes a real improvement over the alternatives.

22:37Russ Roberts:Do you think economists, including the Chicago School, knowingly exploited Smith's teachings, knowingly cherry-picked for their purposes? Or were they true believers and focused on what resonated most and just didn't really engage too much with the rest?

22:54Dennis Rasmussen:My sense is the latter. Smith isn't a particularly easy thinker to read or to understand. I mean, he writes in English and it's modern English, so it can sometimes have the appearance of being very familiar and easy. But to understand the nuances of his thought, you really have to spend some time with it.

23:13Russ Roberts:But the fact is that the Chicago economists, George Stigler and especially Milton Friedman, did promote Adam Smith as a sort of superhero of economic thought. Glory Liu again.

23:26Mariana Mazzucato:Friedman was a rhetorical genius. Like, he was so charismatic and he was so good at speaking to the public.

23:34Russ Roberts:Here, for instance, is Milton Friedman as host of the public television show Free to Choose.

23:41Eamonn Butler:As Adam Smith wrote over 200 years ago, in the economic market, people who intend to serve only their own private interests are led by an invisible hand to serve public interests that it was no part of their intention to promote.

23:56Russ Roberts:This seemingly magical phenomenon, Friedman said, was driven by what is called the price mechanism.

24:02Eamonn Butler:Adam Smith's flash of genius was to see how prices that emerged in the market, the prices of goods, the wages of labor, and the cost of transport, could coordinate the activities of millions of independent people, strangers to one another.

24:16Russ Roberts:Glory Lu likes to call this invisible hand waving.

24:21Mariana Mazzucato:For Friedman, the idea of the invisible hand as the price mechanism isn't just a descriptive metaphor. The price mechanism signaled what producers wanted to produce and what buyers wanted to buy. So the price mechanism was a way to organize and allocate most efficiently. And therefore, once you recognized how prices did that, you didn't need centralized planning.

24:53Russ Roberts:In other words, if markets can organize themselves so well and so efficiently via the price mechanism, you certainly don't want the government mucking things up with unnecessary rules and regulations or, God forbid, with price controls.

25:08Mariana Mazzucato:Precisely. And in fact, a lot of the time, experts, bureaucrats, government organizations act like private interest groups and create huge inefficiencies. I think what we see in the Friedman-Stigler interpretation is a way of treating the market as a moral thing in and of itself, right? While it appears objective, scientific, and politically neutral to say that this is how prices work, there's an implicit moral claim that those are the most important values, right, as opposed to equity, as opposed to universalism, democracy.

25:56Russ Roberts:Here is maybe your harshest indictment of Friedman and his colleagues at Chicago. You write, perhaps the greatest consequence of the Chicago Smith, Adam Smith, was that it served to reframe the problems of modern American capitalism and modern society as problems that stemmed from government rather than the market itself. What's your best evidence that the market itself is responsible for these problems of modern American capitalism?

26:24Mariana Mazzucato:Here's a current example. The opioid epidemic. Why was it so bad? We could look at it from the standpoint of like the psychology of addiction, but we could also look at it from the standpoint of the failure of regulatory bodies and perhaps the market incentives to push a drug onto the market. And as much as we think that might have been efficient in terms of allocation, it was horrible from the perspective of just human welfare.

27:09Russ Roberts:But the version of Adam Smith that was promoted by Milton Friedman and others at the University of Chicago would resonate well beyond academia. Politicians in the U.S. and the U.K. began looking to Smith to shake up their struggling economies. Coming up after the break, how one true believer brought Smith back to Britain just in time for a new revolution.

27:33Eamonn Butler:That was quite thrilling that it was an administration which was genuinely interested in ideas.

27:40Russ Roberts:I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back.

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29:51Russ Roberts:In July of 2022, facing a fragile economy and a stream of personal scandals, Boris Johnson resigned as prime minister of the United Kingdom.

30:02Eamonn Butler:It is clearly now the will of the parliamentary conservative party that there should be a new leader of that party and therefore a new prime minister.

30:12Russ Roberts:The next prime minister chosen by the conservatives was Liz Truss, who had previously served as foreign secretary and international trade secretary.

30:21Mariana Mazzucato:I will deliver a bold plan to cut taxes and grow our economy.

30:27Russ Roberts:Truss was an avowed fan of former prime minister Margaret Thatcher. In her agenda, cutting taxes and trimming government itself, this held considerable appeal for the Thatcherite wing of the conservative party. Everyone else was much less enthusiastic, especially the markets. As soon as Truss announced her plans, interest rates spiked, the pound tanked. And after just 44 days in office, the shortest term ever for a British prime minister, Liz Truss announced she would resign.

31:00Mariana Mazzucato:Given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party.

31:07Russ Roberts:By the time we arrived in London in search of the real Adam Smith, Truss's successor had just taken office, Rishi Sunak, a former chancellor of the Exchequer. And he made clear that his economic plan wouldn't be quite so bold. Some mistakes were made.

31:26Eamonn Butler:Not born of ill will or bad intentions. Quite the opposite, in fact. But mistakes nonetheless.

31:36Russ Roberts:Nonetheless. Sunak lasted only until 2024 when he was replaced by Keir Starmer. The doors in Westminster continue to revolve rapidly. But the man we have come to visit has been here for nearly half a century. Hello there. Oh, hello, Eamon. Hi. That again is Eamon Butler, director of the Adam Smith Institute. The Institute's walls are adorned with Smith portraits. One of them was on the 20-pound note for a while.

32:04Eamonn Butler:No, I got a call from the Bank of England, their library, and they said, do you have any good images of Adam Smith? And I said, well, there's plenty. You know, what would you like? And they said, well, I'm not really supposed to tell you this, but we're thinking of putting him on a banknote. And I thought, oh, yes.

32:20Russ Roberts:There are also some flags hanging on the walls, the Scottish Saltire in honor of Smith. There's also a big American flag, which it turns out makes a lot of sense for the Adam Smith Institute in London would not exist were it not for America. Let me explain. Eamon Butler grew up in the West Midlands of England, and in 1978, he got his PhD in moral philosophy from the University of St. Andrews in Scotland. He and a couple of like-minded friends considered their professional prospects in the UK, and they didn't like what they saw.

32:56Eamonn Butler:We'd all emigrated to America, given that the British economy was plummeting, and so we joined what's called the brain drain. I spent a couple of years in America. I worked on Capitol Hill for a group of congressmen, which was very educational because it let me understand how legislation was made, which is a bit like making sausages, not very pleasant to watch. And then I taught philosophy for a year in Hillsdale in Michigan.

33:20Russ Roberts:Butler was impressed with how some things were done in America. The government didn't regulate industries as tightly as they did in the UK, nor did they feel as compelled to nationalize all the industries as was common in the UK.

33:35Eamonn Butler:For example, in the United States, you had competition in telephones. Now, my economics professor in St. Andrews told me that competition in telephones was theoretically impossible.

33:45Russ Roberts:It was curious to Butler that the U.S. seemed more in sync with the free market teachings of Adam Smith than the government in the country that had produced Smith. Just another prophet without honor in his own country. Was the U.S. government more Smithian because the University of Chicago economists were doing such a good job promoting the invisible hand? The message had certainly worked on Butler and his fellow British expats.

34:12Eamonn Butler:Friedman and Hayek and all of these great economists had laid the foundations, if you like. And people like us were intrigued and captured by these ideas. So he and a couple of friends started up a free market think tank. We'd seen lots of interesting ideas in America that we thought could work in the UK. And originally we thought we would swap ideas across the Atlantic.

34:36Russ Roberts:Instead, they decided to relocate to London. This was in 1977. The Adam Smith Institute took up offices in Westminster, and their timing turned out to be extraordinary.

34:48Eamonn Butler:In 1979, Mrs. Thatcher was elected in the UK, and we had a bit of an open goal in terms of promoting free market theories and free society theories. I belong with Martha Thatcher. I belong with Martha Thatcher. I belong with Martha Thatcher.

35:06Russ Roberts:If there is one political leader over the past half century who embodied the conservative reading of Adam Smith, the Smith of free markets, of economic liberty, of smaller government, surely it's Margaret Thatcher. She was prime minister of the UK from 1979 to 1990. It has been said that Thatcher carried in her handbag a copy of The Wealth of Nations.

35:36Glory Liu:One of the great debates of our time is about how much of your money should be spent by the state and how much you should keep to spend on your family.

35:46Russ Roberts:Here was the big question. Would Britain be, as Adam Smith wrote in The Wealth of Nations, a nation of shopkeepers? Or would it be a nation of government bureaucrats? Thatcher sided with shopkeepers.

36:01Glory Liu:There is no such thing as public money. There is only taxpayers' money.

36:06Russ Roberts:And what did all this mean for Eamon Butler and his new Adam Smith Institute?

36:11Eamonn Butler:It was the most exciting time of my life. When Mrs. Thatcher took office, what you had was an ideological administration. Before then, politicians had all been managerialists. They were just trying to keep the show on the road. Whereas Mrs. Thatcher, daughter of a shopkeeper, she was determined to run the economy like you would run a shop very prudently and to experiment with all sorts of new ideas that had been off the agenda for such a long time because there was this sort of centrist to left of center consensus. So that was quite thrilling that it was an administration which was genuinely interested in ideas.

36:47Russ Roberts:Thatcher cut taxes, slashed government spending and curbed the trade unions. She also set out to privatize a great many state assets and industries. It seemed as if Thatcher was giving a great bear hug to Adam Smith and, by association, to the Adam Smith Institute.

37:07Eamonn Butler:Well, one of our first publications was on what we call Quangos, quasi-autonomous non-government organizations. There are sort of boards and committees around Whitehall that ministers appoint people to, but there's some very weird ones like the Hadrian's Wall Advisory Committee and the Detergent and Allied Products Voluntary Notification Scheme Scrutiny Group. And we discovered in the UK there were 3 ,068 of these. And we said, that's far too many. This is just bureaucracy. Let's get rid of it. And we published that in a book. But it was a strange book because it only had one page. But that page was 12 feet long, which was a list of all of these quangos.

37:48Eamonn Butler:So Mrs. Thatcher saw that. And she got the head of the civil service to meet up with us. And he said, well, the prime minister's told me I've got to cut quangos. Which ones should I start with? So there was that. And then a second thing that we sort of came up with was contracting out local government services, repairing the roads and collecting the garbage and things like that. We looked around the world for practical examples of where this had happened. And we discovered that you save a lot of money and provide a much better service if you contract it out to private companies. And again, Mrs.

38:21Eamonn Butler:Thatcher saw our little pamphlet on that and promptly, against all copyright rules, printed 20 ,000 copies and sent it to all of her local government party members. I'm sure you sued, yes? We weren't too worried about it. And then, of course, there was privatization with all the big industries, shipbuilding, steel, railways, gas, water, electricity, trucking, telephones. All of these things were nationalized industries, and we work on the intellectual means to return them or take them into the private sector.

38:52Russ Roberts:I'm sure many people listening to you will say, oh, yeah, that was a turning point that was important for an economic reform. And there are many others listening to you will say, oh, that was the darkest day ever when privatization began. So to those in the latter group who feel that this was a move in the wrong direction, a move that we are seeing continuing to grow now to the point where many people feel, you know, that labor is continuing to get squeezed and squeezed and squeezed. How do you defend or support that?

39:25Eamonn Butler:Well, when Mrs. Thatcher took office, a third of the housing stock was owned by the local governments. And what she did was to allow the tenants to buy their own properties. for a large discount. So people did that because they knew that they'd be getting an asset relatively cheaply. But against that asset, they could borrow. So they could start a business, for example. So it was a great exercise in promoting a capital-owning democracy. And that was a huge improvement. Or if you look at telephones, one of the biggest privatization of the time in 1984, with millions of people buying the shares, that before then had been a state monopoly.

40:05Eamonn Butler:It had been basically run by the post office, believe it or not, telephones. So yeah, sure, mistakes were made on the way in privatization in the UK because Britain was the first to do it. So actually you make mistakes. But generally speaking, we haven't reversed any of those privatizations. Trucking is still private and telephones are still private and steel is still private and so on and so on.

40:27Russ Roberts:The NHS, however, the National Health Service is not private, is it?

40:31Eamonn Butler:That's correct. Yes. One of our great failures. People say it's a kind of religion in the UK that you have to believe in the NHS. So all politicians say, oh, we do support the NHS. But it's a top-down Stalinist-style organisation, and it's grotesquely inefficient. We're told, oh, it's the envy of the world, but nobody copies it. So that tells you something. There's no reason why every doctor and nurse in the country should be a civil servant, why every hospital should be a nationalised hospital. We don't do that with anything else. If people need shoes or clothing, we give them the money and they go out and they buy shoes and clothes.

41:06Eamonn Butler:Why can't we do that with health care?

41:11Russ Roberts:So you've got another new prime minister, Rishi Sunak, not nearly as thatcherite as his very short-lived predecessor. But if you had maybe a couple hours today with the new prime minister to deliver the economic gospel, according to Adam Smith, what would you want to emphasize as actually doable in this political and economic moment?

41:34Eamonn Butler:Well, I would say that considerable reforms in the government system are needed. You know, we have a huge bloated civil service. It's a complete spaghetti and nobody can navigate their way through it. So why don't we just get rid of a lot of that? Reforming the tax system and making it simple and straightforward, we have the most complicated tax system in the world. The planning reform, again, need to allow people to do what they like with their houses instead of saying you can't build an extra room and things like that when it doesn't affect anybody else. But we have a system where, you know, a few local residents can block an airport, for example, and that's why it's taken 15 years to build a new runway at Heathrow.

42:13Eamonn Butler:So those sorts of reforms were just doing things that everybody knows needs to be done, but there's so many vested interests you have to cut through.

42:25Russ Roberts:I asked Butler if he wanted to take a walk over to No. 10 Downing to see if we could talk our way in and present his Adam Smith-inspired advice. Butler was game. It was a lovely walk through the old Westminster streets, some flint and brick architecture, some odes to Britain's inventive past.

42:45Eamonn Butler:These street lamps here, they're still gas, and they're the oldest street lamps in the world. Really? Because what is now the home office used to be the gas works. Does that make sense that they're still gas? No, it makes absolutely no sense at all. But it's, you know, a nice tradition, and, you know, we do a lot of that silly stuff in Britain.

43:05Russ Roberts:We arrive at 10 Downing Street. There is a throng out front, some of them protesting against the state of the British economy. I don't think any of it does any good. I mean, I've always said if you have to go onto the streets, you've lost the arguments. Butler and I squeeze past the throng and we walk down a barricaded path up to the armed guard in front of number 10.

43:27Eamonn Butler:Good morning. My friends are doing a radio show and we wanted to have a chat with you. I'll not do anything on the right here.

43:35Russ Roberts:OK, so there would be no drop-in visit with the Prime Minister. We passed the protesters again on our way out. I told Butler I had seen more economic protest on this visit to the UK, more anger and fear than any time in my recent memory.

43:52Eamonn Butler:Well, the last time when there was real unrest was the so-called winter of discontent, which was the winter before Mrs. Thatcher was elected. and I think it's that kind of sentiment out there today that they're fed up with politicians that's why the Conservative Party elected Liz Truss because she's not a routine politician and it's why people voted for Brexit because they were fed up with the European way of the bureaucratic way of doing things and I suppose it's why people in America voted for Trump and why people in other European countries are voting for far-right candidates it's not that they particularly want far-right candidates They just don't want the centralist, bureaucratic, management-minded politicians.

44:32Russ Roberts:For a brief moment, back when Liz Truss was prime minister and tried to channel Margaret Thatcher, Eamon Butler and the Adam Smith Institute were poised to return to their glory days of real influence. But it wasn't to be. He seems nostalgic for the past.

44:49Eamonn Butler:I was once at a reception in Downing Street, and they were serving wine and canapes. canapes, and some poor chap, his canapé had a sort of blob of cream or some sort of sauce on it, and he dropped it, and it splodged onto the carpet. The Prime Minister, Mrs. Thatcher, came up, took a cloth out of her handbag, and started wiping it up, and the staff said, oh, it's all right, Prime Minister, you don't need to do that. Oh, no, it's fine, I've got it now. So that was what she was like. She was just very hands-on.

45:19Russ Roberts:Coming up after the break, how faithful is the Adam Smith Institute interpretation of Adam Smith. Did you actually ever read the guy? Because what you're saying has nothing to do with what he said. This gets us to what has been called Das Adam Smith Problem. There's no Das Adam Smith Problem. Like, it's a pseudo problem. Pseudo problem or not, we'll try to solve it. This is Freakonomics Radio. I'm Stephen Dubner in search of the real Adam Smith. We'll be right back.

45:54Russ Roberts:Freakonomics Radio is sponsored by Ozempic. Innovation happens through rethinking what's possible. And when it comes to GLP-1s, Ozempic pill does just that. Learn more about Ozempic semaglutide tablets, 4 and 9 milligrams, by calling 1-833-OZEMPIC or visit Ozempic.com to view the medication guide and ask your doctor what's possible with FDA-approved Ozempic pill.

46:50Eamonn Butler:We'll be right back. Less, contact store for availability.

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47:27Russ Roberts:Eamon Butler, co-founder and director of the Adam Smith Institute in London, was just telling us that Adam Smith and the wealth of nations inspired Prime Minister Margaret Thatcher to privatize huge swaths of the British economy. The water and gas and phone utilities, car and ship manufacturing, the houses where nearly two million Britons lived, even British airways. Butler thinks this all fit snugly with Adam Smith's view of smaller government and that this sort of privatization is an excellent idea. Not everyone agrees. The real irony is that the privatization in the UK was often privatized by selling off the assets to other governments.

48:11Russ Roberts:China, the French state. That is Mariana Mazzucano.

48:14Mariana Mazzucato:Also, Macquarie, a very large Australian financial company, has bought up our publicly owned green investment bank. Big mistake, I think.

48:24Russ Roberts:Matsukato is an economist at University College London. She thinks that certain champions of laissez-faire policies have misinterpreted and exploited Adam Smith, with privatization in the UK being a prime example. UK privatization, one of the things it did is it not only sold it off to the private sector, but lots of different private sector companies.

48:45Mariana Mazzucato:So there's very little coordination. So say public transport. The real question is, why did the UK government, when it sold public transport, public rail to, for example, Richard Branson with Virgin, why were there no conditions attached? We could today have a low-cost, accessible, modern, green, sustainable transport system. Instead, it's not sustainable, it's not green, and it's definitely not accessible. It's extremely expensive. So conditionality, like building into a deal when you're selling something off with strong publicly set conditions, it doesn't mean the state does everything, but it means it has to have the confidence to say, look, we developed this thing.

49:27Mariana Mazzucato:We funded it.

49:28Russ Roberts:If a bit of it is going to get privatized, under what conditions to deliver a public goal? But didn't Adam Smith want free markets, free from the interference of the state? He didn't really mean free from the state when he talked about the free market.

49:42Mariana Mazzucato:He meant free from rent, free from extraction of value from the system. Smith would have so much to say about the excess profits that are being earned by energy and mining companies globally. Modern day finance, where you have$6 trillion in the last 10 years having been used just to buy back shares, to boost share prices, stock options and executive pay. That's the modern-day feudal kind of value extraction that Adam Smith would have ranted against.

50:13Russ Roberts:If Adam Smith were forced to choose between private and state ownership of a given firm or industry, he would almost certainly choose private. But he did warn of the tendency of private firms to collude with one another to fix prices and exploit the public. Today's British public, having experienced a few decades of privatization, seems to side with Mariana Mazzucato. One fairly recent poll found that 61 % of the population would prefer that services like gas, water, electricity and railroads were publicly owned. And what about the other services that governments typically provide, like education?

50:51Russ Roberts:In book five of The Wealth of Nations, Adam Smith would appear to be in favor of this.

50:56Mariana Mazzucato:For a very small expense, the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education. The public can facilitate this acquisition by establishing in every parish or district a little school where children may be taught for a reward so moderate that even a common laborer may afford it.

51:23Russ Roberts:So what does a Smithian on the right side of the political spectrum, like Eamon Butler, make of this? And how can it be that right Smithians and left Smithians come to such different conclusions when they read the same text?

51:38Eamonn Butler:Yes, because The Wealth of Nations is an enormous, elephantine, sprawling book, and it's full of facts and figures and arguments, some of them not entirely consistent. So you can take Adam Smith in many different ways.

51:52Russ Roberts:Now, I've heard you talk about Smith's advocacy or support for the government providing services like education, infrastructure, law and order, and things like that. But then I've heard you say that that argument, which occurred in the last book of The Wealth of Nations, book five, you've said that he was rushed, you thought. Are you saying that he didn't really support that much government intervention?

52:18Eamonn Butler:Well, it took him 15 years to write this book. And I think at the end of it, his friends would say, oh, come on, Smith, old chap. You know, it's about time you got this finished. And so I think the final chapter is a little bit rushed.

52:29Russ Roberts:Look, you're the Smith scholar. So who am I to argue with you? But everything I've read about him and by him suggests he was maybe perfectionist is not quite the right word, but I have heard him called that. You really think he would publish The Wealth of Nations after working on it for so many years with an incomplete idea of the degree to which the government should provide services like education and transportation?

52:52Eamonn Butler:Yes, because I don't think that was the main thrust of his argument. The main thrust of his argument was all the previous stuff about how the economy works and in particular that restrictions on trade and commerce produce bad results, that they don't maximize human welfare. So it wasn't his main thing. And I think his publisher was on to him as well to get the thing out. I think his poor chap was probably under a lot of pressure.

53:16Russ Roberts:So to those in the modern era who want to use Smith to argue that government should, let's say, be massively downsized, do you suggest they just skip book five because it will...

53:28Eamonn Butler:Well, if it was me, I wouldn't read the book at all because it's enormous, 900 pages. 90 pages of it are what he calls a digression on the price of silver. And it's in this 18th century language and it's really just impenetrable.

53:46Russ Roberts:It may strike you as odd that the director of the Adam Smith Institute says we shouldn't actually read Adam Smith. I think it's odd. But remember what the economic historian Robert Heilbrunner once wrote. No economist's name is more frequently invoked than that of Adam Smith, and no economist's works are less frequently read. But there is an even bigger issue. If you do read Adam Smith and you read both his books, The Theory of Moral Sentiments and The Wealth of Nations, you might conclude there is not one Adam Smith, but two Adam Smiths. Because this riddle was explored primarily by Smith scholars in Germany in the 19th century, this has come to be known as Das Adam Smith Problem.

54:33Russ Roberts:Glory Lu again.

54:34Mariana Mazzucato:Which was this theory that Smith changed his mind or had a change of heart between writing the theory of moral sentiments in 1759 and the wealth of nations in 1776.

54:47Russ Roberts:In other words, how could someone who wrote a book about the theory of moral sentiments and the deep humanism we all strive for also be the person who wrote this guidebook to unfettered capitalism? That's Das Adam Smith's problem, essentially, yes?

55:00Mariana Mazzucato:Right, exactly.

55:01Russ Roberts:And why did this happen in Germany?

55:03Mariana Mazzucato:Oh, I don't know. German scholars are weird. One reason why I think it happened in Germany and not in England and not in the United States is because German scholars were really interested in Adam Smith as a thinker, recovering the philosophical consistency of Smith's works, as opposed to like what was happening in England and what was happening in the United States, which is that people didn't really care about what Smith actually said. Smith is really just whittled down to the ideology of free trade.

55:41Mariana Mazzucato:And what does Lou think of Das Adam Smith problem? Any self-respecting Smith scholar will just be like, there's no Das Adam Smith problem. Like, it's a pseudo problem.

55:51Russ Roberts:Dennis Rasmussen, the Smith scholar at Syracuse University, agrees.

55:55Dennis Rasmussen:I think most Smith scholars today would say that this problem isn't a problem, that the two are perfectly compatible. Sympathy in the theory of moral sentiments doesn't entail or require any kind of altruism or other directedness. It's perfectly compatible with people being self-interested. And likewise, the emphasis on self-interest in The Wealth of Nations wasn't advocating that people be selfish, wasn't advocating that greed is good, to use the line from the movie, but rather trying to describe how people interact. And also, the argument is a reliance on self-interest can be liberating in the sense that if you rely on people's self-interest, you don't have to rely on their benevolence.

56:33Dennis Rasmussen:You don't have to act like a dog at a table begging for scraps, right? You can count on people acting out of their self-interest. There's a way in which this produces a sense of personal independence.

56:42Russ Roberts:It does seem that the political right and the economic right and conservatives have done a better job using Smith to advance their arguments, whereas the left and liberals have neglected Smith to their peril. And there's a lot in his writing that I would think they would want to use.

57:00Dennis Rasmussen:So there's a raging debate in Smith scholarship among people who are sometimes called left Smithians and right Smithians about where he would fit on today's political spectrum. I think once a thinker has been claimed by one side reasonably successfully in this case, it's kind of hard for the other side to reclaim them. They often just turn to a different thinker and find that to be an easier path to take.

57:20Russ Roberts:But don't you think that's kind of a shame? Because when you read Smith, there's a lot there for everyone, I would say. And in fact, I would argue that he is a really good thinker if you want to, I'm not saying unite the political extremes, but show that there's a very broad middle, that you can be really pro-market and really pro-human at the same time. So wouldn't it be nice?

57:42Dennis Rasmussen:It would absolutely be nice. Yes. The different elements of Smith's thought that would push him in different directions, right? He shows this very deep and palpable concern for the lot of the poor. The wages, the conditions of the working poor are really his central measuring stick for the wealth of nations, for how wealthy an economy is. It's not, you know, the holdings of the affluent few, but the ease of everyday people to attain the necessities of life. On the other hand, you know, there are elements of his thought that push him toward the right of today's political spectrum. He really does distrust government.

58:14Dennis Rasmussen:He distrusts politicians, both their abilities and often even their intentions. And so there are elements of his thought that push him in both directions. It's hard to know, to be honest, where he would stand on today's political spectrum with regard to a lot of these questions because he saw the two as going hand in hand, right? A lot of the government programs that he's most worried about are there to benefit the rich, and they unfortunately also harm the poor, right? They're rent-seeking things that companies have, as he says, extorted from the legislature for the support of their own absurd and oppressive monopolies.

58:47Dennis Rasmussen:They make ordinary goods more expensive. He thinks that shrinking government, getting government less involved in the economy, benefits the poor. What would he think today about a government program designed explicitly to help the poor? It's really hard to say. Is it his concern for the poor or his distrust of government that would win out at the end of the day?

59:04Russ Roberts:That's hard to know. The more we've been looking for the real Adam Smith, the more I've come to believe this Adam Smith problem may be real, but it's not the same problem the German scholars were concerned with. As Dennis Rasmussen just explained, it is not so hard to reconcile the wealth of nations, Adam Smith, and the theory of moral sentiments, Adam Smith. I think Das Adam Smith Problem today is simply that most of the economists and politicians and others who look to the wealth of nations for guidance have simply never read the theory of moral sentiments. Here is one such economist.

59:46Glory Liu:I thought, well, I don't have to read this because it's not economics. It's philosophy or psychology, you could call it. And I didn't read it forever. Most economists don't.

59:56Russ Roberts:That is Russ Roberts. He got his Ph.D. from the University of Chicago during the era when Milton Friedman was turning Adam Smith into the poster boy of free market economics. Roberts went on to a long academic career at institutions including George Mason University and the Hoover Institution at Stanford, places known for the kind of conservatism or libertarianism that Adam Smith currently represents. And where is Roberts today?

1:00:24Glory Liu:I am president of Shalem College in Jerusalem, Israel. I am the host of EconTalk, the podcast, and author of How Adam Smith Can Change Your Life, an Unexpected Guide to Human Nature and Happiness. So question one, how did Adam Smith change your life? So my book is an attempt to bring to the modern reader Adam Smith's forgotten masterpiece, The Theory of Moral Sentiments. The Theory of Moral Sentiments tries to answer the question, why do we do anything that isn't just for ourselves? Because we are self-interested. We're not selfish, although some of us are, but our nature is to be self-interested.

1:01:04Glory Liu:We put ourselves at the center of our universe, and yet we often do kind and thoughtful things for others. And Smith was interested in understanding why that was the case. And that was what his book was about. And I didn't read it forever. What was that experience like, reading it? You know, I picked it up. I read the first page. I had no idea what it was talking about. It kind of starts in midstream. Read the second page. I read about, I don't know, five, 10 pages. And I thought, I don't really get this book at all. And so I persevered and eventually fell in love with the book. Adam Smith's a brilliant writer.

1:01:39Glory Liu:He's a brilliant stylist. He's one of the rare people writing in the 18th century that you can read with utter delight and pleasure most of the time. He forces you to look at yourself and realize what makes you tick, what pushes your buttons, rings your bells, tightens your shoelaces. He understands our flaws. He understands our need for self-deception.

1:02:02Russ Roberts:There's one passage from The Theory of Moral Sentiments that Robert spends a lot of time on in his book. If you're going to read just one paragraph of the theory of moral sentiments, this might be the one.

1:02:15Mariana Mazzucato:Man naturally desires not only to be loved, but to be lovely, or to be that thing which is the natural and proper object of love. He naturally dreads not only to be hated, but to be hateful, or to be that thing which is the natural and proper object of hatred. He desires not only praise, but praiseworthiness, or to be that thing which, though it should be praised by nobody, is, however, the natural and proper object of praise. He dreads not only blame, but blameworthiness, or to be that thing which, though it should be blamed by nobody, is, however, the natural and proper object of blame.

1:03:02Glory Liu:We want to be appreciated. We want to matter. And what he's saying there is that not only do we want to be praised and honored and respected, but we want to earn that honestly. We want to be praiseworthy. We want to be honorable. We want to merit the respect of others. And then he says something really extraordinary. He says, because we care, because we want to feel important, because we want to matter, there are two ways to get there. One is to pursue fame, wealth, and power. Well, that's pretty primal, yeah. The quieter path is to pursue wisdom and virtue, which he advocates for. He says the pursuit of wealth.

1:03:40Glory Liu:Here's the person who wrote The Wealth of Nations. He says the pursuit of wealth is a fool's game. It's going to degrade you. You're going to do things you're going to be ashamed of and that you'll want to hide.

1:03:50Russ Roberts:After you read the theory of moral sentiments and started thinking and talking like this, did your economist colleagues think you'd gone soft?

1:04:00Glory Liu:Yeah, economic decision-making is basically expected utility maximization, which is just a fancy phrase for you do the thing that gives you the most pleasure relative to pain as best as you can anticipate it. And, of course, you make mistakes and things you thought were going to turn out well don't all the time. That's not a rejection of economics. But I think the essence of the economist approach is that we're constantly weighing our pleasure and pain on a daily basis and trying to project how we're going to feel about the decisions we make. That's really not the nature of the life well lived.

1:04:39Glory Liu:It's not just about racking up utility points. And I think economists often forget this. They focus on what's measurable. So in that sense, I've rejected a lot of the utilitarian foundation in my field.

1:04:52Russ Roberts:You are a particularly good person to speak with about this because you've got an appreciation for the full Adam Smith that many economists don't. But you're also a University of Chicago guy. And in her new book, Adam Smith's America, the political scientist Glory Liu argues that it was that University of Chicago economics department, especially Friedman and Stigler, who sort of cherry picked Smith's writing and turned him into a patron saint of free market capitalism in a way that a closer reading of Smith, especially the theory of moral sentiments, wouldn't support. Can you untangle this for me?

1:05:29Russ Roberts:I mean, I don't mean to cast aspersions on Friedman and Stigler, both of whom were amazingly sharp and shrewd and powerful economists. But I'm curious to know whether you think that they hijacked the reputation to the detriment of the field.

1:05:43Glory Liu:I would say it a little differently. I would say that Milton Friedman is the patron saint of free market economics. and he saw Adam Smith as a cousin, if not a close relative, an even closer relative, a brother in arms. I think that's roughly fair to Smith. I don't think there's anything in the theory of moral sentiments that is an indictment of what we would normally call free market economics. I know progressives have tried to claim Smith. Certainly there are things in Smith that have a progressive aspect to them. Often, it sometimes requires quoting him out of context, leaving out the next paragraph or the one before.

1:06:24Glory Liu:But there are things in Smith that certainly conflict with standard free market dogma.

1:06:32Russ Roberts:You write that Adam Smith has a way of saying things that get into your bones. Can you talk about that a little bit more? Smith was a great writer.

1:06:41Glory Liu:He's a great communicator. I think great writing is underrated. It is no small feat to coin a phrase like the invisible hand. Smith used the phrase the invisible hand twice in his two books, once in each. I would suggest that in neither one is he using it in the way that modern people use it or modern economists. In modern economics and public policy, it has come to mean that we don't have to worry about certain problems because the market will take care of them. And that's the magic of the invisible hand. Now, that gets laughed at a lot. The truth is, it is an extraordinary phenomenon that is underappreciated, but it should not be overappreciated.

1:07:29Glory Liu:The underappreciated part is that over the last maybe 10, 15 years, hundreds of millions of Chinese citizens and people have moved from the countryside into the cities of China. Hundreds of millions. One of the greatest migrations, probably the greatest migration of people in human history, certainly from rural to urban areas. Well, I assume a lot of those people started sending their kids to school. And I assume a lot of those kids started using pencils. That ever affect your life in America? Do you ever say, oh, I wish I could find a pencil, but of course I can't because they're all going to the Chinese.

1:08:02Glory Liu:Oh, there must have been a department set up to deal with that shortage. But there wasn't. That's what modern economists mean by the invisible hand. We didn't have to worry about the availability of pencils. That's the invisible hand. It's invisible, so we don't fully appreciate it. Now, you don't want to carry it too far. Doesn't solve every problem. Doesn't solve pollution. A lot of things require legislation, regulation, and so on. Smith was not an anarchist. His modern disciples, most of them are not anarchists. They understand that not all problems solve themselves. But the fact that any do is quite remarkable.

1:08:42Russ Roberts:My sense from reading your book on Adam Smith, my sense is that it's an act of acknowledging who you were and wanted to be as a human, but it's sort of gotten away from. I want to know how reading that book and then wrestling with that book and writing your own book about it, I want to know how that changed you. A very hard question to answer.

1:09:11Russ Roberts:Because to me, reading your book felt like one long epiphany. It was an intellectual but also sort of a spiritual and moral epiphany. Most of us, when we have an epiphany, we come out a little bit different. And it may not be permanent, but it may be. So that's what I want to know.

1:09:30Glory Liu:I mean, reading the theory of moral sentiments, if you push your way through it, forces you to think about how you live your life. Economists, you know, we think about incentives all the time. But often we get lazy and we focus on monetary incentives because they're everywhere. And Upton Sinclair said it beautifully. it is difficult to get a man to understand something when his salary depends on not understanding it. And that's the truth. You are often pushed and pulled emotionally by who pays your salary and what they want from you. When I read Adam Smith's book, The Theory of World Sentiments, I realized that, you know, there's a lot of other things that push and pull people.

1:10:14Glory Liu:now come on didn't you know that before of course I did but reading Smith forced me to think of it and have it be at the front of my mind that we want to be loved and so when you read that and you think about it you write a book about it as I did it wouldn't be surprising that I started to also begin to think more deeply more focused on questions of what is the life well lived I have trouble not thinking about it.

1:10:42Russ Roberts:Adam Smith led Russ Roberts to rethink himself, and it left him better off. Over the past couple episodes, we have been rethinking Adam Smith, and I would like to think it is leaving us better off. If nothing else, we're starting to see him as more than the cardboard cutout he's been turned into. Smith was a philosopher, but also fiercely practical. He was a macro thinker, but micro as well. He was a radical in some ways, but also respectful and even acceptable to those with whom he disagreed. And that's it for this week's bonus episode. Let us know what you think. Our email is radio at Freakonomics.com.

1:11:23Russ Roberts:Check out the rest of our Adam Smith series on your podcast app or at Freakonomics.com slash Smith. We will be back very soon with a new episode. Until then, take care of yourself. And if you can, someone else too. Freakonomics Radio is produced by Renbud Radio. This episode was produced and updated by Zach Lipinski with help from Dalvin Abawaji. It was mixed by Greg Rippon and updated by Joseph Webster. We also had help in London from Rob Double, Alex DeLasalle and London Broadcast Studios and help in Scotland from Josh Nixon and Upload Studios. Thanks also to John Ewell for reading Adam Smith.

1:12:02Russ Roberts:The Freakonomics Radio Network staff also includes Augusta Chapman, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Ilaria Matenicourt, Jake Loomis, Jeremy Johnston, Mandy Gorenstein, Pete Madden, and Tao Jacobs. Our theme song is Mr. Fortune by The Hitchhikers. Our composer is Luis Guerra. Big thanks to Not Sensibles for letting us play some of their amazing 1979 song I'm In Love with Margaret Thatcher. As always, thanks for listening.

1:12:31Mariana Mazzucato:I'm thinking of this quote always like you know where it is and then of course right when you want to find it you can't find it

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