The Real Adam Smith： Morality and Markets - Full Video

Corruption, fraud and greed continue to dominate media here in the United States and around the world, as high unemployment and wage stagnation plague the middle class. And growing income inequality has caused millions to wonder, is the system rigged? Is the free market in its very nature corrupt? What is the relationship between morality and markets? Amazingly, a Scottish philosopher and economist explored that very relationship nearly 250 years ago, in the 18th century. His name was Adam Smith. Adam Smith was first and foremost a moral philosopher. His great gift was observation. But perhaps he is best known for his groundbreaking work in economics. Some people say that he is really the father of modern economics. He's a synthetic thinker that crosses these disciplinary boundaries. Adam Smith was born in a small Scottish town, and learned early in life about morality and economics at the local merchants' market. He went on to study at Glasgow University, became its top administrator, and then a pillar of the most unlikely intellectual revolution the world had ever known, the Scottish Enlightenment. He lived, lectured and socialized in Scotland's capital city of Edinburgh, created the unique economic concept of an invisible hand to describe what happens when we act in our own self-interest, and invented the idea of the impartial spectator in a surprising analysis of the evolution of morality. And I'm fascinated by Adam Smith, a man who would turn the notion of how societies and economics work on its head, and make way for the modern age. He recorded his ideas in two comprehensive books, The Theory of Moral Sentiments and The Wealth of Nations. Was he a revolutionary moralist, an uncompromising advocate of self-interest and free markets, or something altogether different? Who was the real Adam Smith? Funding for this program has been provided by John Templeton Foundation and Templeton Religion Trust. Historic Edinburgh still reflects the energy and cultural vitality for which it was known in the 1700s. A dramatic castle still dominates the landscape above the Old Town. Below stretches the Royal Mile and the hustle and bustle of modern city life. Edinburgh today is a haven for the arts, full of open, warm and welcoming people. In 1707, Scotland had joined with Ireland and Wales to become the United Kingdom. It would be Europe's largest free trade zone. And the great cultural and intellectual revolution to be known as the Scottish Enlightenment would soon transform Scotland and much of the world. Adam Smith was destined to be part of that change. He was born in 1723 in the town of Kirkcaldy, just across the bay from Edinburgh. His father, also named Adam Smith, was a lawyer and customs inspector, who spent many of his working days chasing whiskey smugglers, and who died several months before his son was born. The young boy's widowed mother, Margaret, would devote the rest of her life to raising her son, and would become his lifelong companion. Adam Smith loved growing up on the shores of the river estuary known as the Firth of Forth. This small town of Kirkcaldy would remain his spiritual home for most of his life. I'm Johan Norberg, a writer and an analyst born and raised in Sweden. For many years, I've studied markets and global trade. And no one thinker has been more important to the development of today's widespread prosperity than the revolutionary 18th century philosopher, Adam Smith. Most people today remember only half of what makes him important, his economic principles. They associate Adam Smith with free markets, but few think of him as the great moral philosopher that he was. We need to put both sides of the man together to find the real Adam Smith. Smith's primary concern as a political economist and a moral philosopher is the well-being of the poor. Ryan Hanley is Associate Professor of Political Philosophy at Marquette University. His work concerns the moral aspects of Adam Smith's worldview. So in many ways, Smith subverts our conventional distinction between left and right by sharing with the contemporary left a deep concern for the goods and the well-being of the poor, and with the contemporary right a belief that the proper means for achieving this, the most efficient means, are in fact free markets. These steps lead up to the church that Smith's mother, and sometimes he himself, attended. Hi, George. Hi, Johan. Let me show you around. Thanks. George Proudfoot is a local historian, college professor, and trustee of the Adam Smith Global Foundation. Can you tell me a little bit about the church? Well, this was the church that Adam Smith was baptized in on the 5th of June, 1723. Adam Smith and his mother would have attended the church on a Sunday, and these are the very steps that they would have climbed from the house up to the church. So Smith walked on these steps? On these very steps, that's correct. And he went to school somewhere around here? Yes, the borough school was just across the way there. It was a very good school, and its headmaster, David Miller, was exceptionally good. Apparently, all of the students received a good grounding in classical education, and Smith was instilled with a lifelong appreciation of learning. His mother's house stood right there, and across there was where the outdoor market was, and of course he would be able to see the market from one of his windows. Imagine him waking up early in the morning and seeing the market through his window, and on his way home from school, watching the buyers and sellers in action. From an early age, he was a keen observer, and the economics and morality in the marketplace of his youth inspired his written word. The propensity to truck, barter, and exchange one thing for another is common to all men. They were exchanging ideas. They were exchanging gossip. They were exchanging goods. They were exchanging money. Nick Philipsen is an honorary fellow at the University of Edinburgh, and the author of the award-winning biography, Adam Smith, An Enlightened Life. And that notion of exchange, and watching people exchanging things, that's something which I'm pretty sure was with Adam Smith right from the word go. Exchange, and through exchange, trust. He sees trust and the morality underpinning it as the key to any successful society. And this rather curious, withdrawn, observant chap simply spent his life observing the peculiarities of human behavior, cataloging them, turning them into systems, theorizing about them, building up this portrait of what human behavior tells us about human beings in general. He will return to Karkati again and again, to think and to write, and to take long walks along this beach. And Smith was quite a walker. There's a story that one morning Smith walked along the beach in his bathrobe and got so caught up in his own train of thought that he went 12 miles before he knew it. It's in this small seaside town where he would be most productive. At the very young age of 14, Smith leaves home and travels to Glasgow, the seat of one of Scotland's four ancient universities. The University of Glasgow was founded in 1451. Here he begins his studies, and almost immediately is immersed in the revolutionary thinking of the Scottish Enlightenment. The University of Glasgow is fast becoming one of the best universities in Europe. Here he will build the intellectual foundation of his life's work. One constructed on a firm base of Enlightenment values. Scottish Enlightenment thinkers are deeply rooted in reality. They value reason, debates, evidence, and reject any authority that facts cannot justify. But it also enables them to develop an astonishingly powerful tool, the scientific method. His favorite professor is Francis Hutcheson, a respected father of the Scottish Enlightenment, and the first to teach in English, and not the traditional Latin. Hutcheson's thoughts will guide Smith's early education, and influence his later writings. This is Adam Smith's personal copy of Hutcheson's book, Illustrations on the Moral Sense, with Smith's notations in the margins. He was marked out as a star, as a university student. He got a special fellowship to take him to Oxford for six years for studies. Something happens in Oxford that will change the direction of Smith's life forever. He reads the work of David Hume, one of the most prominent philosophers of the Enlightenment. Reading Hume introduces the young student to an entirely new set of ideas. Hume explains how human beings can grow and develop, survive and prosper, without once drawing an assumption about God. It is dangerous thinking. The authorities at Oxford are not fans of Hume, and they punish Smith for his self-education. In protest, Adam leaves Oxford and England. It's the Scottish thinkers, like David Hume, who appeal to Smith's intellect, and he is eager to share his ideas with them. When he arrives back in Scotland, he settles here in Edinburgh, just across the Forth of Forth from his hometown of Kirkcaldy. And when he gets here, the Scottish Enlightenment is in full swing. If you had wondered in the 17th century, or the 16th century, what country would be a likely place for an Enlightenment, Scotland would not have probably been on the list. James Artisan is an Adam Smith scholar, and professor of political economy at Wake Forest University. For that magical period in the 18th century, Edinburgh had a lot of things come together. A country with no apparent warning at all, suddenly developed a small, but extraordinarily sophisticated and creative group of philosophers, scientists, men of letters. The central figures of the Scottish Enlightenment were not just interested in material prosperity. They were also interested in the character of people. Are human beings naturally selfish? Are they naturally benevolent? The Scots decided that you couldn't really answer these questions. They're all speculative. All you can do is observe the world around you. And that's exactly what the Enlightenment thinkers did. Observe. For example, it was common knowledge in the 1700s that the earth was less than 6,000 years old. It was the Irish bishop, James Usher, who had carefully researched the issue. And Adam begat Seth, and Seth lived 105 years and begat Enos. By adding up each and every one of the begats, or generations, in the Bible's Old Testament, Bishop Usher declared that the earth was created on Sunday, October 26th, 4004 B.C. The issue was settled. Until James Hutton, a medical doctor from Edinburgh, and a keen observer of the world around him, takes a walk in the British countryside, and comes upon a section of Hadrian's Wall. The wall is most certainly old. The Emperor Hadrian built it during the Roman occupation of Britain in about 120 A.D. Hutton sees almost no signs of erosion. Yet these nearby volcanic mountains have been almost completely eroded by the same processes. To Hutton, the conclusion is obvious. The earth is much older than 6,000 years. The bishop must be wrong. But challenging the Church on any issue, without suffering reprisals, was something new. Even now, there are hardliners in the Church opposed to the ideas of the Enlightenment thinkers. It's this combination of keenly observing the world, and bravely challenging conventional thought that is at the heart of the Scottish Enlightenment. Just as critical thinking is at the heart of the scientific method today. And that inspires Smith. Oh, and today's best estimate of the age of the earth is about four and a half billion years. Finished with Oxford and his formal education, Smith finds himself out of work. He's now an educated young man looking for a job. And by a stroke of good luck, he's invited to give two series of public lectures to Edinburgh's movers and shakers. He will focus on human behavior and morality, in what will be known as his lectures on jurisprudence and rhetoric. He begins by wondering how humans acquired the gift of language. These college students have just met, and are getting to know something of each other through their conversation. Traditionalists considered language a special gift from God. Smith thought otherwise. The earliest human beings, he thought, lived in a dangerous world, and had to communicate to survive. And that meant using signs and sounds. From these first signs and sounds, and under the pressure of life, language developed. Smith argues that society and civilization were born as people, like these students, traded information through language, and built a common understanding of the world around them through this exchange. But Smith considers other forms of trading. The offering of a shilling, which to us appears to have so plain and simple a meaning, is in reality offering an argument to persuade. And in this manner, everyone is practicing oratory on others through the whole of his life. What Smith sees from a very early stage is that this business of exchange can actually lead us into investigating how we acquire values, not just information, but values, how we acquire ideas of what's good and evil. Good and evil fascinate Smith. And in his lectures, he asks, how do human beings develop a sense of morality? Before Smith, people thought that morality was somehow out there, it was objective. Eamon Butler is co-founder and director of the Adam Smith Institute in London. And then Smith came along and said, no, morality is not something that's objective and that it's out there. It's inside ourselves. The sine qua non of Smith's moral theory is what he called sympathy, what we might today call empathy. It was not feeling sorry for other people. What it was instead was this idea that we desire to see our sentiments echoed in other people. By echoed in other people, Smith means that we all want to be liked, and we'll do things to gain approval. He thinks that in ordinary, everyday interactions with people, we come to learn when others like us and when they don't. Kind of like the Rockefeller Center in New York, that really Christmassy vibe. This fellow is a bore, and he's insensitive. His friends are getting tired of him, and their expressions and body language reveal their disapproval. We ourselves, we're approved of when we do certain things. We're disapproved of when we do other things. We watch other people in society. We see the way in which they're approved of, and they're disapproved of, when they say certain things, when they do certain things. Smith took a kind of evolutionary view a hundred years before Darwin. He knew that there was something in us as social creatures that made us follow a moral path, because if we didn't, if we went around robbing and stealing and killing each other, then we wouldn't get very far as a species. How do we move from knowing how to act in social settings, of how to be approved of and disapproved of, to knowing the difference between right and wrong? How do we solve the moral dilemmas that we all face each and every day? This man is in danger of losing his wallet. It's full of cash. What do you do? Keep it all? Keep the cash, but return the wallet? Or do you just give the wallet back untouched? What do we do? We all know what we do. We turn in on ourselves, and we start to have conversations with ourselves, internal, private conversations. And the funny thing about these internal conversations is that they are with a fictitious person, and he calls it an impartial spectator. Smith says that the impartial spectator is the sum total of everything that we've ever learned about what's polite and rude, what's right and wrong. Built up over time, it's our moral compass. We endeavor to examine our own conduct as we imagine any other fair and impartial spectator would examine it. Putting ourselves in the position of a spectator of ourselves, imagining a third figure outside of us, what does he or she see when she's looking at us? Sir, you lost your wallet. Thank you. Thank you so much. The impartial spectator will become one of Smith's most important concepts. And the centerpiece of his first book, The Theory of Moral Sentiments. He will spend the rest of his life refining these ideas. But for now, he's caught the public's attention and established himself as an innovative member of the Scottish Enlightenment. He's moving from rhetoric, from questions of religion, to questions of morality and moral philosophy, to questions of political economy. You can't have ideas of fairness without having ideas of justice. I think what is happening to that man over there, I might say, is just unfair, and someone ought to do something about it. And so it leads me to thinking about what governments ought to do. And so there's a natural progression from Smith's new science of man, which studies exchange in terms of language, to studying how we acquire moral ideas, ideas of justice, even ideas and thoughts about what governments ought to do. Smith is on a big trajectory, and he knows it. In 1751, at age 27, he's appointed professor of logic and metaphysics here at his alma mater, the University of Glasgow. He will be a teacher, a researcher, and an administrator, all at the same time. By far the most useful, and therefore by far the happiest and most honorable period of my life. Smith throws himself into day-to-day operations, even the minutia of managing the university's Roman artifacts, currently on display here at the Hunterian Museum. He takes charge of the university library, and creates space on campus for the workshop of a young inventor, James Watt, who will refine the steam engine for practical use. It's a hectic schedule, dominated by teaching. Every weekday from October 10th to June 10th, with just a single day's break for Christmas, he teaches moral philosophy and continues to refine his ideas. And this, of course, is a perfect opportunity for him to develop his thinking about exchange on an enormous scale. In fact, we know exactly how his thinking developed during these years, thanks to a fascinating discovery. So what have you got here? Well, these are two volumes of student notes from Adam Smith's time here at Glasgow University as a professor. Robert Maclean is an assistant librarian of special collections. On the left, we've got a volume of notes that describe his lectures on jurisprudence, and on the right, from his lectures on rhetoric. And why are these relevant? What do they tell us? Well, they can tell us all sorts of different things about the subjects that were taught. Very little is known, other than from lecture notes, about what he taught in his classes. He taught about ethics and morality. Economic concepts like the mechanism of the price system, the shortcomings of protectionism, and the development of governmental and economic institutions. What it shows is that his thinking about economics is embedded in his thinking about justice and about the duties of government. Years later, these ideas will become the cornerstones of his works on morality and economics. His teaching has transformed him into something of a cult figure, an academic rock star whose portrait bust can be bought by the students in the local bookshop. If he were teaching today, they'd probably buy a T-shirt with his face on it. No one can have worked harder than Smith as a professor. By any standards, ancient or modern, it's an absolute killer regime that he goes through. After years of research and writing, his first great book is ready. At its core are the ideas that trust and empathy are the root, the essence of any successful society. Today, first editions of Smith's breakthrough book are very rare and can sell for hundreds of thousands of dollars. By special arrangement, Nick Philipson and I are going to be able to see one close up. Johann, what we have here is a first edition of Adam Smith's Theory of Moral Sentiments. Bill Zaks is a distinguished Scottish Enlightenment scholar. It was published in London in April of 1759 1,000 copies were printed for distribution there, in Edinburgh, and in other places across Britain at a cost of six shillings per copy. And who got this first edition? Lucky people got presentation copies, and the lucky people tended to be powerful people in London, members of the literary elite. But the book sold like hot cakes, and two-thirds of the first edition was sold out in a couple of months. One of the most profound things about Adam Smith is his view of social evolution, that many of the institutions that we have, language, markets, you name it, these are indeed the results of human action, but they're not the results of human design. We never planned these things. So note that phrasing, individual human action, but not individual human design. Smith thought that those people who believed they knew what was best for others were represented by a figure he called the man of system. The man of system is the man who is entranced, enthralled by his own idea of the ideal, tries to make that ideal a reality, and decides that he's going to impose it from the top down whether people want it or not. And as Smith said, the man of system makes the mistake of thinking that he can move people around the way a hand moves chess pieces around on a chessboard. And Smith thinks that this is dangerous for two reasons. First, he thinks he knows more than he can actually know. He thinks he knows what's good for all individuals, and then tries to force them into his particular boxes. But of course, the mistake, Smith says, is that human beings are not like chess pieces. They have principles of motion all their own. They have their own ideas about what they'd like to do in life. They have free will. Far better for the well-being of the economy as a whole, far better for actual individuals to be free to pursue their own self-interest as they see fit. Smith had clearly made his mark with the theory of moral sentiments, but the pressure of writing, teaching, and management had been extraordinary. He was exhausted, nearing a breakdown. The theory of moral sentiments saved him. It was well-read in influential quarters in London, and in fact, by the guardian of the young Duke of Buccleuch. Who then probably hired him at a salary of 300 pounds a year for life, which was a fabulous amount of money, to become the tutor to the young Duke of Buccleuch. Who was 18-year-old, just about to become into his legal majority, to take him on a grand tour of Europe. And so Smith found himself going through France and Switzerland with the young Duke of Buccleuch. It was an offer you don't refuse. And Smith had always wanted to go to Paris. It is the first time, and will be the only time, he leaves Great Britain. It will be a life-changing experience. Still a destination for writers and thinkers from all over the world, Paris today is even more glorious than when Smith arrived in 1764. Its wide and airy boulevards showcase a stunning ceremonial architecture. Yet Paris remains an accessible city, as it was when Smith came here to walk in the parks with the great French thinkers of the day. Smith, along with Henry Scott, the young Duke of Buccleuch, and his Saint-Laurent, settled into this neighborhood, Saint-Germain-des-Prés. As now, it was a cosmopolitan mixture of shops and restaurants. You have to imagine Smith going to Paris with one of the richest, grandest young men in Britain, whose estates were gigantic in Scotland and in England. You also have to remember that Smith went to Paris as a man who had written The Theory of Moral Sentiments and was enjoying an enormous success in the salons and in the clubs of Paris. Paris was ready for Smith, and Smith was ready for Paris. The Theory of Moral Sentiments was a smash hit here. It was twice translated into French during Smith's lifetime. He was taken up by the ladies in Paris, his bad French became a talking point. He started to dress rather well. His social life is suddenly full. There are frequent gatherings in grand salons like this, where intelligent men and women meet to discuss literature, ethics, and Smith's own works. One of the things that's funny about Smith is that awkward, eccentric though he is, very few people have a bad word to say about him. And rather improbably, Paris loved him. Adam Smith probably dined here with some of his new friends. This is Le Procop, founded in 1686. It's one of the oldest restaurants in Paris. This establishment was a gathering place for many of the great thinkers of the age. Voltaire was here so often that he actually had his own desk here. And he was often joined by the likes of Thomas Jefferson, Benjamin Franklin, Diderot, Rousseau, and many, many others. Smith now changes his focus from the perfection of private nature to the improvement of public systems. These are the ideas that will take final form in his second book, The Wealth of Nations. In France, Smith met many of the very early economists of his time, the so-called physiocrats, who were theorizing, interestingly, on what he took to be the central problem of economics. How do you extend the wealth and power of a nation? In Paris, Smith meets the leader of the physiocrats, François Quesnay. They take long walks and discuss novel ideas with other French intellectuals and economists. They thought, like Smith, that the key to doing this in a modern world was liberalizing the market. Both Smith and Quesnay are radical critics of the old mercantilist system of tariffs and monopolies. They both believe in free trade, and they both think that wealth is created by individuals and businesses, not by the government. Like Smith, the physiocrats apply the scientific method to the study of economics. They coupled liberalizing the market with absolutely massive state intervention. Quesnay believes that the French economy can only be rebuilt after radical changes in land ownership and inheritance law are imposed in a revolutionary manner, from the top down. And this is where they part ways, because Smith thinks that revolutionary changes like that are politically disastrous. He is convinced that economic growth is dependent on progressive improvements and freeing up change at the bottom. Smith thinks that markets, governed by civil society, are much better than a revolution to improve the lot of the common man. Years later, the terror of the French Revolution will bear him out. For now, he finds a perfect example of progressive improvement in a method of industrial production that has fascinated many French Enlightenment thinkers. Ah, there it is, Diderot's famous print of a pin factory. One man draws out the wire, another straightens it, a third cuts it. There are dozens of stages involved in making pins, from straightening out the arm, to flattening it, to sharpening it, and so forth, and so on, and so on. The pin factory becomes Smith's most famous example of how division of labor can create large-scale voluntary cooperation between people specializing in different tasks. What Adam Smith suggested was, when you divide the labor of a particular task among many people, the overall productivity goes up. If you want to know the state of a nation's economy, look at the stage of its division of labor. The more division of labor, the more productivity and the more prosperity. That means that the larger the market, the more prosperity. Smith doesn't conceive of division of labor. His great contribution is to show how necessary it is for widespread prosperity, and that the roles we play in that division must constantly change according to our skills, the demand for them, and the competition we face. From the hustle and bustle and glamor of Paris, Smith returns home to the quiet of Kerkady to settle down and develop ideas for his next book. The deal with the Duke of Buccleuch means that he doesn't need to worry about paid labor anymore. He is his own man financially. This gives him the opportunity to finish The Wealth of Nations, and to define many of the economic principles that will stand the test of time and usher in the modern world. He is reading voraciously. It's intense writing, rewriting, over a three, four-year period. We know that after a hard day's work, Smith occasionally visited the Parth Tavern to exchange stories and raise a glass or two. Established in 1750, it was just a few blocks from his home. Hi, how are you doing? Fine, how are you today? Great, thanks. It's lovely. Could I have a glass of claret, please? Yes, of course you can. His drink of choice is claret, and even in a simple glass of wine, he sees an economic principle. It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. Never to make at home what is cheaper to buy elsewhere. And that was certainly true of wine in Smith's day. In Scotland, the land lacks the chalky limestone and gravelly soils that lend so many flavors to the wines of France. Even more, it's too cold and wet to grow good wine grapes here. In Smith's day, like today, most good wine drunk in Scotland is imported from France. It's reasonably priced, readily available, and tasty. So when it comes to wine, France has a competitive advantage. It's nearly impossible to produce fine wines in Scotland. But the Scottish soil is perfect for something else. Could I have a Bavini, please? Certainly. Although the Scottish soil, or terroir, is inhospitable for the growing of grapes for wine, it's perfect for growing barley. And malted barley is the major ingredient in single malt Scotch whiskey. The moral of the story? Do what you do best and trade for the rest. Sure, the best wines from France cost a fortune, but so do the best single malts. The essential thing about the free market is that it is voluntary trade between different people, voluntary exchange. What we're doing is looking at each other as potential partners, as peers, not as enemies. You're my opportunity, not my enemy. So Smith saw the market economy as extending the frontiers of opportunity for everyone, including, and especially, the least among us. Smith knew that moving products to supply people with what they needed and wanted from around the world is a complicated process, too complicated even for the most powerful government to manage. But he saw it as a natural function of a free market. If you make that into a system whereby it's not just you and me, but it's millions and millions of people all trading with each other and exchanging things that they produce, then that is an extremely efficient system. It's all highly organized, not from the top, but from below. It's the result of millions of people acting in their individual interests. Have you ever noticed that when it's raining, there's someone there selling umbrellas? And when you're at the beach, it's easy to find sunglasses and suntan lotion. Adam Smith told us why. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love. By self-love, Smith means that sellers want to earn a living in order to support their families. To do that, they make the products that they think you and I will want to buy, not because anyone tells them to, but because it's in their best interest. So for Smith, what he saw was not mutual selfishness. What he saw was mutual respect, which is an entirely different moral paradigm. Here's how it works. The prices we're willing to pay send key signals. And Smith used a baker as an example. Hi, this all looks delicious. Could I have a cup of coffee? Yeah, of course. And a scone, please. Thank you. But let's say we all want scones, and the baker keeps running out. Well, then she can charge a bit more. Seeing the demand and money to be made, other bakers will start offering scones. All throughout the supply line, people spring into action. Farmers see that bakers are buying wheat, so they plant their fields and up production. Truckers see money to be made in delivering wheat to bakers, so they buy trucks and hire drivers. Thank you. So we vote with our wallets, and all around the world, people spring into action to satisfy our demands. No one orders them to do this, but every purchase sends a message. As the supply increases, competition forces prices down. Fewer bakers bake scones, and things stabilize as supply meets demand dynamically and automatically. This all happens without government intervention, without any trade commissar or man-of-systems dictating quotas. This is Smith's invisible hand at work. It guides large businesses and even a small baker. Just as the impartial spectator summarizes much of the theory of moral sentiments, the invisible hand summarizes much of the wealth of nations. He is in this, as in many other cases, led by an invisible hand to promote an end, which was no part of his intention. When the baker sees that we want to buy bread, she makes the bread so she can make a living. And the other side of the coin is that we get bread. And it's a beautiful place, welcoming, friendly. There's more to competition than price alone. One of Smith's great contributions to humanity is his realization that things didn't have to be planned in order to be orderly. He believed that many complex systems can be generated by local behavior. They don't have to be, and actually can't be, created from the top down. If you just left people to their own devices in what he called the system of natural liberty, that people will find ways of working with each other, and cooperating with each other, and collaborating with each other. Smith thought that entrepreneurs and businesses create wealth, but don't get the idea that he was an apologist for all business. On the contrary, he saw how many businessmen were drawn to create monopolies, and deceived the public interest for their own benefit. And that is precisely why he argued for free competition and free trade. Greedy businessmen who tried to rob consumers by raising prices or lowering quality would be ruined if the consumers were allowed to turn to another competitor. And that is why Smith thought that the government shouldn't be pro-business, it should be pro-market. I think probably the biggest misperception people have about Smith is that he advocated some kind of extreme selfishness or greed. Smith recognized selfishness for what it is, something that's unattractive when we see it, and something that's unhealthy when we experience it. Smith sees the invisible hand working in small marketplaces. But in the wider countryside, kings and queens had long sold monopolies and lavished gifts of land upon their favorites. In Adam Smith's day, castles like this dotted the Scottish landscape. Their owners were nobles, devoted to a life of ease and pleasure, and the legal system was structured and enforced to keep it that way. Of course, those people had enormous power, not just economic power, but also political power as well. Inheritance laws forced family estates into the hands of the eldest surviving male, and that kept them intact, instead of being divided among the siblings. Among tradesmen, you had the guilds who were deliberately trying to get regulations in their favor to keep out competition. So the ordinary working person really was very much left out by this system. Laws and government may be considered in this, and indeed in every case, as a combination of the rich to oppress the poor, and to preserve to themselves the inequality of the goods. People used to think that wealth is the treasure you keep safely locked up behind thick walls. In the 18th century, many people thought that what wealth was was gold. That what we needed to do is to export a lot, and then we would get money from other people, and import as little as we could. It was a zero-sum worldview, where one country's gain had to be another's loss. So they created a legal framework that was a lot like their castles- high walls all around, and a drawbridge to keep competition and imports out. Of course, Smith said that was all wrong, that both sides benefit from a transaction, both the buyer and the seller, and that if you really want to increase prosperity, what you should do is to increase trade as much as possible, rather than try to prevent one side of it coming into you. Smith's detailed study of markets leads him to realize that it's the labor of a nation's inhabitants that is the major source of wealth. If you read The Wealth of Nations, the very first sentence, he says the wealth of a nation is fundamentally the productive labor of its people. In other words, it's gross national products, as we would call it these days. Absolutely breathtaking. And in the second sentence, he talks about gross national product per capita. In the third sentence, he talks about productivity. These are completely new concepts. That is how you grow. That is how you acquire wealth. It isn't the amount of silver that you can get into your vaults. It is the productive capacity of your citizens. Before Smith, almost every school of thought taught people that one's own interest is always contrary to someone else's. But Smith changes everything. If trade increases our wealth, then other people, other groups and other nations are not by nature our enemies. Tying the progress of modern society to productive people and open markets is a revolutionary idea. But he also speaks to the role of government in a free society. Little else is requisite to carry a state to the highest degree of opulence, but peace, easy taxes, and a tolerable administration of justice. All the rest being brought about by the natural course of things. This displays a striking faith in the average human being. If we just give you some space and protect your basic rights, you can figure out how to improve your own life. We don't have to do things for you, we just have to stop doing bad things to you. In 1773, Smith is here in Kirkcaldy, working on the Wealth of Nations. But the material he needs is miles away in London. So he sets out to visit Parliament to investigate taxes, a potential war with the American colonies, and the government's support of monopolistic companies. Because peace, easy taxes, and a tolerable administration of justice does not describe what goes on in the British Parliament. Eighteenth-century London didn't have cars or buses, but it was a huge, vibrant metropolis, and the center of the most important political debates. Smith followed them closely, and he wrote about them in detail. As you read Smith, it becomes very clear that the problems of his day are very much similar to ours. Poverty and unemployment, failure in the educational system, political pork, foreign conflict, runaway spending, and a burgeoning national debt. Some of that debt can be blamed on what was perhaps the greatest state-supported monopolistic company in history. Here along the Thames, in the southeast corner of London, lay the docklands, home to those mighty fleets of sailing ships in the days when Britannia truly ruled the waves. This place doesn't look like much today, but in the early nineteenth century, this was a bustling, wide expanse of docks and port facilities owned by the East India Company. This used to be the home port of one of the most powerful organizations on earth. Now, it's just filled with mud. Smith saw the East India Company as the epitome of monopolistic evil. Britain's National Maritime Museum in Greenwich has the story. Here, within the galleries of this World Heritage Site, is an amazing repository of the seafaring heritage of the British Empire, filled with treasures large and small, including a superb exhibit of the East India Company. I think what surprises people when they come into this gallery is just A, how large the company was, and B, how long it lasted. I mean, this is something that's dominating Asian trade for almost 250 years, essentially. Robert Blythe is the senior curator of world history here at the museum. The East India Company actually becomes an Asian power. It has its own army, its own navy, and of course, its own merchant ships are armed as well. In fact, it was one of the most powerful organizations on earth. In Smith's day, the company accounted for much of the world's trade and had its own army of almost 70,000 soldiers. It ruled all of India. So the company is actually minting its own coinage in India in order to strike some of its deals. So an official coat of arms and minting your own coins, it seems like they're almost spontaneously, without intention, moving from being a company to becoming a government. Absolutely. This is monopoly. The company has real power. So this is company as government. The story of the East India Company highlights how easy it is to divert public resources for private gain. If you think of Adam Smith's ideas of a free market, of free trade, the company is the absolute antithesis of that. Smith denounced the company as a blood-stained monopoly, burdensome, useless, and responsible for grotesque massacres in Bengal. Its managers and officers became incredibly wealthy, but the company itself was never very profitable. When it's not making a profit, when military conquest in India really is a drain on its finances, the British government has to step in to prop up the East India Company. Essentially, the company becomes too big to fail. In order to bail out the company, Parliament passed the Tea Act of 1773, allowing the company to sell its tea to the American colonies on privileged terms, at a tax rate lower than the local tea merchants. This, of course, led to the Boston Tea Party. So it is East India Company tea that is thrown into the harbor at Boston. Now it might be too much of an exaggeration to say that the East India Company's monopoly caused the American Revolution, but definitely a factor in it. Smith finds himself having to think about how do you manage empire in the modern age? But even worse, there is the problem of America. What to do about those discontented, troublesome American colonies who have begun to demand more influence, or even independence? Smith thought that the Americans were victims of the mercantilist system, that Britain was trying to extract wealth from America and make sure that no wealth went from Britain to America. Smith gets caught up in this debate and becomes closely involved. The Parliament of Great Britain insists upon taxing the colonies, and they refuse to be taxed by a parliament in which they are not represented. Smith is widely respected, very well connected, and feels that the way Britain deals with the American colonies is very important, not just for the colonies, but for Britain as well. Is a Commonwealth, a free trade zone with America, is that possible? Because he believed that the best for both sides would be open and free trade. This is one of the most hotly debated and difficult problems that any British government has ever had to face. Smith listens to the debates on the American issue in the British Parliament. He even lobbies politicians, urging them to let go of their mercantilist thinking, and keep Americans on friendly terms with open trade and migration. In fact, he speculates that America could one day be the seat of the capital of Great Britain. Yet war is clearly on the horizon, in which thousands of British troops will be sent to die on a faraway shore. It will be a very unpopular and costly war. In Smith's day, the military is the government's single largest expense, and this is one reason why. This is the HMS Victory, on which Admiral Lord Nelson defeated the French Navy and lost his own life at the Battle of Trafalgar in 1805. It's been beautifully restored and rests here in Portsmouth, England. Built at a cost in excess of what would be 75 million U.S. dollars today, the Victory was a deadly floating gun platform, with 100 bronze cannons on three decks. She carried four acres of canvas, and made battle speeds of eight knots. Launched in 1765, this ship had a crew of 821 men. The Royal Navy in those days had more than 500 active ships and 140,000 seamen, plus huge homeport facilities in England to maintain and repair all those ships. Smith has run the numbers in detail, as he always did, and he really couldn't see any way in which the colonies would ever be profitable to Britain. Controlling colonies just to monopolize trade would never pay. As we all know, the British government didn't adopt Adam Smith's views on the colonies, but he felt so passionately about it that he concludes The Wealth of Nations with them as an example. In 1776, just months before America's seething discontent bursts into outright rebellion, The Wealth of Nations is published. It's a beautiful book. It's expensive. If you walk through the great libraries of the world, you will find the Bible, you will find Newton, you will find Darwin's Origin of Species. That collection is not complete without The Wealth of Nations. It is one of the path-breaking books of all time. And it's written to be understood and taken seriously by governments as well as by philosophers. And governments do take it seriously. Almost immediately, Smith's ideas catch fire around the globe. The founders of the American Republic, the kings, queens and parliaments across Europe from Great Britain to Russia become convinced that Smith has conceived of a revolutionary blueprint for prosperity. And they start reforming their countries with the result of unleashing growth and speeding up the Industrial Revolution. Smith is now wealthy, famous and influential. He and his aging mother move to Edinburgh. Here, in this building on High Street, he will follow in his father's footsteps as a commissioner of customs. He will live out the last 12 years of his life in his new home, just a few blocks away. He chooses the Canongate neighborhood, known for its large and fashionable homes and gardens. And he settles into this home, the Panmure House, named after its original owner, the Earl of Panmure. Big, ugly house. Next, however, to a church. And his mother is a deeply religious woman. But it's near the center of things. And in a sort of way, it's a friendly house. Here in this large and friendly house, he convenes weekly dinner parties that soon become major intellectual and social events. All of the minds that were there in Edinburgh at the time, the great minds, could come around to his house and talk about life and politics and art and literature and economics. And so, the end of his life is a sociable life. The only snag is that it doesn't give him much time for writing. And yet, something he does write shines a critical light on the real Adam Smith. He returns back to the theory of moral sentiments, and he revises it very comprehensively. He adds a very significant section, and it's a study of the virtue and, indeed, the virtues that he believes to be necessary for a modern commercial society. To feel much for others and little for ourselves. To restrain our selfishness and exercise our benevolent affections constitute the perfection of human nature. Smith mattered to his contemporaries, and the fascinating thing is he's gone on mattering to posterity. He was deeply concerned for the plight of the working poor that he felt were really kept out of opportunities by the kind of cartel and the crony capitalism of his day. So, laws and institutions shouldn't only be set up to favor the already entrenched interests. People at the bottom of the economic spectrum matter, too. Every generation has to cope with the problem of how far should governments intervene in the business of trying to maximize the wealth of their own country. These are eternal questions which every single government, in every single generation, in every single country, has to address. Perhaps the greatest gift that Adam Smith has given to us is a set of institutions, political economic institutions, that have enabled the greatest increase in productivity and prosperity that the world has ever known. To an impressive degree, the world now runs according to Smith's vision. In fact, his ideas are so universal that it's difficult to tell where they begin or end. He died in 1790, six years after his mother. He's buried here in a cemetery just a few houses from his beloved Pannier House, and next to the church where his mother used to worship. Together with Newton, Voltaire, Jefferson, Darwin, and other great thinkers, this was one of the greatest minds of his era. Through persistent observation and astonishing insight, he showed how society and human interaction really worked, and how much happier and more prosperous the citizens could all be. Who was the real Adam Smith? Surely he was both free market advocate and moral philosopher. I was intrigued to learn that in the twilight years of his life, and in secret, he gave the bulk of his wealth to charity. In the end, and true to his principles, he left his considerable estate to the poor, and his ideas to us. Funding for this program has been provided by John Templeton Foundation and Templeton Religion Trust. The Real Adam Smith is available on DVD. For more information, or to order a DVD of this program, call 1-800-876-8930. Or visit www.freetochoose.net.