Episode 177: Guest Russ Roberts on Adam Smith and Libertarian Economics (Part One)

0:00 Mark: You're listening to the Partially Examined Life, a podcast by some guys who at one point set on doing philosophy for a living, but then thought better of it. Our question for episode 177 is something like, how does economic order arise? And we're talking with Russ Roberts, longtime host of the Great Econ Talk podcast, in order to follow up on some issues we raised in our episode 174 on Adam Smith's 1776 book, the wealth of Nations. For more information, Please check out partiallyexaminedlife.com this is Mark Linsenmayer setting all of the prices for the goods I buy through a combination of theft and recompensatory website donations.

0:33 Seth: In Madison, Wisconsin, this is Seth Paskin in Austin, Texas.

0:38 Wes: This is Wes Alwan in Cambridge, Massachusetts.

0:40 Dylan: This is Dylan Casey in Middleton, Wisconsin.

0:42 Russ: This is Russ Roberts in Potomac, Maryland.

0:45 Dylan: Potomac, Maryland. I lived in Annapolis for 11 years.

0:49 Russ: Lovely.

0:49 Mark: Well, welcome, Russ. Let's talk for a few minutes about Econ talk before we get into the substance here. 500 plus episodes going back to what, 2005 or so.

1:00 Russ: Yeah, we just recorded our 600th, actually.

1:02 Mark: Oh.

1:03 Russ: We started in 2006.

1:04 Dylan: Congratulations.

1:05 Russ: The answer is, it's been a long time.

1:09 Mark: Yes, it's easy to disappear into that hole. And you don't even put them on one feed that you have to browse through. Six different feeds, whatever it is. The only episode that I required that everybody on this call listen to was was a June 2017 episode that you did with Don Boudreaux and Mike Munger on Emergent Order.

1:29 Russ: It's a perfect example of emergent order because I had a particular set of goals with that episode, and they didn't really come out. So the actual episode emerged to be something I didn't intend, which is not uncommon in life. And in thinking about emergent order, you see that everywhere.

1:45 Mark: I got to say, a lot of my favorite episodes of Econ Talk are the ones where you or you and Mike Munger just kind of go off and do some basic self reflection.

1:54 Russ: Thank you. We've got one coming up this Monday which will air before this our conversation airs.

1:58 Seth: So, Russ, this is Seth. I would just like to say that I'm a big fan. I'm sure I've listened to several hundred episodes at least. You're a constant companion in my ear, and it makes me not a little bit nervous to have you on the call. We're very happy to have you here. I really appreciate the work that you do.

2:17 Russ: That's very kind. Love the idea that I'm a companion to anybody outside the ones in my direct personal sphere. Right. That's the strange thing about this business that we're in. You don't exactly know who's listening, what they're experiencing. A little bit like life. But it's gratifying to hear that. Thanks.

2:33 Mark: Well, and one of the ongoing things that your podcast has raised my consciousness, I think we're all on this podcast, kind of knee jerk liberals in various ways. And of course we're mostly talking about the text of some particular philosophical work, often hundreds of years old. And so these political issues might just come out as a little side thing, but I remember way back when we were talking about utilitarianism, I recall reading about how some Asian country, I forget exactly where it was, had put into its constitution that we're actually going to use the principle of utility to guide our laws.

And we are kind of laughing on how far removed that is from what we do here because we feel like there's something much less deliberate about the way the American system is put together. And it's very hard to get anything done given interest groups and everybody vying for their own power. So the idea of beforehand actually making this a goal, that there was something that just couldn't even enter our political vocabulary. And listening to your podcast and your generally free market views, again, very self reflective, very non extreme, and you engage in dialogue with a lot of people that have very different views from you in both directions, has kind of made me see that perhaps an argument can be made.

I think it was explicitly made in this episode you had with Tyler Cowen very recently, that economic growth actually is, if you're going to do a utility calculus is the main thing. We don't need a deliberate governmental dedication to the principle of utility that just following the principles of free markets more or less does in the long run. Just look at history, that we have a higher standard of living, that any sort of positive governmental measures we would have laid out would not have gotten us to this point as quickly and can only hold us back in the future.

4:18 Russ: I'm the free market guy, but it's a little bit grand. I appreciate the idea that you're thinking in those directions, but of course there are many things government does that make that possible. The rule of law, property rights, protection of individual liberty. I think the challenge is figuring out what else should or can government do that would be productive in adding to, well, being in the longish run. Obviously there are things government does in the short run they meet today that are helpful to people and harmful to some, but helpful to others, that many people would say that's worth it.

The challenge is figuring out that over time thing. So when we absorb job losses, say from trade or job losses from technology in America, we tend to think, well, that will probably pay off for our children and grandchildren. And so that's a good trade off. But not everybody feels that way. And the political process is always struggling to deal with that tension.

5:10 Mark: And to bring it back to Adam Smith, we'll use Adam Smith as a launching point and bring up things from the previous episode that we did that you just listened to. But if we end up getting a little more general, I mean, I will direct listeners to. Maybe we can get a curated list of a couple dozen episodes so they don't just completely drown in your backlog, but like sort of what would constitute a legitimate introduction to the field. I think we're going to have to restrict ourselves here more or less to. I think our philosophical concern is more meta economics than economics itself.

Questions about how scientific is it overall, the relationship between government and morals and the economy. Smith gives us a good initial window into that. And plus we also have on the table the paper we covered in a past episode, Hayek's 1945 paper, the use of Knowledge in Society. So that is also fair game to pull from. I know that's a favorite of yours. Let's at least have this opening thing so everybody can kind of get some issues out there. And whether or not we cover them all remains to be seen. Last time we talked about how the economy was something like a natural machine, right?

A system that you can analyze kind of like the physics of a gas or a liquid. You can talk about the shapes of balloons in a very scientific way. You squeeze over here, the gas is going to move over there. So I'm interested in exploring to what extent you feel like that's an accurate picture and to what extent that's reflected in Smith. It does suggest if it were an analyzable system, a natural machine, that maybe one could manipulate it. Right. An engineer. Engineer can design plumbing taking into account the natural movements of liquids and things and sort of steer it to desired ends.

But the libertarian tendency would say, no, no, we kind of have to let. As you were saying, there are certain things we can do to set the stage, certain regulatory environment that we need to set up or need to have set up, but that there are certainly limits on what we might want to try that the machine analogy would not support.

6:56 Seth: Reading the wealth of Nations, I was Interested in learning a little bit more and trying to understand the connection between the Theory of Moral Sentiments and Wealth of. To try to understand how Smith connected those two things. And I feel like that's something I didn't quite get out of our reading. So it's certainly a theme that I'm interested in, bearing in mind that we read Theory of Moral Sentiments as a philosophical work in conjunction with talking about Hume on moral sentiment. So we were kind of focused on the mechanism, maybe didn't read all the relevant parts, but it's that sort of sense of individual morality and then societal or market forces, and then trying to untangle a little bit about how Smith describes human nature in the wealth of nations, the desire for commerce, the fact that commerce is what separates us in some respects from the animals, and that commerce generates wealth and understanding.

If we agree, if we understand that mechanism and we say, yes, that certainly works, how does it come into conflict with individual action? And in what sense is a market approach or a wealth generation approach not in concert with the types of things that we think shouldn't be treated as exchanges or the exchange. The human element of commerce is not necessarily an economic one, like social relationships. And so we had this same conversation with Michael Sandel about the moral limit of markets, talking about, are there certain kinds of things that we shouldn't treat in that same way?

And so those are the themes that I'm interested in.

8:29 Dylan: We read certainly not all of wealth of nations, but a selection of it. And for me it was the second or third time, though it had been quite a while since I had read it before. I'm always struck when I read Adam Smith about how thoughtful he is about these things in particular, in contrast to the way he's usually portrayed. I guess I shouldn't be so surprised because that happens a lot of times with philosophers and other people who write really interesting books, because it turns out that what they wrote was much more interesting than what you heard about them.

I found myself gravitating a lot to the invisible hand question, which made me all the more interested in hearing the Emergent Order podcast and you guys talking about that. I myself have a lot of interest, more from a sort of physical systems point of view, on the question of emergence and emergent order and where it shows up and what are the signs of it and that kind of thing. Thinking about that episode and Adam Smith and the question of natural prices that Mark brought up made me just think a lot about what we mean by a natural system in terms of economics and what it means to have laws associated and where its naturalism means an education in how it works versus what it is and the distinction between that and what is most desirable.

So what are the conditions for flourishing in a natural system, let's say a fairly sophisticated one, like an ocean or a forest or some other kind of natural environment in an economy, which would seem to be a pretty good analogy. And how are those conditions of flourishing dependent upon the inputs, in the case of the economy that we have into it?

10:15 Wes: I became interested in the question of emergent order or spontaneous order, trying to say more precisely after listening to the Econ talk podcast, what it means when we are talking about economics in terms of emergence. So what the high level properties are of the system that we're trying to explain, why we consider those emergent. So that could be something like the phenomenon of people being able to get what they need from others, the phenomenon of cooperation and seeming cooperation and coordination at a high level that doesn't really exist, things like that. So I looked a lot into emergence and then I realized how complicated it is and how many different definitions there are and even how, according to Chalmers, problematic the idea is. And I thought, okay, well, I'm not going to talk about emergence. So that's the dead end that I reached on this.

11:06 Dylan: So I think even though it is complicated, it is not so hard to talk about what is meant by it. It might be that there are problems with the concept and there might be problems with people argue about whether it actually exists or doesn't exist, but we can talk about what the phenomena we're speaking of, and that's not so hard to talk about.

11:26 Mark: So yes, Russ, tell us.

11:28 Russ: I'm going to get at some of those concerns, I think indirectly, and I think Dylan's right. I think let's talk about something in particular. I think trying to talk about emergence in general is extremely difficult. I think Wes is really onto something there. But I think in particular context it's very powerful and useful. And the simple way I would just describe it is that the system all has properties that no individual intends and outcomes are not the result of anyone's intention or design. And yet despite that, there are patterns that emerge that we can understand and think about thoughtfully and sometimes make value judgments about at least ex post.

And I think when you look at the world with that perspective, you see things you wouldn't otherwise see. So that's all I'm going to say about emergence generally. To start with, let me try to go backwards and respond to some of the comments that were made earlier and then we can see where we go. Does that sound good?

12:13 Dylan: Sounds great to me.

12:15 Russ: So modern economic theory does tend to look at the economy as a machine with levers and dials that you can manipulate if you're an economics engineer. And I think if you ask most economists at first rate institutions, graduate school places in America at least, they would say, yeah, that's what we were taught how to do. So that's a very common perspective. There's a small group of us who are troubled by that for a whole bunch of different reasons. And Smith would be, I think, troubled by it. Certainly Hayek was troubled by it. I think the metaphor for the Smith Hayek camp, which I put myself in, is an ecosystem, a rainforest, a garden, maybe a garden.

Because you can think about certain kind of gardens are pruned and designed very explicitly where others are a little wilder and more natural, but they may still have some human interaction. We don't just let our yard go the way it might just go with no direct intervention, but we might limit our intervention to certain kinds of interventions. Rain, perhaps we might water the lawn if it hasn't rained in a long time. We might exclude species that we don't want there who invade some bamboo from a neighbor. Say it's not a totally laissez faire system, but within the rules that are established by that relatively hands off gardener.

A lot of things are going to flourish and change and it's going to be alive. And I think when you think of the economy as an organic thing, it's a very productive way to think about it. It doesn't mean you don't do anything. It doesn't mean you never intervene. There might be results that you think you can attain through various kinds of interventions, but it forces you to intervene in very thoughtful ways, trying to anticipate as much as possible the connections between things. Which is what? Any complex system, any emergent system, has an inherent level of complexity to it.

And I think that that is the perspective that I would say is probably the single most important piece of all this. Now there's a welfare part, what's called a normative part, the part that we think is, say, good or bad about it. And I think that gets missold somewhat, and I'm sure I do it myself. It's very easy to jump from the positive side, the mere description of how the system exists and what its relationships are. It's very easy to move from that to, and therefore this is a good outcome, or therefore you shouldn't touch it So I would just make the point that I think for a lot of non economists, they look at some outcome in the economy and they figure because it's an outcome, someone must have intended it.

And it might be a conspiracy between corporations, or it might be a conspiracy by the government or by politicians, or it might be somebody's wicked motivation. And what the emergent perspective often teaches you, or at least encourages you to imagine, is that it's more complicated than that it might be no one's design. And that's just a mind blowing thing when you first think about it. I often use the example of a restaurant where it's a little noisy, or let's say a dinner party. And if someone says, says folks, let's try to keep it down, it's getting hard to hear in here.

You can announce that all you want. Very hard to maintain that there's certain natural, what I would call market forces or human forces that often will push things in a direction that even though people are trying to change that they just can't. The war on drugs, an obvious example. People like drugs, people like to make profit from selling them. So we make it illegal. And some people actually think, well, let's solve that one. And it's pretty obvious even to a fairly unobservant person that we haven't solved that one. That those natural forces of supply and demand that people want to sell to make money and people want to buy to enjoy the drugs are very hard to stop.

And you can affect the price of drugs a little bit. So again, it's not that nothing happens when you intervene, it's also the case that when you intervene you get a whole bunch of things you didn't intend. Gang wars, deaths of innocent people, and crossfire people turning. Anyway, you get the idea. So to come back to the main point, I think the economy as a machine is actually a dangerous metaphor. It's a metaphor that economists like because it encourages people to demand their services. So if I think like an economist about economics and economists, I would come to the conclusion that economists would be naturally inclined to see the economy as a machine rather than a rainforest, because it increases the demand for their services to run that system.

So I think we should always be skeptical of what we hear from the left or the right about those kind of interventions that we think are going to make things better. Now I want to talk about the invisible hand because I think that having talked about emergent order, it's a natural segue, as I think someone mentioned in your last podcast on this topic, Smith mentions the invisible hand once in all of the wealth of Nations. He mentions it exactly once in the Theory of Moral Sentiments. And I think he mentions it one other time that we have in print in his lectures on astronomy.

So it's a phrase he used three times that we have in his written work that's been preserved. We don't know how often he used it in casual conversation, but it's become somewhat synonymous both with Smith and a particular worldview. And it's awkward for people. But the fact is that the way Smith uses the phrase invisible hand is not the way that we use it in economics today or that it's used in casual conversation. Smith uses the phrase invisible hand to mean things happen that you didn't intend and that actually happened to be somewhat positive.

You could have a bad motive and it turns out well for the economy or the society at large. That's interesting. That's not what people mean by the invisible hand today. What people mean by the invisible hand today is if you leave things alone, they tend to turn out pretty well. That there are certain natural self regulatory governors on the system constraints that push self interest toward more positive beneficial outcomes. The irony is that even though Smith doesn't use the phrase the invisible hand to talk about the fact that there's a tendency to, when things are left alone to turn out pretty well, he does argue that he just doesn't call it the invisible hand.

And in particular, perhaps ironically, I think the place he does that best is in the Theory of Moral Sentiments and talking about the evolution of norms and morality where he says our human desire to be loved and lovely encourages us to act as if we were policing each other's behavior. So that if you treat me in an opportunistic way, I'm going to think less of you. You know that. And other people around you will see that you acted opportunistically and as a result you're going to be deterred somewhat. It's not a perfect system. It's amazing it works at all.

It's what Smith, I think would say, but you're going to be deterred somewhat from doing opportunistic or destructive or cruel or bad things. Just to take an example from the news, I think Harvey Weinstein might end up in jail, but he might not. But in which case, if he doesn't, he's been punished tremendously. He's lost his job, he's lost the respect of many, many people. And I'm sure given some people pause as to how they will behave if they ever get to be the head of a movie production company.

18:50 Seth: Yeah, but for 40 years he wasn't worried about people thinking him lovely.

18:54 Russ: Correct. As an aside, I suspect he probably thought of himself as lovely despite his unloveliness. And Smith understood that. Smith talks a lot about our natural inclination to self deceive. That's why I emphasize a very imperfect system.

19:06 Wes: His loveliness lay in the fact that he could make people stars and make.

19:10 Russ: Exactly. And make great art. And he helped people, I'm sure, and you name it. I'm sure he had many rationalizations. We all do for the things we do that are cruel and not nice. But I think the point I'm trying to make is that jail, prison and government are not the only ways that bad behavior gets punished. Smith was very interested in that and he understood that.

19:31 Wes: I was just going to point us to the passage where the invisible hand comes up in chapter two in the wealth of nations of restraints upon the importation from foreign countries of such goods as can be produced at home. I just wanted to clarify how the difference that you were pointing out, because I take it that the argument in that chapter is just. He's arguing against using tariffs to kind of establish a domestic monopoly for some industry. And basically what he argues is that first of all, the people are naturally going to deploy their capital close to home anyway.

So it's not like you are protecting industry in general. And the other is that the best possible benefit to society as a whole comes from they're naturally going to produce the greatest possible value because that'll produce the greatest profit. But then the annual revenue of a society is just the exchangeable value of the whole annual produce of its industry. So basically the value to the society is just the aggregate of the value that people are trying to create individually. So that people really do. By pursuing their own interest. They, as he puts it, they're led by an invisible hand to promote an end which was no part of his intention.

By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation indeed, not very common among merchants, and few words need to be employed in dissuading them from it. You were saying there's some difference in the way the invisible hand is used today from the way it was used there.

21:06 Russ: Yeah, well, that statement. First of all, I'm not even sure it's true. The underlying economics of what he's claiming what he's trying to claim there is. We tend to invest in our local businesses and if you think about 1776 when information was hard to come by, communication was very imperfect, news sources were very mediocre. The fact that you were sending a boat off to somewhere to pick up some spices and come back, that's a really frightening thing to invest in. The boat might never come back. There might be a storm, there might be crooks, there might be pirates. The people who are sending out the boat might be dishonest. There are just so many uncertainties about that that you have a natural impulse to invest in things nearby where you have a lot more information, a lot more reliable. So that's what he's saying.

21:46 Wes: It's a two part argument and that's one part of it.

21:48 Russ: Yeah, right, that's the first part. It's your own self interest to do that. But he then claims, and this part I don't think is necessarily true and economics properly considered and that's good for the society at large to have the money at home. Now let's assume that's true for the point of the argument. What he's saying there is that sometimes you do stuff that's purely self interested, that turns out good for people beside yourself. You could argue that's what the invisible hand today is, but I wouldn't say that's really what people fully have in mind.

What people fully have in mind is a much richer feeling about self regulation of the economy, that competition in particular regulates malfeasance, dishonesty, fraud and so on. And that therefore we need a less heavy hand, that we get rid of the consumer protection pieces of Dodd Frank. Everyone thinks that consumers are now going to be taking advantage of the Smithian modern version of the invisible hand, which is not what Smith wrote would say. Well, that might be true, but then again you have to think about those who impose costs on financial institutions.

Maybe those costs end up getting passed on to consumers, end up paying for it. Maybe those benefits aren't worth it. Maybe it could rely on reputation and brand name. That's a much more complex argument than I think Smith has in mind. And in the Theory of Moral Sentiments he makes a very similar argument as he does in the wealth of Nations. Just a different example basically argues that rich people like a lot of stuff. They think it's going to make them happy, it doesn't. But in their pursuit of trying to lead a rich life, they employ lots of gardeners and servants and other people and therefore they Help people besides themselves.

Again, that's not what I think of when I think of the invisible hand. There's a piece of it that's the invisible hand, modernly construed, which is there are ramifications of your actions that you might not intend that are good ones.

23:28 Wes: Not just actions, but self interested actions.

23:30 Russ: Correct. In particular, that motive alone does not determine whether outcomes are good or bad.

23:37 Wes: Self interest accrues to the interest of society as a whole.

23:40 Russ: And we know that's not always true. So it's a bad principle. I think what Smith's pointing out is that it can be true, which is shocking, it's novel. My point is that when we think about the invisible hand or laissez faire or Smith is the godfather of capitalism, I think thinking of a much bigger systemic idea that for example, that the profit motive, which would be an application of the examples that we just gave, that the profit motive, which is about one's own self interest, encourages you to do things that develop new products, treat your customers well, ideally, and that leads to outcomes that your desire to have a nice vacation every year with your family is not part of.

But I think more than that, Smith's deeper insight, which I would not say he literally described as the invisible hand, more than that is this idea that when we generally let people pursue their own self interest, a system emerges of outcomes that are mainly beneficial, that are related to economic growth, they're related to the opportunity for individual flourishing, of figuring out where you fit in with the system rather than being assigned an occupation or a place to live in a controlled economy or centrally planned economy. I'm just trying to make the point that I think Smith is the intellectual godparent of the invisible hand as we think of it today.

When he wrote about it with that actual phrase, I don't think he captured what we're thinking of and what we're talking about with emergence.

25:03 Wes: Before we leave this section, the other thing he does here is he makes a really interesting comparison. So he says trying to use tariffs to create these monopolies in an industry at home, it's sort of like my neighbor makes really great shoes and I make scarves for a living. But. But I'm not going to buy my shoes from my neighbor because they're over there and I want to produce them at home, which is enormously wasteful because I know how to produce really good scarves really efficiently. And it would be much cheaper for me just to sell my scarves and use that to buy much, much higher quality shoes. And for me to also become a cobbler, what those tariffs do, what that sort of interference does, is it undoes the division of labor, which is the mechanism by which individual interests accrues to the general interest.

25:51 Russ: On this view, that's very well said. And for Smith, the division of labor is the linchpin of prosperity. The way I would think about that scarf shoe thing is that I have two ways to make shoes. I can make them myself or I can make scarves. And making scarves is just a different way to make shoes. And if it takes me two hours to make a scarf, I could swap for a pair of shoes, but four hours to make the shoes myself. I'm a fool to make my own shoes unless I get pleasure from it, which is okay, that's all right. You can do lots of things that are, quote, financially irrational. That's not irrational. Literally. It's just they might cost you something to indulge the pleasure you get from it.

26:23 Wes: It's just irrational. If you do it at a scale, a country level scale, where you're saying, well, we can't compete in our, let's say, automobile manufacturing, so we're going to prop that up. That's the analogy. He's trying to say, well, no, you're better off buying the cars from Japan and putting your existing energy and capital towards something you actually do well. And then you use the result of that to buy your cars. He's using that just as an analogy to say something about public policy.

26:52 Dylan: Yeah, that might be true, but it's not clear to me that the objection of different kinds of interests coming to play, other than economic interests, that you would acknowledge on the individual level doesn't also play at larger levels. So calling it irrational doesn't sound quite right. It seems like, in fact, whether you called it a proper purposeful manipulation of the economy or a corruption of a natural order, you would say that there's all kinds of implementations of economic policy that work under exactly that principle. And it's not that they don't have effects.

27:27 Wes: Well, it's irrational. If you're trying to maximize wealth, that's a move that actually reduces the wealth of the nation.

27:33 Dylan: But right there in the end of the sentence is the point, right? Maximizing wealth is being the interest that ought to be maximized. And all I'm saying is that for exactly the same reason as one might maximize a different kind of pleasure in their own individual economic activity, and that, in fact, it's very complicated how to understand what one's natural interests are and how that varies and how those natural interests contribute to the natural behavior of the economy. The same thing is true at a larger level.

28:08 Wes: Yeah, I think you can have other motives to prop up an industry, but if your economic motive were the general wealth of the country, I think that's where he would claim that you're actually shooting yourself in the foot. But yeah, I mean, conceivably you just reject the premise that the highest good or the only good that you're shooting for. And maybe there are other considerations.

28:25 Russ: We know it's not either at the individual or at the national level. But I think this distinction you're making between individual action and national action and the willingness to tolerate losses in wealth for regains in somewhere else is really illuminating. It's totally irrational. When I said irrational, by the way, which I apologize for introducing that word because I meant it in quotes. And so I tried to say financial and corrected it and put financially irrational. My point is it's not irrational at all to bake your own bread, which is if you have a high value of time and give up an opportunity for consulting projects so you can bake your own bread.

That's obviously a beautiful thing. If you love baking bread and you hate consulting. And even though you lose baking the bread, it's worth it. We do that all the time. I rake my leaves, which is expensive for me. I give up a lot of time and I could take that time, do something with it that's profitable and buy the services of somebody who could do that. But whether it was a good idea or not, I thought it was good for my kids to see that I raked my own yard. And so I did that. Maybe that was a mistake, but we make those kind of decisions all the time.

What's interesting at the national level that we're missing, which I think is really important, is that it's great. If it was unanimously agreed that it's worth reducing, say, large retailers so that we can have quaint mom and pop shops around our town as a place to shop, rather than having the big box at the edge of town. And there's a thousand issues like this. Whether we want to have American made shoes, so we want to preserve our shoemaking industry, or American made textiles, we don't want to allow imports of textiles. The problem with that leap to say, well, just like the case of an individual, sometimes it's worth it to do things that are not growth enhancing because we get a value from it.

The problem, of course, is that the value and the cost and the benefits don't accrue to the same people. And then we enter the world of reality, painful world where we have some people benefit, some people lose. And what do we do now? And I think economists have made a wonderful contribution to the world to remind people that sometimes when we benefit one group who are, say, politically powerful or, or loud, that that might make the pie smaller or induce pain that's not so obvious on other people. Then I think economists go too far. They say, well, it's inefficient, this policy, which all that means in economics talk is it makes the pie smaller than it otherwise would be.

But sometimes that's probably something a lot of us are willing to tolerate. Smith wasn't a fool. Smith didn't believe that wealth was all accounted and we know he didn't believe anything remotely like that. But the growth is good, Growth is good, but it's not the only good.

30:58 Mark: It just seems a lot of Smith's discussion in terms of the interaction between people and benefiting each other assumes a basic equality. And if we're talking about say the developing world with the same anti protectionist arguments that might well apply to us, would that apply to them because they might want to keep car imports out so they can develop their own auto industry? And as Wes was just saying, well, no, maybe according to Smith, they'd be better off just buying the cars and letting that amount of effort, letting those amount of resources go to something that they can do better.

But when you're a small country faced with the juggernauts of the U.S. and other places like that that are pretty much better at everything in terms of that, it seems like there would be a different logic. It's not as obvious where the money should go, or maybe they're not starting with as much, certainly monetary resources in the first place. Would that affect what their trade policies should be, given their particular circumstances?

31:50 Russ: I don't think so, actually, but it's a little tricky. In general, poor countries need free trade much more than rich countries, especially large rich countries. If America closed its borders tomorrow, literally to all imports, we'd be a little poorer. But we have a really big market domestically and that would allow unleashing the forces that Smith talks about, the division of labor. We get quite a bit of division of labor if we quote, only trade it among ourselves, because only trading among ourselves is 330 million people trading among themselves.

Which is very different than say, a country that has 5 million people and desperately trying to leverage those skills into something toward a higher standard of living. If you try to make your own cars when you're not good at it at all. Or better said, if you're trying to make your own cars when there are cheaper cars available, you impoverish yourself. Now, there's a reason you might want to do that. You could argue, I think it's a bad argument, but you could argue, but car jobs per se are part of our national culture. Of course car, car manufacturers and car employees will always push that argument.

And I think that's a natural thing to be wary of. I think we should all be wary of those kinds of arguments because those are really ways to deceive us into thinking that it's in our interest for these people to be enriched through a policy of restricting trade. The nations that have made the largest leaps in economic well being that are unparalleled to anything in human history over the last 25 years are India and China. India and China. You can debate legitimately how much of that was top down command and control versus bottom up emergent. What you can't debate is that they've thrived through opening their economy to the outside world.

Again, you can debate how much was steered, how much was coming through capitalism or entrepreneurship. But basically when those very, very poor countries changed their perspective with respect to the outside world, they flourished. Not the only thing that changed. I want to attribute it all to that. There are a lot of other things going on domestic. The second thing I want to say is that it's all well and good to say that a domestic car industry should be replaced by an import. If the import's really cheap, that presumes, and this is an attack on my free market positions to make it clear.

This is, I think, often forgotten. And it's important to remember that presumes you have a pretty effective labor market, a labor market that works pretty well. Because in the story of how free trade and creative destruction improve lives, the story is as that so you don't have carmakers anymore, but that's okay because now that we have cheap cars from outside, we have all these resources we can use to make something else. And the workers who are in the car industry can now do these other things. Well, in a lot of poor countries, those labor markets work really poorly.

And so to take an example against my usual viewpoint, when we export cheap food, we close to give away cheap food to foreign countries. That's very hard on their agricultural sector. Well, the standard view which is mostly correct is yeah, but now they've got cheap food that's really good. And that's true what's not good though, is that if the people who are in farming have very limited ability to do other things and have a lot of trouble moving from the rural sector, say, to a new factory that's opened down in the city, the implications of that in the short run are very painful.

And that short run might be fairly long in a country that's not well developed. So I, I think that's the way I would think about the choices that are being made there. A better way to say it is that talking about trade often overemphasizes the power of borders. Trade makes us rich. Trade allows us to specialize. There's nothing really that special about a border and trading with somebody across the border in Canada, if you live in Maine, versus trading with somebody across the border in New Hampshire or Vermont. And so I just think the underlying inside of Smith, that not making everything for yourself is a good idea carries you along.

35:27 Dylan: Russ, your description of the challenges of a poor country having their local economy disrupted by cheap agricultural imports because of the lack of flexibility and mobility of the labor makes me wonder, doesn't that apply similarly inside borders, even like a country like ours? Just thinking about the progress of labor in jobs in rural markets and the movement of agriculture jobs and the decrease of them, or even the same kind of argument about industrial sectors where there are other factors going on, one of them being people's relative unwillingness to be mobile, the desirability, specialized skills. Specialized skills. And so thinking about the question of what kind of efficiency we're talking about, there may be inefficiency of price regarding food, but there may be also an efficiency, right, regarding livelihood and the distribution of possible livelihoods.

36:27 Russ: Well, it's so much more than that, right? It's your dignity, your emotional well being, your self respect. If I tell you you're going to have cheap corn, but you're going to sit around the house all day and have very limited sense of respect for yourself and your friends may not respect you either because your corn farming business is now defunct. And by the way, of course we have to add that these agricultural exports in the United States are due to the fact that we subsidize food and have too much of it through government policy. But can I turn to the.

I wanted to talk about that domestic point because I think it's a fantastic point. It's 100% right. All kinds of things disrupt the patterns of specialization and the investments that people made in skills or where they want to live. And that's the extraordinary aspect of an unplanned economy. We tend to think about foreign shocks, foreign trade, because it's easy to demonize foreigners. So people who want to protect their livelihoods tend to to use foreigners as an easy whipping opportunity. But it's true of every kind of change in our economic system, whether it's a change in tastes.

If you're a potato farmer and people start worrying about carbohydrates, you might take a hit. If there's an innovation in teaching and professors are going to, which I'd love to see that MOOCs Online learning opportunities improve and professors can't make a living anymore. And we're going to hear how important it is for American youth to be face to face with their teachers. That's everything thing. So everybody tends to invoke all kinds of arguments beyond the financial to motivate people to prefer a policy that doesn't actually help them. It helps the person who's making the sales pitch.

The point I want to make is that, what do you do about that? And my answer is I want to do two things. I want to make labor markets more effective and I want to reduce artificial barriers to mobility like zoning laws in cities that are done to protect property values rather than enhance, say, neighborhood design or safety or whatever it is. And right now it's an issue in America. Even though we have very low unemployment, you'd think we have 20%. You'd think we were in the Great Depression where unemployment reached 25%. Right now we have unemployment of 4.

I think it's 4.2. And yet still people are. Now there are people who'd like to be working in the labor force who've given up. So it's not a trivial thing. There are people in rural areas, as you suggest or implied, I think that, who have trouble finding jobs where they used to find them. They're people whose skills used to be great, great at finding a decent paying job, and now no longer do. And the pace of all that is increasing. The result of that, in my view. I'm going to give you a counterpoint in a second. But in my view, the result of that is the most extraordinarily dynamic economy in the world.

Because we tolerate so much economic change now, we don't tolerate all of it, but we tolerate a lot of it. My argument would be that if we don't help make labor markets more effective, if we continue to have barriers to labor markets that we have that are typically, I think, policy mistakes, then we're going to have costs from these economic changes that are going to be less palatable to people. We're seeing that right now. That's what the populism phenomenon is to a large extent. It's people who find the economic change intolerable and now they want something done about it.

My view would be, let's fix the underlying thing that's making it hard for people to adjust. Mobility is going down in the United States, starting new businesses going down in the United States. Let's study that. My own ideas about why, that they're going to get better, but let's let that go. Now, the counterpoint to that which I don't agree with, but it's a very plausible counterpoint, is, well, all this economic growth you're talking about, which is the result of this dynamism and the tolerance for economic change that we let in the foreign cars, let in the foreign televisions, we let people make cars and put the buggy makers out of work.

Horses rejoice, of course, because now they're used for pleasure and less hauling around stuff. And there are more horses now than there used to be, which is great, but the argument would be that's just fantasy. Those gains aren't going to the average person. Now, if you've listened to econ talk, you know, I'm a skeptic on that claim, but a lot of people believe that claim. They have data to back it up. I heard someone mention in your earlier program on the wealth of nations that the transformation of standard of living is a pretty good selling point for capitalism in relatively unfettered markets.

But you can certainly make the case. Again, I don't agree, but you can certainly make the case that, well, that was then, this is now, and we need to different set of rules of the game because the gains aren't being spread very widely. Again, I disagree with that empirical claim, but there is evidence for it. And if it's true, I can understand why you'd worry more about reshaping the pie rather than making it bigger.

40:37 Mark: To generalize, if we're going to talk about the economy as a system, you might say, well, what is the function of the system, the function of the garden? It's not clear treating it like an autonomous entity. Its function would just be its telos, the kind of stuff that it tends to do. Of course, you could also talk about the garden. As you know, it's your garden. Is it providing you with the pleasure that you want? And so the economy sort of falls between those two things. The way that you talk about it in your poem about the Bread distribution.

41:05 Russ: It's a wonderful loaf.

41:06 Mark: Yes, it's a wonderful loaf.

41:08 Russ: Available online with resources on emergent order. For Those interested@wonderfulloaf.org Its function is to.

41:15 Mark: I don't want to say it's maximizing satisfaction of wants, but it certainly provides this amazing distribution of goods that one would not expect and that would be very difficult to plan. That's different than saying its function is to provide everyone with their means of sustenance or to provide something for everyone to do right. Should employment even be something that we expect out of the economy? One of my long standing social desires is to see as much employment automated as possible. But yet people educated so that they can find their own calling, so that they can find something that's not necessarily just being pushed into whatever job, probably by the force of circumstance that actually choose what they want to do with their life. There's so many things, ways that we

42:02 Wes: can help each other in the ideal world. Everyone has a podcast.

42:05 Russ: Yep, that's right.

42:07 Dylan: We talked about this in the new work episode. It is an interesting thing, whether it be technology or economics or whatever, that as we become more efficient and save time. We don't actually save time.

42:19 Russ: Well, there's a problem with time, you see, which is it's really hard to get that 25th hour of the day. So we've only got 24 and we can try to expand our lifespan, which we have quite dramatically until just recently. We'll see what happens. But we got a fixed allotment of that. It's just a question of using it as effectively, wisely, whatever you think of as your motivations for how you use your time. But the question's about work and automation are really interesting. But I want to go back to the question that was raised a minute ago about the goal of the economy because it's a really interesting way to frame public policy issues.

I think most economists, many economists, not all. And what I'm going to say is I think a reason a lot of people hate economics, and perhaps rightfully so. A lot of economists believe the goal of the economy is to get bigger. That's the goal. Our goal as economic engineers is to make the economy bigger and not worry about any individual's place in it. Now, there's a lot of wisdom in that. Going back to the earlier remark that someone made about Tyler Cowen in a recent Econ Talk episode. He makes an interesting philosophical case for why that should be the only thing you really.

It should be. The main focus of public policy is to make the Pie bigger. I would think about it a different way. It's kind of like this wonderful quote from a former chairman of Merck, the pharmaceutical company. I'm going to paraphrase it. It's something like our goal is to make people healthy and to create great medicine. And when we do that, our profit is largest. So they don't see themselves as maximizing profit, but by seeing themselves as helping people, they do maximize profit. So I want to argue that I would never suggest that an individual's goal should be to make as much money as possible, ever.

We know that's not a good goal. And in general, having the economy be as big as possible in some measured sense is not a good goal in and of itself. But if that really is your goal, the right way to think about getting there is not thinking about how do I get there, it's about thinking about it in a different indirect way, which is I think of the economy as the place where we find our potential to flourish in the monetary sense. And of course, inevitably you have to also take into account the non monetary rewards of life because they're the most important.

The monetary part's only for most of us. It's only a vehicle to the non monetary satisfactions we get, which are the deep and abiding ones. And Smith would agree with that 100%. He thought the pursuit of wealth for its own sake was dangerous and destructive force. And it didn't lead to happiness and money itself didn't lead to happiness. He writes about it extensively in the Theory of Moral Sentiments. And I do want to come back to the difference between those two books that Seth raised. But my point is that when you say what's the goal of the economy?

Or what should we as policymakers or its observers think about the goal? I to me, it's that place where you can find your place. I think of it as a dance floor. It's the place where there's room for you and ideally a few partners, your loved ones, or maybe it's your business associates, to create great things that you share with the people around you and that you enjoy what they're doing. That's brilliant and wonderful and lovely and inspiring and meaningful and so on. So I think seeing again this gets us away from the economy as a machine. Away from the economy is the system of, say, planets interacting and more as a garden or a dance floor or something that's more alive and less predictable and more interrelated on that point about

45:38 Seth: trying to identify the how we would go about doing that. We Had a disagreement on our episode about wealth of Nations. We were talking about the mechanism for creating wealth is division of labor. But there are parts in the book where he talks about how the division of labor has a deleterious effect on people.

45:56 Russ: Yep, absolutely.

45:58 Seth: And so we had a hard time kind of reconciling his positive statements about human endeavors and all the non monetary pursuits that are worth doing. And yet also it seems inherent in the nature of growth that it's going to be damaging to some portion of

46:11 Russ: the population, at least for some time.

46:14 Seth: For some time.

46:15 Russ: Not for long stretches of time, maybe not for each generation. But I use the example of Charlie Chaplin in Modern Times. He's on an assembly line. He's tightening a bolt for 8 hours or 12 hours or 15 hours a day. I think that's his whole job. He's got a wrench in one hand and he's tightening the bolt. And Smith, I think he says that explicitly. Specialization can be very tedious. Now if you're a pediatric oncologist, you're specialized, but your life is not tedious. It's very meaningful and it's profoundly interesting and it's constantly changing.

Even though you're specialized, you're not tightening a bolt. And we see the transformation of civilization from, from agriculture to industry to the world we live in today. So called knowledge workers. What you and I do, we're specialized. This piece of our life, this podcasting thing, and we're better at it. I don't know about you. I'm better at it than I was 10 years ago or five years ago. A little bit better, I don't know how much better, but somewhat better. But it's not boring because it's repetitive, even though I'm doing the same thing over and over again.

So here's the way I would say it, and I think this is just an important general point. You guys recognize that extensively in your wealth of nations podcast. What people say about Adam Smith is not nearly as interesting as what Adam Smith said. The book is infinitely more rich and thoughtful and it's true of everyone. Just to give a much less dramatic example, in 1957, I think it was, Gary Becker wrote a book called the Economics of Discrimination. If you ask people in the profession, what did Gary Becker say in that book? They will say, and this is a total corruption of what Gary Becker said, they will say, oh, well, Becker said that with competition, discrimination will disappear.

Well, that's a stupid thing to say. It's not true. And empirically it's certainly not true. And Becker never said it. And he read the book. And I went back to read the book because I'd heard it so many times, I hadn't read it in forever. And it's an incredibly thoughtful analysis of the complexity of the data you could possibly use to evaluate it and the complexity of human choice when you are prejudiced and you want to indulge that prejudice, but it's costly. He never said anything remotely like, well, it'll go away. He just said, there's a cost.

And so to bring that back to Smith, Smith said correctly that specialization plays a significant, maybe the central role in generating gains from trade and the improvement of standard of living that he was just on the cusp of, ironically. I wanted to say to him, if I go back in time, you ain't seen nothing yet. I mean, you're not going to believe what's going to be the ramifications of what you're talking about. But he's not a fool. He's not a politician or a salesman. He's not going to say, so specialization is good. He understood what was good about it.

He understood it wasn't all good. We, as debaters, policymakers, analysts, observers, can then discuss whether those gains are big relative to the cost, but they're costs for sure, especially in industrialization. And again, Smith didn't see all of that, but he foresaw it in many ways.