The greatest thinkers - Adam Smith: The Father of Economics and the Philosopher Who Shaped Our World

In this episode of "The Greatest Ever," we dive deep into the life and ideas of Adam Smith, often called the father of economics.
But Smith was more than just an economist—he was a moral philosopher with profound thoughts on human nature and society.
Join us as we explore his groundbreaking works, from "The Wealth of Nations" to "The Theory of Moral Sentiments," and unpack his ideas on free trade, the invisible hand, morality, and their relevance in today's complex world. Is Smith's vision still guiding us, or do we need a new path forward?

Adam Smith
The Theory of Moral Sentiments by Adam Smith
The Wealth of Nations by Adam Smith

Transcript

00:00
Welcome to a deep dive into the mind of Adam Smith. You've given us a collection of excerpts here from the theory of moral sentiments and the wealth of nations. And I think this is gonna be a really fascinating exploration to uncover some surprising things about how Smith viewed human nature. Yeah, I think a lot of people know one side of Adam Smith and they know him as an economist, but he was a much deeper thinker.

00:28
Okay, so let's unpack this. We know Smith is considered the father of capitalism, because of the wealth of nations, but he also wrote extensively about morality in the theory of moral sentiments. Absolutely. So how do these two seemingly different areas of his work connect? I think that's what's so fascinating about Smith is that he saw them as deeply intertwined. He absolutely believed that self-interest drives economic activity. Okay.

00:55
but he also placed huge importance on sympathy as the foundation of our morality. Yeah. Most people wouldn't associate sympathy with the guy known for writing about markets and competition. I know, right? So what did he mean by sympathy? Was he just talking about being nice? Not exactly. Okay. For Smith, sympathy was about more than just being polite. Okay. He believed that we have this innate ability to understand and share the emotions of others. Okay.

01:24
it's actually how we form moral judgments. Oh wow. According to Smith. So you're saying our sense of right and wrong is based on feelings, not just logic or rules. That's a big part of it, yes. And he even argues that our ability to sympathize directly impacts how we judge people. And he gives this great example. Think of someone who's overreacting to a sad situation. We tend to judge.

01:48
them harshly, not because we think they're faking it, but because their extreme reaction makes it hard to fully sympathize with them. Yeah, that's so true. Right. Like, we instinctively expect a certain level of restraint. Yeah. Even in grief, it's like our internal sense of what's appropriate is based on shared feeling. Exactly. And Smith takes this even further with the concept of the impartial spectator. It's kind of inner observer. Yeah.

02:12
that helps us judge our own actions. So the impartial spectator. So it's like we're stepping outside of ourselves and looking at our behavior as someone else might. Yes. We imagine how this impartial observer would view our actions. And that shapes whether we approve or disapprove of ourselves. It's like our internal conscience keeping us in check. So how can we actually use this idea of the impartial spectator to make better decisions in our own lives?

02:38
It's about cultivating self-awareness and trying to be more objective about our own behavior. So next time you're facing a tough decision, try to imagine how someone completely neutral, someone who doesn't have a stake in the outcome, would view the situation. This can help you make choices that are more aligned with your values and consider the impact on others. I like that, that's a really helpful tool. Yeah.

03:03
It's so easy to get caught up in our own perspective. It is. And lose sight of the bigger picture. Absolutely. So for Smith, this idea of the impartial spectator is key to developing a strong moral compass. I think so. But he also gets very specific about how virtue shows up in our actions. Right? Right. Yes. He breaks it down into three main ways. Propriety, prudence, and justice. Propriety is all about acting appropriately.

03:32
Based on our sympathy for others, we consider how our actions might affect those around us and strive to be considerate. So it's not just about following the rules, but understanding their spirit and impact. Precisely. Okay. Then you have prudence, which is more about self-interest, but not in a selfish way. Okay. We weigh the long-term consequences of our choices, aiming to benefit ourselves without causing harm to others. Right, it's that classic balance between

03:59
Looking out for number one and not stepping on toes along the way. Exactly. And finally, justice. Yep. This one's the most straightforward. Yeah. Simply refraining from harming others. Yes. Seems like a pretty basic foundation for any functioning society. It is, and yet so crucial. Yeah. What's fascinating is how Smith uses these seemingly mundane examples. Right.

04:24
to illustrate these complex moral ideas. Yeah, tell me about that one. Okay. I always find his examples so insightful. Well, Smith argues that we tend to judge people harshly. Okay. When they seem overly excited about a sudden stroke of good luck. Like winning the lottery? Yeah, like winning the lottery. Okay. Like they should be more humble or something. Yeah. Well, not necessarily humble. Yeah. But there's this expectation. Yeah. That they would temper their joy. Okay. Recognizing that not everyone is as fortunate. Right.

04:54
It's as if we instinctively expect them to have some sympathy for those who weren't as lucky. That's fascinating. It makes you think about how social norms are actually shaped by these deeper moral sentiments, even when we're not consciously aware of it. Exactly. Wow. So this brings us to another fascinating aspect of Smith's work. His analysis of the division of labor, which he explores in The Wealth of Nations. Yes.

05:23
This might seem like a jump from moral philosophy, but it's actually deeply connected. I think so. So we're going from sympathy and morality to the world of factories and production. Yeah. How does that work? Well, Smith famously argues that the division of labor where individuals specialize in specific tasks dramatically increases productivity. You remember his classic example of the pin factory? Of course. Such a simple illustration. It is.

05:53
But it completely changed how we understand production. It revolutionized it. So how does he tie that back to sympathy? Well, he shows how breaking down the process of making a pin into multiple specialized steps leads to far greater output than if each worker tried to make the entire pin on their own. And here's where it gets really interesting. Go ahead.

06:17
Smith believed this specialization actually fostered a greater understanding and appreciation of others. Wait, so working on an assembly line actually makes us more sympathetic. In a way, yes. When you're focused on your specific task, you become aware of how much you rely on others for all the things you can't do yourself. It highlights our interdependence. It makes you realize how connected we all are, even in a complex economy. I never really think about.

06:46
all the people who make it possible for me to have a cup of coffee in the morning. Exactly. From the farmers who grow the beans to the baristas who brew it, there's this whole chain of interconnected labor that we often take for granted. It's a good reminder to be mindful of the invisible contributions of others. Absolutely. Smith would definitely agree. So he saw the division of labor as not just an economic engine, but also a force that could strengthen social bonds.

07:13
I think so. And create a more prosperous and interconnected society. Yeah. This is so thought provoking. It is. We've gone from sympathy being the basis of morality to seeing how it plays out in the economic sphere through the division of labor. Yes. So what other key ideas are crucial to understanding Smith's economic theories? Well, one we can't overlook is his concept of the real value of labor. OK, the real value of labor. Yes. Break that down for me.

07:42
This underpins much of his thinking in the wealth of nations. For Smith, labor was the ultimate source of value. He argued that the price of any good or service ultimately reflects the amount of labor required to produce it. So it's not just about the raw materials, but the human effort. That transforms them into something useful and valuable. That's it. Money for Smith is just a tool for exchange, a kind of shorthand. It's labor that truly determines a commodity's worth.

08:11
That makes you rethink how we assign value to things. I know. Like suddenly a handmade piece of furniture seems so much more valuable than something mass produced. Right. Because you can see all the skill and effort that went into it. Exactly. And Smith would argue that the higher price you're willing to pay for that handmade piece reflects the greater amount of labor embedded within it. So for Smith, labor is both the source of value and the measure of value. Yes. And this has been.

08:40
profound implications for how we think about wages, profits, and the distribution of wealth within a civility. Yeah, we're getting into some serious economic theory here. We are. But it's fascinating to see how it all connects back to this core idea of labor as the foundation of everything. It's all beautifully interconnected. Yeah. And to understand how prices are formed and wealth is distributed. Mm-hmm.

09:08
Smith breaks it down into three core components. Wages, profits, and rent. Those terms are familiar, but I'm eager to hear Smith's take on them. He defines them in relation to the factors of production. Wages are the payments made to workers for their labor. Straightforward enough. Then you have profits, which are the returns earned by those who own capital, the tools, machinery, and resources used in production, and finally rent.

09:36
which is the payment made for the use of land. Another essential factor in creating goods and services. So wages, profits, and rent each reflect the contribution of labor, capital, and land to the overall value of what's being produced. You got it. Wow. And Smith dives deep into how these components are determined, how they interact in the market, considering things like supply and demand, competition, and the scarcity of each factor of production.

10:04
This really helps understand the dynamics of how an economy functions. It does. Yeah. And Smith's insights on these matters really laid the groundwork for much of modern economic theory. This has been incredibly enlightening. We've covered Smith's views on sympathy as the foundation of morality. The division of labor is this driver of economic and social progress. And now his breakdown of how prices are formed. Right. But you mentioned earlier that

10:33
His insights went beyond just economic theory. Yes. What do you mean by that? Well, what's so compelling about Smith is that he didn't see economics as this separate sphere. He was keenly aware of how economic forces shaped society as a whole and vice versa. So he was thinking about the big picture, how all these pieces fit together. Absolutely. OK. For example, he explored the impact of free trade.

10:58
Okay. Versus protectionism. Which is still a hotly debated topic today. Which is still very relevant today. Yeah, it always seems to be in the news. Right. Smith argued that open markets, where goods and services can flow freely between nations, ultimately benefit everyone involved. He did. He believed that specialization and trade allow countries to focus on what they do best, leading to greater efficiency and prosperity overall.

11:25
But doesn't that also lead to job losses in certain industries? With the Dalit Plain. Especially as we've seen with globalization. Yeah, and Smith acknowledged that there would be winners and losers in any economic system. However, he maintained that the benefits of free trade outweighed the costs, leading to a higher standard of living for most people over time. Yeah. He also emphasized the need for governments to support those who are negatively impacted by these economic shifts.

11:54
So it's not just about letting the market run wild. Exactly. But also having policies in place to help people adapt. Precisely. Smith was not advocating for some kind of unbridled capitalism. He believed in government intervention to regulate markets, provide public goods, and ensure a basic level of social welfare. That's much more nuanced than many people might assume. It is. And speaking of nuance. What?

12:22
Smith was also a sharp critic of monopolies, which is incredibly relevant to our conversations today about corporate power. Especially with all the debates about big tech and antitrust laws. Right, exactly. He saw monopolies as inherently inefficient and harmful to consumers. They stifle competition, leading to higher prices and lower quality goods and services. So even though he's known as a champion of free markets. Yeah.

12:50
He also recognized the dangers of unchecked corporate power. Yes. He believed in a system of fair competition where businesses could thrive based on their merits, not through unfair advantages or manipulation of the market. It sounds like he was advocating for a kind of ethical capitalism where profits shouldn't come at the expense of fairness and the well-being of society. That's a great way to put it. For Smith.

13:16
economics and morality were always interconnected. He was concerned with both individual wellbeing and the greater good. This has been such an eye-opening exploration of Adam Smith's ideas. It has. It's clear he was much more than just an economist, but a true philosopher who thought deeply about human nature, morality, and how our actions shaped the world around us.

13:41
He was a brilliant observer of human behavior and how it plays out on both a personal and societal level. This deep dive has really only scratched the surface. It has. There's so much more to explore in Smith's work. Absolutely. Well, for now we need to take a short break. Okay. We'll be back soon to continue our exploration. Sounds good. Of the brilliant mind of Adam Smith. Great. Stay tuned. Welcome back. We've been having such a fascinating discussion about Adam Smith and I'm really eager to dive deeper into his economic theories.

14:10
Yes, there's so much to unpack. We left off talking about wages, profits, and rent. Those core components of price that Smith analyzed in such detail. I'm curious to hear more about what factors he thought influenced wages. Well, Smith believed that wages were influenced by a whole web of factors, really. He considered the overall wealth and prosperity of a nation, of course, as well as the specific supply and demand for labor in any given field. OK.

14:40
And the cost of living played a role too. So in a booming economy where everyone's hiring wages would naturally go up. That was his thinking, yeah. When businesses are expanding and need more workers, they have to compete for talent. And that competition drives wages higher. Makes sense. But what about when the economy is struggling and there are more workers than jobs? Smith recognized that wages would likely fall in those situations. With fewer businesses expanding and some maybe even laying off workers.

15:10
the supply of labor outstrips the demand. And that puts downward pressure on wages. Classic supply and demand, but applied to the labor market. Exactly. And what's interesting is that Smith wasn't just looking at this in some abstract way. He was very aware of how these fluctuations in wages directly impact the lives of everyday people. He was.

15:31
concerned with the human side of economics. Absolutely. He especially cared about the well-being of workers, particularly those at the lower end of the income scale. He believed that a truly just and prosperous society should provide a decent standard of living for all its citizens. So it wasn't enough to just have a thriving economy. It had to benefit everyone. Right. It's not just about the aggregate wealth. Yeah.

15:56
Did he have any specific ideas about how to achieve that? Well, he put a lot of emphasis on education and training. OK. He felt that equipping workers with valuable skills was key to increasing their earning potential. Investing in human capital. That's a great way to put it. Yeah.

16:12
He also believed in fair labor practices and regulations to protect workers from exploitation and ensure they were being paid a just wage for their efforts. So again, we see that Smith was not a proponent of unfettered capitalism. Not at all. He saw a role for a government in creating a more equitable and humane economic system. Precisely now moving on to profits. How did Smith view their role?

16:39
This is a big one. Profits are at the heart of how businesses operate. Yeah, Smith considered profits an essential incentive for businesses to invest, to innovate, and to take risks. The reward for entrepreneurship. Exactly. He argued that without the potential to earn profits, there would be little motivation for businesses to grow, to develop new products, or improve their efficiency. It makes sense you need that carrot to drive progress. So this pursuit of profit, according to Smith, is what fuels economic growth.

17:08
That's right. He believed that the pursuit of individual self-interest, guided by what he called the invisible hand of the market, would ultimately lead to benefits for society as a whole. It's a powerful idea. It is. This notion of individual ambition ultimately serving the common good. But it has certainly been challenged over the years. Some argue that this unchecked pursuit of profit

17:35
leads to negative consequences, like environmental damage and widening inequality. That's a valid criticism. And as we've discussed, Smith himself recognized the need for some regulation and ethical considerations to guide economic activity. He wasn't advocating for a completely hands-off approach. So it's about finding that sweet spot, that balance between allowing businesses to flourish while ensuring that they're operating in a way that's sustainable. Right.

18:04
and socially responsible. Use a balancing act for sure. Yeah, now let's move on to the third component of price. OK. Rent. Yeah. What were Smith's thoughts on that? Land is such a fundamental resource. It's fascinating to think about how its value is determined. Yeah. Smith saw rent as the income earned by landowners for allowing others to use their land. Right, the payment for using someone else's property. But he delved deeper, exploring what determined how much rent.

18:32
landowners could charge. He argued that it boiled down to two main factors, the fertility of the land and its location. So more productive land or land in a prime location would command higher rent. Think about it. If farmer would be willing to pay more to rent land that consistently produces bumper crops or land that's situated near a bustling market where they can easily sell their produce. It's all about maximizing their profits, right? Yes.

19:02
and this competition among farmers for the best land drives up those rental prices. It's fascinating how this principle of supply and demand applies to so many different aspects of the economy, whether it's for labor goods or even land. It's a fundamental principle in Smith's economic model. He saw these market forces as constantly shaping and reshaping the economic landscape. So it's not a static system but one that's constantly evolving.

19:31
Precisely, he believed that flexibility and competition were essential to ensure that resources were allocated efficiently. And that prices reflected their true value. I'm seeing how all the pieces fit together now. We've got these three components of price. Wages, profits, and rent, each influenced by a complex set of factors, all interacting within this dynamic market system. It's a beautiful tapestry, isn't it? Yeah.

20:00
And at the heart of it all is human nature, with its drive for self-improvement, its capacity for sympathy and cooperation, and that constant striving to create a better world. It's a reminder that economics is not just about numbers and formulas, but about understanding people and their motivations. Absolutely. Now we've talked about labor, the division of labor, the components of price, this dynamic market system. But what about money itself? Yeah.

20:30
It seems like such a fundamental element of any economy. You're right, we can't ignore money. Yeah. And Smith had quite a bit to say about it. Okay. He recognized that money serves three main purposes in an economy. Okay. It acts as a medium of exchange, a unit of account, and a store of value. Okay, break those down for me. I think I have a grasp on medium of exchange. It means that money facilitates transactions.

20:57
instead of bartering goods directly, which can be very inefficient. We use money to buy and sell things. It makes trade much smoother. It's like a common language that everyone in the marketplace understands. That's a great way to think about it. Now, as a unit of account, money provides a standardized measure of value. We use it to compare the worth of different goods and services so we can make informed decisions about buying and selling.

21:23
Like a yardstick for measuring economic value. Exactly. And finally, as a store of value, money allows us to save and accumulate wealth over time. We can hold onto money and use it to make purchases in the future, knowing that its value will be relatively stable. So it's a way to transfer purchasing power from the present to the future. Precisely. Oh.

21:47
Smith understood that these three functions of money were absolutely essential for the smooth operation of any market economy. It really highlights the importance of money. It does. Even though Smith emphasized that labor is the real source of value. Yes. It's crucial to remember that money is a tool, a facilitator of economic activity. It's not valuable in and of itself, but derives its value from the goods and services. It can be exchanged for

22:16
like a lubricant that keeps the gears of the economy turning smoothly. A great analogy. And Smith was very interested in how money was created and managed, especially the role of banks and governments in regulating the money supply. Now we're getting into the nitty gritty of monetary policy. We are. What were Smith's views on that?

22:36
Well, he recognized that banks play a vital role in facilitating commerce by providing credit to businesses and individuals. So it's not just about safeguarding our money, but also lending it out to stimulate economic activity. Yes. And Smith saw this as a positive function. But he also warned against excessive lending, which could lead to inflation and destabilize the financial system. So he advocated for a balance. Right.

23:05
between encouraging lending and making sure it was done responsibly. Exactly. He also believed in the importance of a stable and reliable currency, one that people could trust to hold its value over time. That makes sense. Otherwise, it's difficult to plan for the future or make long-term investments. Right. And Smith believed that governments had a role to play in ensuring the stability of the currency and regulating the banking system to prevent abuses.

23:33
So again, it's not about a completely hands-off approach. It's not. But about creating a framework that fosters responsible economic activity. That's a great way to summarize Smith's perspective. Wow, this deep dive has really given me a much richer understanding. It did? Of Adam Smith's economic theories. Me too. It's fascinating to see how he wove together insights about human nature, morality.

23:58
and the workings of the market to create such a comprehensive and enduring vision of how economies function. And a human vision too. Yeah, I'm starting to grasp why he's considered one of the most influential economic thinkers of all time.

24:12
His ideas continue to shape our understanding of capitalism, free markets, and the role of government in regulating economic activity. That even today his work is studied by economists, policymakers, and anyone who wants to understand the complex forces that drive the global economy. It's incredible how someone writing centuries ago could still be so relevant to our current debates and challenges. It really is a testament to the power. Yeah.

24:42
and enduring relevance of his ideas. He tapped into something fundamental about human nature and how we interact with each other to create wealth and prosperity. It's been such a privilege to delve into his work with you. It's been fun. I feel like I've gained a much deeper appreciation for the complexity and nuance of his thinking. I agree. But for now, we'll need to take a short pause. We'll be right back to wrap up our deep dive. Sounds good. Into the brilliant mind of Adam Smith. Okay.

25:11
Don't go away. Okay, we're back for this final part of our deep dive into Adam Smith. And there's one thing we haven't discussed directly yet that I'm really curious about. We've explored his ideas on markets, morality, human nature, but what about the role of government in all of this? Was Smith a strict believer in a completely hands-off laissez-faire approach? You know, it's a common misconception that he was.

25:36
While he championed free markets, Smith actually believed in a significant role for government. Okay. The one with clearly defined boundaries. So it was more nuanced than just let the market run wild. Exactly. Okay, so what did he see as the proper role of government? Well, Smith laid out three key functions of government. Okay. First, he argued that government has a fundamental duty to protect society from violence and invasion, both from external threats and internal conflict. Okay, that makes sense.

26:06
establishing a basic level of security and stability. Right. Seems pretty fundamental for any society to function. Absolutely. It creates the foundation for a stable environment where markets can operate effectively. OK, what was his second point? His second point was that government should establish a fair and impartial system of justice. OK. This means ensuring the enforcement of contracts and protecting property rights. So everyone plays by the same rules. Exactly. Ensuring fairness and building trust in the system.

26:35
It's crucial for a healthy market economy. Okay, and what was his third point? And finally, Smith argued that government should provide certain public works and institutions. Okay. That while beneficial to society as a whole, wouldn't be profitable for private individuals to undertake. What kind of things did he have in mind? Things like roads, bridges, canals, even public education. Okay. These are all things that benefit society as a whole. What economists call

27:05
positive externalities. Their impact goes far beyond those who directly use them. So it's in everyone's best interest for the government to step in and provide these things, even if they're not profitable ventures. Exactly. Smith understood that there are some areas where the market driven by private interests simply wouldn't provide essential goods and services for the common good.

27:29
This paints a much more nuanced picture. It does. Than just assuming Smith was all about government stay out of it. Absolutely. He wasn't advocating for anarchy. Right. He believed in a strong and active government, but one whose powers were carefully defined. Okay. And limited to areas where it could truly make a positive difference. So it's about finding that right balance. Yes. Not too much government intervention. Right.

27:54
but also recognizing that there are certain things that government is uniquely positioned to do for the good of society. Exactly, Smith was wary of excessive government meddling in the market, believing it could stifle innovation and lead to inefficiency. But he also understood that markets aren't perfect and that sometimes government action is essential to ensure fairness, stability, and the provision of those essential public goods we were just talking about.

28:23
It's incredibly insightful, especially considering he was writing centuries ago. Yeah. It feels very relevant to the debates we're still having today. It does. His work continues to be studied and debated for a reason. Yeah. His ideas about the role of government, the benefits of free trade, and the importance of ethical considerations in economic decision making are arguably more relevant than ever. Well, this deep dive has really been a journey.

28:48
It has. Not just through Adam Smith's ideas, but also through how they connect to the challenges we face today. Yeah, I agree. It's amazing to see how his insights rooted in the 18th century can still help us understand the complexities of our modern global economy. So as we wrap up this exploration, what's the key takeaway you hope our listener walks away with? I think the most important thing to remember is that Adam Smith was not just some cold calculating economist. Okay.

29:17
He was a deep thinker who was concerned with human nature, morality, and the complex relationship between individual actions and societal well-being. He believed in the power of free markets to generate wealth and improve lives, but he also recognized the importance of ethical considerations, government regulation, and social responsibility to ensure that those benefits are shared widely and that the system itself remains sustainable.

29:46
That's a powerful message. And one that resonates deeply today is we grapple with issues like inequality, climate change, and all the disruptions of a rapidly changing world. He reminds us that economics is not just about numbers and graphs, but ultimately about people. It's about how we organize ourselves to meet our needs, create a just and prosperous society, and ultimately live good lives. Beautifully said. Well, thank you so much for joining me. Oh, it was my pleasure.

30:15
On this fascinating journey into the brilliant mind of Adam Smith, it was fun. I hope our listener has gained some new insights. I hope so too. And perhaps a renewed appreciation. Yes. For the enduring power of ideas. This is incredible. And who knows, maybe this is just the beginning. Yeah. Of their own deep dive into Adam Smith's remarkable world. Absolutely. Until next time, keep exploring, keep questioning, and keep diving deep.