HH: I wanted to do a make good from Friday. Many of you complained I didn’t do the Hillsdale Hour on Friday in the last hour, but the news was coming in hot and heavy, and I wasn’t in the studio, and I wanted Duane to make sure he covered everything that was happening both with the school shooting and with the knife/axe wielding guy in New York, and with Ebola. And so I was happy to say look, we’ll do the Hillsdale Hour on Monday, and that’s what we’re going to do now with Dr. Larry Arnn. You can read all about Hillsdale at www.hillsdale.edu. All of the Hillsdale Dialogues are available at www.hughforhillsdale.com, and not just Dr. Arnn today. We’re also joined by Dr. Michael Clark, who is the Wallace and Marion Reemelin chair in free market economics at Hillsdale. Welcome, Dr. Clark, but forewarned is forearmed, Dr. Clark. I took one economics class at Harvard, and just spent all of the time running around with the Straussians. And I did very poorly at it. And so I’ve never actually read The Wealth Of Nations, only those parts that they give to the political philosophy people. Is that a common problem among your students when they arrive at Hillsdale, that they actually haven’t read The Wealth Of Nations?
MC: Very few people have read The Wealth Of Nations, actually. It’s a pretty thick book. Even those with PhD’s haven’t always read the entirety of The Wealth Of Nations. But generally speaking, what we run into is people with just enough economics like you, maybe with one class, to be a little dangerous.
HH: Well, I am a lot dangerous on matters of economics. I want to know, though, you’ve got that marvelous statue of Maggie Thatcher on your campus, Dr. Arnn, and it is said that she carried Wealth Of Nations about in her handbag. Does that handbag on the sculpture bulge?
LA: (laughing) No. And we had a lot of trouble with her shoes, but no trouble with the handbag.
HH: But she did. She bragged that she carried Wealth Of Nations, which I can’t imagine. It’s like carrying about, I don’t know, it’s a big book.
LA: Yeah, it is a big book.
HH: So let’s begin with Adam Smith, born in 1723, died in 1790. And Dr. Clark, Wealth Of Nations comes out in a pivotal year for America, 1776. It’s his second big work. What’s the most important thing for us to begin understanding about Smith?
MC: You read the first three chapters of The Wealth Of Nations, which there’s five books within The Wealth Of Nations the way that he breaks it up, and the first three chapters hit home this idea that’s central to all of his work, and that’s the invisible hand. That’s generally what you get in an Econ 101 class…
MC: …with Adam Smith, first chapter of your Econ 101 textbook, they’ll say hey, there’s this guy named Adam Smith, the invisible hand, things work pretty well and you move on. And you realize that all of economics branches off of this insight. But this is his main thrust here is this idea of the invisible hand or of spontaneous order in markets.
HH: And when did it get you, because I find that people who are Adam Smith devotees or Milton Friedman followers like Jim Doti, who is Larry’s counterpart at the university in which I teach law, they get it early and they can’t get enough of it. When did it get you?
MC: It got me here at Hillsdale College. So I’m a Hillsdale grad. 2004, I graduated from Hillsdale, had econ classes here, took a number of econ classes and was very wrapped up in the work of Smith and this idea of spontaneous order. And then every time I started to think that I could outsmart economics, I got a very humbling message right back at me, and I realized I can’t do better than this. There’s not really a whole lot more that’s as important as this message of the invisible hand.
HH: Now Dr. Arnn, there is this election coming up, and I hope to talk with you the week after next about a very successful Republican day. But there is within the Republican Party, which has great connections to Hillsdale College, a group of devotees of Adam Smith who are making it everything of the party as opposed to merely a piece of the party. Do you understand what I’m referring to?
LA: Yeah, well that wouldn’t be true to Smith. Smith is interested in everything. And you know, Joe Cropsey, one of Strauss’ main students, wrote his doctoral thesis about Adam Smith and about his moral philosophy, which is a kind of development on David Hume. Smith thought not just that the invisible hand was effective. He also thought it was good, that it produces a harmony in the society, because the transactions that happen in a society, if they’re free, don’t happen unless they’re to the advantage of both parties. And so Smith had a theory of how people relate to each other, and that those relations are good when they have some sympathy with each other. And so Smith is a generally interested man. Maybe that’s why that book is so long.
HH: The theory of moral sentiments, our trusty friends at Wikipedia tells me, was his first book. And when I dove into his background, not with a serious biography, but to prepare to read The Wealth Of Nations, I was struck by that. I didn’t know that he’d been a moral philosopher, Dr. Clark, before he became the father of economics.
MC: He considers the work of Wealth Of Nations actually kind of a sub-category of his theory of moral sentiments. There’s numerous reports of Smith actually preferring the Theory of Moral Sentiments to The Wealth Of Nations. He has a number of different statements that suggest as such. And The Theory Of Moral Sentiments is really this umbrella or this overarching concept within which The Wealth Of Nations is just one argument. So he has this larger moral fabric that needs to be established in order for large-scale social institutions to exist, and to exist within a way that we can communicate and exchange with each other peacefully, and prosper from this.
HH: Well, let’s start with spontaneous order, then, because it’s a common language thrown about, little understood. What do you mean by spontaneous order?
MC: The famous phrase of this is of human action, but not of human design. So if you think about that for a minute, it comes about from humans acting, but the result is not of any one human’s actual design. So my favorite example of this, actually, is kind of a modern example of this, is you can go onto like Google Earth, and you can look around at your neighbor’s house, or Hillsdale College, or whatever you want to look at. But one thing you can look at is like shopping malls or Wal-Mart parking lots, or grocery store parking lots. And I recommend that you do this. Try this out. Check it out. And if you look at, say, the top of your local grocery story, and you look down at the parking lot, no one planned this. But if you look at the shape that the cars make, it’s a triangle with the point furthest away from the store. Now if you were trying to design the best outcome possible, that would be the shape that you would make, right? And it’s not that it’s a perfect triangle. There’s a few spots here and there that are open, but it works pretty well without anybody actually designing it. Now there’s some rules. There’s lines for parking spaces and things like that, but there’s rules within society, rules of justice, basic rules that we have to follow. But within those certain institutions, the behavior works out pretty well just like the triangle at the shopping center. And you can do this for like a Wal-Mart where they have two entrances. And guess what? The shape is an M, right? There’s two peaks to the situation. So you have this outcome of human action. People are deciding where to park based on trying to just do what’s best for them, and you get an outcome that works pretty well, pretty efficiently for the overall situation.
HH: But then, Dr. Arnn, we introduce human disaster into this equation. For example, the outbreak of Ebola in Liberia and Guinea and Sierra Leone, a probably historically significant event the likes of which we will not know how historically significant for many months yet, but potentially on the order of what Churchill wrote about in the Plague years in his History Of The English-Speaking People. How do you spontaneously order what economists I think call black swan events?
LA: Well, I guess it depends on what they are. You know, if there’s an earthquake, then most of the work of relief is going to be done by people who have survived and not by professionals, probably, because there’s a lot more of them and they’re right there. So that’s an example, right, of people helping each other. I heard a really great story on Sunday in church that there’s a man named Arthur Williams, and in the Delta Airlines flight, or was it American, some airlines flight, hit the bridge in Washington, D.C. And this one fellow, and there’s footage of it, they lower the helicopter cable down to him, and he gives it to other people.
HH: Yeah, the man in the water, a very famous…
LA: Yeah, and it’s, you know, he didn’t survive.
HH: My wife was there that day. No, he died.
LA: And that’s a kind of a, he wasn’t serving his own interest, but he was there, and order ensued. And you know, he was serving his own interest in another way. He died an excellent death. And so the point is the reactions to a cataclysm will be predictable given the way human beings react and serve themselves, right? And sometimes, you know, because people love each other, and that means that their self-interest encompasses that love. And so yeah.
HH: When we come back, more on spontaneous order and Adam Smith, as well as those events which disorganize that which had spontaneously organized already with Dr. Michael Clark and Dr. Larry Arnn of Hillsdale College.
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HH: Dr. Clark, right when we went to break, Dr. Arnn had rightly pointed out that in the aftermath of cataclysm, spontaneous order emerges. And in fact, I’ve seen that happen in earthquakes and in fire, and in watching Haiti after their massive upheaval, and in other places. Are these all just examples of what Smith was writing about?
MC: Well, you can pull from this some of what Smith calls the fourth source of moral approval. He has three sources of moral approval. These are ones that we can see up front. You know, if there’s two people acting, the first one is the motivations of the person acting. The second one is how well received it’s received from the other person. The third one is does it fit to rules. The fourth one, however, is does it make society better off overall? If we look at this large-scale situation, does it actually kind of have these unintended consequences that create good? And Smith’s bringing up points even in bad situations, where he’s saying listen, something, say, like price gouging after a hurricane. Me might not be very happy about the motives of the person just trying to make more money, trying to profit off of the losses of other people. But if we look at the fourth source of moral approval, if we allow for something like, say, price gouging, then firms in areas where maybe there’s, you know, hurricane seasons roll through, or common earthquakes or whatever, maybe they stockpile on water, generators, flashlights and things like that, so when things like this happen into the future, they can raise the prices and meet people’s needs.
HH: Do they anticipate the disorder and they profit by it, but by profiting by it, they provide that which is needed at that moment as opposed to having it 100,000 miles away where it cannot be of service.
MC: Correct. And even in this, I think it’s important to point out that this is kind of a straw man of Smith as well, that he just says well, the government should do nothing, right? The government shouldn’t have their hands in anything. He actually says, you know, he says listen, little else is requisite to carry the state into the highest degree of opulence from the lowers of barbarism but peace, easy taxes and a tolerable administration of justice. So we do have a system of governance here, and he also talks about some potential interventions that could be possible. He isn’t building liberty as an axiom, where it’s liberty no matter what. He’s building liberty as a maxim, where it’s the rule that we follow. It’s a presumption of liberty, similar to the presumption of innocence. We should presume that liberty works pretty well, because we don’t often see that fourth source of moral approval, that it builds a good society, not just it allows the rich or the wealthy to profit, but it actually helps most of those out. So he actually has some interventions that he says well, maybe we could have this, such as requirements of firewalls so that fires don’t spread across apartment buildings. And that could be similarly argued with situations such as virus breakouts and other things, where you know, if it’s absolutely urgent in the chaos of most urgent necessity, as he puts it in The Wealth Of Nations, maybe then we could consider breaking with that maxim of liberty.
HH: Peace, easy taxes and a system of justice. I’m reminded of Dr. Wayne Grudem, who’s a systematic theologian, and Barry Asmus, who’s an economist…
HH: …wrote a book called The Poverty of Nations, in which they identified that which the poorest countries most obviously lack, that which combines them. And they always lack a system of justice, and they usually lack peace and reliable law enforcement. And so you’re saying Smith anticipated that years ago that Africa would be Africa because it did not have peace, easy taxes and a system of justice.
MC: Yeah, I mean, that’s what he’s seeing in his life. So he’s from Scotland, and in the highlands of Scotland, they kind of consider it barbarism at this time period. I mean, keep in mind he’s writing from 1750 up through 1776 and then revising The Wealth Of Nations and the Theory Of Moral Sentiments after that. This is just as commercial society is coming in, and he is seeing, he’s asking the question. It’s an inquiry into the nature and causes of the wealth of nations. It’s not just the wealth of nations. He’s saying how in the world is it that we go from this state to actual wealth? The majority of human history has been a lack of prosperity. It’s been really tough getting through. It’s been more like barbarism. And so how is it that we actually can get any amount of wealth? And he says this isn’t an easy task, but what we need is not some master plan, not some top-down creation, but we just need peace, easy taxes and a tolerable administration of justice, and allowing, therefore, the invisible hand, or in other words, allowing the individuals to figure out how to move us forward.
HH: You know, right, the great futurist, Herman Kahn, wrote that right through the end of the 1789 period, 90% of people spent 90% of their money on bread, and that the world began to change. But Adam Smith may have contributed to that, but boy, there was terrible dislocation. And we have every Dickens novel to prove it, right, that this was not easy to build the workhouse of Europe in the world, was it?
MC: Yeah, he’s not saying that this change will be, he actually thinks it’ll be really long run. He thinks it’ll take quite a while. He’s not saying this change has nothing but benefits. He’s doing a comparative institutions approach. He’s asking the question that Thomas Sowell so famously continually asks about policies. He’s saying compared to what.
LA: Yeah, let me add a point. So in the years that the Dickens novels concern, Benjamin Disraeli said in the middle of the 19th Century, he said those days, England was for the few, and for the very few. And they had a political system where the landed and the wealthy were represented, and others were not. And in that political system, taxation was based on taxing basic food stuffs, which was mostly produced by land owners, so that bread was more expensive to the ordinary folk that ate it. And that meant that the whole system was based on a transfer of wealth from the poor to the rich. And so that means that there’s a political intervention there. And you know, one reaction to that, you know, Dickens was not a socialist, but in the last 19th Century, then you get the socialists. And what they project is it’s going to become democratic, and remember, the move to democracy was a bipartisan move.
LA: The Torey parties supported, too.
LA: Winston Churchill’s father, and Winston Churchill and Disraeli and them. But they said that that will inevitably lead to the introduction of socialism. And you know, think about that for a minute, because Smith is foundational in some vital ways, because if it’s true that voluntary transactions benefit both parties and breed harmony, and if it’s true that it also breeds order, then it’s possible to have limited government. If on the other hand every transaction has got to be regulated, and effectively every child raised by the government, then it’s not possible to have limited government. And that’s a tragedy, because who’s going to have all that power?
HH: The bureaucrats, of course.
LA: That’s it.
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HH: Dr. Clark, people often get Smith’s theory wrong, usually journalists. Now I have as a friend, Richard McKenzie, who spent a lot of time teaching me not to say really stupid things about Adam Smith. But what are the worst things that you hear said routinely about him?
MC: Well, I mean, this really piggybacks off of Dr. Arnn’s point heading into the commercial here, that Smith’s main point, or one of his major points in both The Wealth Of Nations and his Theory Of Moral Sentiments is that privilege corrupts the spontaneous order, that these handouts, that power, that the inferior versus superior relationship in mankind kind of perverts this spontaneous order that naturally would come about. So most people think he’s very much pro-business, he’s, you know, promoting this idea of narrow self-interest and people profit off of, you know, everybody else, and that’s what makes things go. And he has this pro-business reputation. And often, you see in different exhorts in the media he has this famous quote of people of the same trade seldom meet together, even for merriment and diversion. But the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. And they say see, Smith isn’t this just pro-business only guy. We’ve got you. He’s more left wing. So we get it from both sides, right?
HH: So he’s distorted at both ends of the spectrum.
MC: Some people think he’s all about promotion of business, and some people think, you know, listen, he’s not that way at all, he’s not really even that free market. And the idea here is that you can be free market and not just pro-business. He’s against business getting the kind of cutbacks, the crony capitalist deals.
HH: Help me distinguish him. A lot of our listeners love Ayn Rand. A lot of our listeners maybe even know who Herbert Spencer is, and Oliver Wendell Holmes’ denunciation of him. How is Smith different from them? Or is he, Dr. Clark?
MC: Smith’s very different from Rand, especially when it comes to the moral philosophy. Smith doesn’t think that he has his overall system prove here that free markets work. He doesn’t have this down to an objectivist consideration. He believes that there are many moral virtues, and one virtue being pursued without others often leads to bad outcomes. But he’s not suggesting that he has the answer here. He believes that listen, there’s some things in life, like justice, that can be seen as rules of grammar. They’re black and white. Like if you coerce me, it’s very clear. But other parts of life are more like aesthetics. And we have to judge what the good and what the beautiful is, and that’s what he’s trying to do when he’s shaping his moral philosophy, is just trying to educate us that leaving people alone to their own freedom actually turns out to be a more aesthetic outcome.
HH: You know, Larry Arnn, a lot of people of your acquaintance seem to have forgotten this distinction between Smith and Rand.
LA: Yeah, well, it’s, Smith is, he’s, well, you know, so let me offend the Randians. Rand is interesting, really interesting, but Smith is not, he’s, I’m struggling for the word. Smith is not as dogmatic.
MC: He’s not as abrasive.
LA: That’s right. And he’s not as, and you know, it’s not, everything in Smith is not an absolute. And that, in my opinion, is a better way to investigate the world. And so there’s a lot to it with Smith. This is a man who, and by the way, he didn’t regard himself as a revolutionary and as a world changer. He was a thinking guy. And some of the passages in this book, you know, about the, the one about the butcher…
LA: You know, you don’t rely upon his charity.
LA: I bet Mike can quote it from memory. But it’s really wonderful, and an extremely powerful insight. And because he’s capable of holding the mind open, he can have many on many subjects like that.
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HH: Professor Clark, I want to go back to Smith on inequality, because this is where, this is the language of the campaign in which we are presently enmeshed. Hillary is already running for president denouncing inequality. What did Smith, the father of it all, say about inequality?
MC: Yeah, this is a major topic within economics right now. Piketty’s recent book on inequality came about, and it was a bestseller on Amazon and all of these other things. It’s a huge topic, right? And we’re pretending like it’s something new. Smith wrote about inequality quite a bit in 1759 in his Theory Of Moral Sentiments. And if we actually think about this, Smith’s known for this phrase the invisible hand. In his two published works, Smith said the phrase invisible hand twice – once at the smack dab middle of The Theory Of Moral Sentiments, and once right in the middle of The Wealth Of Nations, right? And when he talks about the invisible hand in the Theory Of Moral Sentiments, he’s talking about issues of inequality. He’s going through and he’s saying listen, even if the poor man’s son who sees himself as not privileged and wants to have more, he imagines that life with all of these frivolous things would be so much easier and so much more rewarding, and he goes on to examples such as like little tweezer cases that he may carry around. And he talks about how frivolous they actually are. But he says this is actually a good thing, because it drives man to produce for others. Within a free market system, within a system where it’s a system of private property, you cannot gain without helping others. And so he says listen, we’re fighting for more for ourselves, but this leads to the creation of wealth, which actually ends up dividing up the necessities for all somewhat equally. I mean, it actually drives us to produce the things that we need to actually have happiness. It leads us to spread these among everyone. I mean, we can think about the examples of today. We live better than kings did a hundred years ago. Through this process of spontaneous order, even if we’re chasing tweezer cases, or in our case today, you know, the latest iPhone or whatever it happens to be, we’re actually creating a division of labor and a system of wealth and of knowledge within our economy that allows us to transmit the basics to everyone. And what really matters, and the people on the left often make this argument, who cares about these fancy things? What really matters is for you to be able to have a good life is to be able to spend time with your family and to have it be not so hard, and to have food and access to education and all of these other things. Smith is saying you know what people chasing wealth does, is it allows everyone to have those basic necessities.
HH: You know, the two most impoverished places I have been in my life, the Dominican Republic hillside slums of Santo Domingo, and the favelas of Rio De Janeiro. And I’ve spent time in them. I was amazed at the beehive of activity, and the overwhelming effort for people to deliver goods and services in a warren, a rabbit maze of just absolute disorganized poverty that no Westerner is accustomed to when you’re right down at the bottom. But they were all striving to get what they need and to make a buck.
MC: Yeah, and in that situation, the reason there isn’t actually wealth is not the people, right? People are the same everywhere, and that’s part of Smith’s point, is listen, there’s this egalitarian point to Smith. Man is man, and he’s limited, but he is man. And everywhere, we have this aspect of our human nature, part of it being that we are, look to be prudent and follow our self-interest, right? But what’s different is the rules. And the rules of the game in these poor situations don’t allow for individuals to invest in business or companies that can produce wealth well on into the future, and allow them to take part in what Smith calls the division of labor. But what he really means by that is just this vast cooperation where you have access to more and more people, and you can amass more and more wealth. You can’t do that in those situations, because there’s no rule of law. There’s no justice there.
HH: They can’t own their property, actually. That’s what I was getting to.
LA: So down in Orange County years ago, Hugh, you may remember when Vice President Godoy of Nicaragua came to visit?
HH: Yes, yes.
LA: …with that guy, Zuniga…
LA: And I sat by him at dinner, and I said how’s it going in Nicaragua, and he said after the Sandinistas were thrown out, and he said very difficult. And I said what’s the problem, and he said well, it’s the people. And I said what’s wrong with the people, I mean, they elected him, and he said so many of them are liars and spendthrifts. And I said why is that, and he said because they’ve been living under socialism, right? They can’t amass any property, because it’ll be stolen from them. So they spend it as soon as they get it. And if you tell the truth, they might get arrested. And so you see that it, these rules, they degrade something more than the wealth of people. They teach them that bad behavior is the most rewarding.
HH: You would be amazed to find that in the new book by Nicholas Kristof and his wife, Sheryl WuDunn, he doesn’t know that he’s making that very point over and over and over again. It is these lawless places where thrift is not rewarded. And how do you introduce the rule of law and the regularity of justice so that people can save? I mean, A Path Appears is really one of the greatest free market books I’ve ever read, and I’m quite sure Nicholas Kristof did not intend to write that.
LA: Didn’t mean it. You know, our friend, Joel Kotkin, our mutual friend…
LA: He published this beautiful article, he often writes very well, and I think in the Wall Street Journal of late, and he pointed out that if you want to look for income inequality in America, you’ve got to look for the places with the highest taxes and the most liberal governments, because in New York City and Washington, D.C., the society is becoming stratified.
LA: And those who have can use the law to get more, and those who don’t have, the barriers to entry are huge.
HH: Oh, the most amazing thing two weeks ago, the founder of Facebook gave $25 million dollars to the CDC, to government. He gave $25 million dollars to government as opposed to, say, Doctors Without Borders to help the Ebola thing. It was the least informed act of generosity I’ve ever seen.
HH: $25 million dollars to government.
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HH: I want to finish in this short segment, Dr. Clark, on the real Adam Smith. I noted in my preparatory he was actually kidnapped by gypsies when he was a young lad, and it was said of him that he would have made a very poor gypsy. But he escaped. They found him after a period of time in captivity. But that’s an interesting passage. Who’s the real Adam Smith?
MC: I would say Adam Smith, if you look at what his works actually stand for, the last point that we were talking about, and that society’s cultural shape is also better off in a free society, is really Smith’s main thrust here. He’s asking about large-scale social institutions. How do we actually get the good? How do we actually achieve that? And he says that the culture actually develops in a way kind of through almost a spontaneous order in our morals as well as through wealth, and that freedom has these moral aspects to it. If you read the first three chapters of The Wealth Of Nations, what he’s so much is focusing on is this vast system of cooperation. It’s not of self-interest vulgarly understood, as he says. He’s saying it’s really about this cooperation that we stand in need of the assistance of great multitudes while in our whole life, we scarce have time to gain the friendship of just a few persons. And he has the beautiful example of the woolen coat. I do this for my students all the time. The woolen coat is the example of something really simple to make, and yet in a commercial society, how is it made? And from the passage, he says these are the people involved. And I won’t read them all, because it would take too long. But to start, he says listen, there’s the shepherd, the sorter of wool, the wool comber, the carter, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, so many others, those who carry, those who are merchants, those who move these things, the shipbuilders, the sailors, the sail makers, the rope makers, all of these things. I mean, he just goes on. He has this massive paragraph of all of these people that are involved in making something as simple as the woolen coat. And for today’s reader, if you don’t want to back to Smith, you can look at Leonard Read has the beautiful piece called I, Pencil.
HH: I, Pencil is wonderful, yeah.
MC: It teaches you so much about Smithian economics in such a short read. And Leonard Read, what he’s doing is he’s pulling from the example of I, Pencil and also, or of the woolen coat in Adam Smith, but also the pin factory.
HH: When you walk, you began with a grocery store. I’ll end there. When you walk into a grocery store in America, I just sometimes marvel at the division of labor and the specialization that brings all of that abundance to one store at one time. It’s just absolutely astonishing, Michael Clark and Larry Arnn, that we get to live in a time like this.
LA: Hugh, if we’ve got time before we go, I want to tell everybody that Michael Clark was a varsity basketball player, and good at it. And also, I want to say that at Hillsdale, we believe in the free market so much that we’re suspicious of the influence of the invisible hand.
HH: (laughing) Larry Arnn, Michael Clark, I’m glad to hear it. It’s so good that Smith gets reintroduced there again and again and again.
End of interview.