The Answer Is Transaction Costs

Adam Smith's Wealth of Nations: Episode 1 (Background)

• Michael Munger • Season 3 • Episode 8

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(N.B.:  This episode is cross-posted at our partner site, Adam Smith Works. There are lots of resources and background material there, if you want to delve deeper)

The Scottish Enlightenment emerged as a remarkable intellectual movement that shaped modern economics, philosophy, and social science, with Adam Smith at its center developing a dual theory of human nature through his two masterworks.

• Scottish Presbyterian education fostered literacy and critical inquiry despite doctrinal rigidity
• The 1707 Act of Union created unique conditions where Scots pursued intellectual achievement rather than political power
• Scottish universities thrived through student-funded education while Oxford professors "gave up even the pretense of teaching"
• Thinkers like David Hume, Francis Hutchison, and Thomas Reid established key intellectual foundations
• Smith's concept of sympathy involves synchronizing sentiments with others, not just feeling pity
• Justice protects "person, property and promise" as the foundation of social order
• Beneficence is "the ornament" of society while justice is essential to its existence
• Smith was strongly anti-slavery, describing enslaved Africans as "nations of heroes" superior to their captors
• The Theory of Moral Sentiments and Wealth of Nations form a unified system, not contradictory works
• Commercial society requires both moral foundations and economic understanding to function properly

For the complete series on Adam Smith's Wealth of Nations and additional resources, you can also visit Liberty Fund's Adam Smith Works website.  For the material on this episode, go here. 

APPENDIX:

To reduce transaction costs, here is substantial amount, probably more than you want, of primary and secondary material on Smith and WoN.  Enjoy!

Primary Smith Sources From Liberty Fund

 1.      The Theory of Moral Sentiments (1759/1790). Edited by D. D. Raphael & A. L. Macfie (Indianapolis: Liberty Fund, 1982)
 https://oll.libertyfund.org/titles/theory-of-moral-sentiments-and-essays-on-philosophical-subjects 

 2.      An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Edited by Edwin Cannan (Indianapolis: Liberty Fund, original editions 1904, in two vols.): https://oll.libertyfund.org/titles/smith-an-inquiry-into-the-nature-and-causes-of-the-wealth-of-nations-cannan-ed-in-2-vols 

 3.      Lectures on Astronomy (c. 1748).  Essays on Philosophical Subjects (1795), which contains Smith’s “History of Astronomy”—based on his lectures.
  https://oll.libertyfund.org/titles/theory-of-moral-sentiments-and-essays-on-philosophical-subjects

 

 General Resources

 1.      Aristotle. (n.d.). Nicomachean ethics. (Jowett translation)

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


This is Mike Munger, the Knower of Important Things from Duke University. This week I'm doing the first of a series of special podcast episodes considering the Scottish Enlightenment, Adam Smith, and his Master Work An Inquiry into the Nature and Causes of the Wealth of Nations. The edition that I'll be working from, and the one you should have if you want to follow along, is the 1982 edited by Campbell and Skinner edition of An Inquiry into the Nature and Causes of the Wealth of Nations. It's two volumes and it's available from Liberty Fund. I'll put up a link in the show notes if you want to buy a copy. It's two volumes, but you should have it or you can follow along in the electronic version of course, which is free and also available from Liberty Fund. Speaking of Liberty Fund, I want to acknowledge their support and help, especially from Amy Willis of AdamSmithWorks.

ASW is going to release their own versions of these podcasts over the next few months, so it's a joint effort. There will also be extended show notes and academic and pedagogical resources for those of you who want to use these podcasts as an aid in teaching Adam Smith in your classes or to yourself. This first episode will be followed by six more episodes, one a month from July through January. Today we'll talk about the causes and nature of the Scottish Enlightenment and an overview of what I claim is the model of human nature, propriety and civilization that Adam Smith advances in the combined work of Theory of Moral Sentiments and Wealth of Nations. Unsurprisingly, I'm going to argue that both of them have to do with the problem of transaction costs. I'm obliged to acknowledge that I have a particular view of Adam Smith and his life's project and that view is far from universally held.

(00:01:52)

I've developed that view by listening to and reading a number of people who know a lot more than I do, including Daniel Klein, James Otteson, Maria Pia Paganelli, and of course my secret sweetheart, Russ Roberts, as well as quite a few others. If the outline in discussion I give here is correct, it is a credit to those mentors. If I get something wrong, it's entirely my own fault. A note on listening. This first overview today is going to skip around quite a bit. I don't want to make it sound like it was just written and read. You can do that with AI. I'll usually just give a book and chapter reference for the quotes today, but in the upcoming episodes we'll be looking at specific parts of Wealth of Nations and I'll give page numbers to the Liberty Fund edition so you can follow along if you want. Straight out of a Creedmore. This is TAITC Special Adam Smith Wealth of Nations series episode one.

(Intro)

I thought they talk about a system where there were no transaction costs, but it's an imaginary system. There always are transaction costs.

When it is costly to transact institutions matter and it is costly to transact. 

Craig Smith, on AdamSmithWorks, wrote the following:

In some respects, it's surprising that there was such a large surge of intellectual achievement in what many considered to be a comparatively poor isolated and conflict blighted part of Europe, but the combination of favorable historical circumstances together with a generation of remarkable minds placed Scotland at the forefront of the European Enlightenment. 

I think one of the things that's interesting is much like at the time of the American founding, this is not just true in retrospect, they knew it at the time. Voltaire famously said, we look to Scotland for all our ideas of civilization or something like that. He apparently said, let's be clear. He did not mean that the nation of Scotland was a model of civilization and manners. Quite the contrary. Much of Scotland was rude, even uncouth compared to the highly evolved manners and customs of upper class French society.

What Voltaire meant was literally about the ideas about civilization, which came from a remarkable collection of thinkers, drinkers, and writers who worked feverishly between about 1735 and 1800. One of the key thinkers and the main focus of these podcasts was a man named Adam Smith. Now, Smith, Voltaire said this, Smith is an excellent man. We have nothing to compare with him, and I'm embarrassed for my compatriots. Again, not because he was a model of decor and manners, but because his understanding of the origins and function of civilization was ideal. Between roughly 1740 and 1790 Scotland, particularly the cities of Edinburgh and Glasgow became crucibles for innovation in philosophy, economics, history and science. The Scottish Enlightenment combined empirical investigation, moral philosophy and pragmatic political economy producing thinkers whose influence continued now to shape our understanding of human society. Now, I'm going to try to not go full Arthur Herman here. Herman wrote a famous and frankly fun book, How the Scots invented the Modern World. It's not wrong, but its emphasis on Scotland as the source of all wisdom in the second half of the 18th century is a bit misleading. Still, Arthur Herman has a point. The Scots did help invent the modern world. How did that happen? Why did Scotland, a relatively poor, politically subordinate nation, produced thinkers like David Hume, Adam Smith, Francis Hutcheson, Thomas Reed, Adam Ferguson figures who helped lay the foundations for modern economics, philosophy and social science? Well, there's no single event that marks a clear beginning, or for that matter, end of the Scottish Enlightenment. There's a cluster of institutional, intellectual, and cultural developments that came together to launch this extraordinary era of thought. One gets the sense that they knew that it was an unusual period, and we'll see why. We'll have a timeline of key and some early markers to give you your bearings.

In 1696, we see the Kirk, the Scottish Presbyterian Church founding the Scottish Parish school system. Now, often the Kirk was associated with doctrinal rigidity, but paradoxically, the Scottish Parish school system played a supportive role in the rise of enlightenment thinking. Given Calvin's traditional emphasis on predestination and scriptural authority and a sort of commitment to obeying scripture, there was also a tradition of a priesthood of all believers where everyone was not just allowed but obliged to read scripture and interpret it. So the intellectual/institutional legacy of the reformation in Scotland created conditions that were very conducive to inquiry, education, and civic responsibility, and those were the pillars of enlightenment culture. First, Presbyterianism emphasized literacy and education, so the parish schools and a comparatively high literacy rate by the end of the 18th century meant that the Scottish population was at least as and in most cases, more educated as any other country.

(00:07:38)

In Europe, the people were more receptive to philosophical, scientific, and historical arguments, even when they diverged from orthodoxy, in part because Scotland was far from the centers of culture that dictated what people thought. Second, the Kirk was decentralized. It was based on presbyters. It was based on bottom up governance through church courts, and it fostered habits of deliberation, consensus building, and resistance to authority. Those values, that questioning of authority without overthrowing the authority. We have to compare this with France. France used reason to question authority, and because they were using reason, they said, we're going to start from nothing. Scottish Kirk said, we are going to accept the existing structure, but you're allowed to question each and every part of it. More recently, we've seen this in James Buchanan's “relatively absolute absolutes.” It's absolutely typical of the Scottish Enlightenment. Many enlightenment thinkers, including ministers like William Robertson, operated within the Kirk while advancing progressive ideas about history, society, and reform.

The moderate party within the Kirk emerged in the mid-18th century as a group of clergymen who embraced enlightenment ideals. They advocated moral philosophy, empirical observation, and historical contextualism- moving away either from doctrinal absolutism that is just saying that all truth was revealed and they moved away from reason, which is saying that all truth was deductive. There's a third approach that they argued for, and that was empiricism rather than suppressing inquiry. Then the Kirk, especially in this moderate form, channeled religious thought into broader and ethical philosophical questions about human nature and social improvement. Though Scottish religious life was shaped by strict Presbyterian Calvinism, then the unintended consequence was an intellectual culture that was grounded in literacy and pretty free thinking, scriptural interpretation. Now, the Calvinist insistence that individuals read and interpret the Bible cultivated those habits of critical inquiry, even where religious orthodoxy resisted philosophical innovation.

The tools for independent reasoning were already in place. You have literacy and independent critical thought. Adam Smith himself was educated in this environment, beginning studies at the University of Glasgow at the age of 14, so that would've been 1737, where exposure to classical philosophy and emerging scientific ideas dramatically shaped his worldview. It's not clear that any other environment in the world would have matched what was available in tiny backwards Glasgow, in some Presbyterianism was not an intellectual strait jacket. It was a scaffolding on which the enlightenment was constructed. The second important precursor dates from 1707, the act of union between Scotland and England, the Act of union fundamentally altered Scotland's trajectory. It created a paradoxical environment that helped catalyze the Scottish enlightenment politically. It dissolved the Scottish parliament and subordinated Scotland to Westminster, but Scotland did retain distinct national institution. Its legal systems, universities and the Presbyterian church.

Now, this is not a federal system. There was a unified parliament in Scotland's representation and it was tiny, but so were there fiscal obligations to the financing of the British Empire rather than having to try to do this on their own. So this duality a loss of political sovereignty, but the preservation of cultural autonomy proved fertile ground for intellectual innovation. The union opened access to English markets and the expanding British empire, fostering economic opportunities that spurred the growth of urban centers, trade centers like Glasgow, Edinburgh as commercial and cultural hubs. As I mentioned, one of the most significant institutional advantages for Scotland lay in the independence of its universities, particularly in Edinburgh, Glasgow and Aberdeen. Unlike England's universities, Scottish professors and schools depended directly on student fees, not on royals cures or endowments. I'm not looking at you, Harvard, don't think that. As Adam Smith observed in the Theory of Moral Sentiments, in the University of Oxford, the greater part of the public professors have for these many years given up altogether.

Even the pretense of teaching the discipline of the colleges and that of the university are equally neglected. The tutors seldom mind the conduct of their pupils and almost never accompany them to the lectures, which themselves are very seldom delivered. The students who are supposed to attend them generally neglect them altogether. End of quote. Now, by contrast, Scotland's universities retained control over their curricula and emphasized new disciplines, moral philosophy, political economy, and the natural sciences, and the professors depended on students showing up and being interested in the lectures. It was a much better system, partly because the Scottish universities couldn't rest on their laurels. They were trying to get better after the union. They felt like they were the weak younger siblings of the great British empire, and as a result, while the English schools were often mediocre at best, the Scottish universities were hungry and aggressively ambitious.

These fields, moral philosophy, political economy, and the natural sciences attracted scholars eager to address both practical and normative questions concerning human nature and governance. There were few political routes to power or to wealth due to English dominance and the Scottish exclusion from court patronage. That meant that ambitious Scots had to turn to intellectual achievement. As historian Arthur Herman writes, “in the absence of political sovereignty, Scot's turn to the sovereignty of the mind political subordination, thus paradoxically fueled meritocratic ambition and intellectual vibrancy comparable to the cultural creativity seen in other second cities.” So Chicago often calls itself the second city. Yeah, we can't compete with New York, and that's how they compete with New York. The union also sparked a deeper cultural question, what did it mean to be Scottish? Within the British framework, intellectuals such as David Hume, Adam Smith, and Francis Hutcheson explored the implications of commerce, civil society and historical development.

(00:14:39)

Acutely aware of Scotland's peripheral status within the British state, the tension between national pride and imperial incorporation encouraged reflection on identity, history, and modernity. Scottish Enlightenment became both universal in scope, engaging themes of progress, reason, and liberty, but distinctively national in tone, rooted in Scotland's unique institutional and cultural configurations. Now, of course, not all Scots accepted the union quietly. There were a couple of revolutions. The most important was the 45- calling it that is helpful because it reminds you that it was in 1745, the Jacobite rising was the most famous attempt to reverse the political subordination imposed by the Union. Now, in a way though, it was an attempt at a restoration of the Catholic King James, which is why Jacobite Jacobus is Latin for James, and it was led by Charles Edward Stuart known as Bonnie Prince Charlie, because the Scot's Gaelic word for Charles sounds a lot like Charlie.

So the Jacobites sought to restore the exiled Stuart monarchy to the throne of Britain. Charles landed in Scotland with a small group of supporters. The French troops that had been going to come with him didn't make it because of a storm, and he immediately, he Bonnie Prince Charlie immediately began to rally Highland clans to his cause, and there were some early victories. They actually captured Edinburgh and they won at the Battle of Preston Pass. Now, it should be noted that even though Adam Smith didn't like Oxford very much, he was at Oxford in this period and away from the fighting, not that there was much fighting. Edinburgh was taken almost without a fight. The Jacobite army advanced into England as far south as Darby, causing alarm. In London, however, lacking broad English support which he had expected, and facing advancing government forces which had finally gotten organized, Bonnie Prince Charlie and the Highlanders retreated back towards Scotland.

The rebellion ended decisively at the Battle of Edin near Inverness in April, 1746, poorly supplied and exhausted. The Jacobites faced a well-equipped English army battle was brief and brutal was a crushing defeat for the Jacobites, and Edin effectively ended Jacobite hopes of restoring the Stuarts while subsequent reprisals suppressed highland culture and dismantled the clan system. Now, if the relationship between the Act of Union and the 45 is not obvious, that's because it's actually very complicated. It's not clear that the Highland clans would have had their power restored by the Stuarts because after all, the Parliament had been reformed, but they did believe that they were better off with a Stuart King than a Hanovarian king. So for whatever reason, there was a decisive crushing and dismantling of the power of the clan system in the Highlands, and as a result, having broken the system down, something like the breakdown after Japan and Germany in 1945, it meant that all of the existing power structures had been leveled and Scotland was able to rebuild a new power structure on those ruins.

So in some sense the 1707 Act of Union, whilst politically subordinating Scotland, preserved critical national institutions that empowered an intellectual flowering, excluded from court patronage and marginalized within the empirical imperial framework, Scots channeled their ambition to scholarship, philosophy, and scientific inquiry. What's interesting is that the Act of Union blocked political rent-seeking as a way to achieve power and wealth. That's actually great if you have a group of ambitious people for whom political rent seeking is foreclosed, they're going to refocus their energies and attention elsewhere, and that's what happened. The third great tradition that I want to say a little more about is the process of urbanization and commercial development. Even in the early parts of the 18th century, which had begun to change the class structure from being mostly dominated by landowners to being at least partly in the towns dominated by people who engaged in commerce, often international or large scale shipping and commerce.

(00:19:38)

So the 18th century saw dramatic urban growth in Edinburgh, Glasgow, and Aberdeen. Again, the three great cities. Edinburgh's New Town symbolized enlightenment ideals in architecture and civic design. There was a feeling that you could build a new, you could build a new buildings, new towns, and a new intellectual flowering. Glasgow's rise as a commercial hub brought prosperity and with it intellectual ferment, coffee houses, clubs, salons became central to public discourse. The Select Society in Edinburgh founded in 1754, brought together leading thinkers including Hume, Smith, the chemist, Joseph Black and many others. So urbanization created both the material wealth and the physical space and concentration and density that were necessary for intellectual exchange. Rather than having a bunch of landowners, all of whom might live miles apart, people live together in the cities, but there was very substantial wealth in the cities because of the growth of commerce.

Another factor is that we have to recognize the Scottish Enlightenment did not emerge in isolation. The European enlightenment more generally did create conditions that helped foster the Scottish Enlightenment. Scottish thinkers corresponded with critiqued and drew inspiration from continental intellectuals, especially France and England, which was after all essentially another country. Voltaire praised the Scottish universities as the only schools where one can study reason and humanity, but Scots also diverged from certain continental tendencies, particularly the rationalist excesses of Descartes or the moral pessimism of Rousseau. Indeed, the Scottish Enlightenment offered an alternative vision. It was empirical, pragmatic, and optimistic about human progress, but it's always important to recognize that things don't happen in a vacuum. The Scottish Enlightenment was in part a reaction to the rationalist reason-based European Enlightenment, especially in France. Let me say a few things about some other important events that led up to where we want to get, which is Adam Smith beginning his work between 1710 and 1726, Francis Hutcheson was very influential in forming the curriculum at the University of Glasgow.

Not only did he teach students and Smith was his student, but Hutcheson reformed the curriculum. He taught moral philosophy, promoting ideas of innate moral sense and human sociability. Now, he was in part reacting to Bernard Mandeville, but also to Thomas Hobbes. Both Mandeville and Hobbes thought that people were essentially bad and we need political or other institutions to control and direct their activities. Hutcheson believed that human nature was essentially good. People are mostly motivated by benevolence. Now we're going to talk more about some of these technical terms, but remember that one benevolence is to be contrasted with greed and self-interest and vice, which were the Hobbesian and Mandevillian assumptions about human nature. Hutcheson's major work was An Inquiry into the Origin of Our Ideas of Beauty and Virtue. He organized what he called moral sense theory and thought that benevolence was the default state of human beings.

Now, we weren't always benevolent, but that was the default state. Hutcheson taught both Adam Smith and Thomas Reid, and he should be credited as an important founder of the Scottish Enlightenment. Much of what Smith later wrote was an extension, a correction, or just a reaction to what Smith had been exposed to in Francis Hutcheson's classroom, and then later as a fellow faculty member. Second, in 1725, the founding of the Edinburgh Philosophical Society. The Philosophical Society was one of several learned societies that brought together scholars and professionals, and you need to recognize that at this time, philosophy encompassed both science and economics. These are not separate disciplines the way they are in the academic world. So natural philosophy is what we now think of as physics and science. Both cause and effect can be found in the formation of the philosophical society. Partly it is an effect because people said it'll be really interesting to get together and talk about this stuff, but it's also caused because it provided a forum where these discussions could lead in new directions where people could get the cutting edge body of thought.

So the Edinburgh Philosophical Society became a model for intellectual collaboration. Well, just two more influences to go. In 1739, an amazing thing happened. An extremely influential and entirely unknown book was published, and the fact that those two things can both be true is the story of David Hume’s book, A Treatise of Human Nature, which was published in three volumes between 1739 and 1740. Its subtitle being, “An Attempt to Introduce the Experimental Method of Reasoning into Moral Subjects.” You need to remember that subtitle, being an attempt to introduce the experimental method of reasoning into moral subjects. That in a nutshell is the start of the Scottish Enlightenment because using experimental reasoning as a science of man is where it comes from, though not initially a success. This work laid out radical ideas on empiricism and human psychology. It's now considered a foundational text of the Enlightenment, and some people would say it's the most important book written in philosophy in English.

I happen to believe that, at least in terms of its impact. However, it's not like it worked out very well at the beginning. As Hume himself said in his kind of autobiography, My Own Life, “Never a literary attempt was more unfortunate than my treatise of human nature. It fell dead born from the press without reaching such distinction as even to excite a murmur among the zealots, but being naturally of a cheerful and sanguine temper, I very soon recovered the blow and prosecuted with great ardour my studies in the country. In 1742, I printed at Edinburgh the first part of my essays. The work was favorably received and soon made me entirely forget my former disappointment.”

Well, he was being a little bit modest there, a number of scholars, not hundreds, but a number of people read it. Most of them were horrified, and so one of the reasons why publication in 1739 of Treatise of Human Nature is a foundation of the Scottish Enlightenment is that it sent ripples out where people said, oh, heck no, that's not right. I have to address this, and they did. Hume famously influenced [Immanuel] Kant. Hume’s central claim, which disturbed Kant was that we humans have no rational basis for the concept of there being a necessary connection and cause and effect. Our belief in causation arises from habit, custom convention, not reason or empirical certainty. In reacting to this, Kant said, “I freely confess, it was the remembrance of David Hume that first interrupted my dogmatic slumber and gave my investigations in the field of speculative philosophy quite a new direction.”

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Well, that impact of Hume’s, Treatise of Human Nature ignited not just the Scottish Enlightenment, though it did, but accelerated the enlightenment all over Europe. Now finally in the 1740s, Adam Smith and others begin their careers. Smith, as I said, studied under Hutcheson, began lecturing in Edinburgh by 1748, Thomas Reid, the later founder of the Common Sense School of Philosophy emerged during this decade. Reid was reacting in part to Hume and to Mandeville and to Hobbes. Reid thought it makes no sense to say we don't know things, and that's why his philosophy was called the philosophy of common sense. Reid thought we do know things- we know right and wrong. Philosophers’ tricks are just misleading. We use our basic human sense and intuition. Reid's major work was An Inquiry into the Human Mind on the Principles of Common Sense. He tried to apply what he called common sense realism, the critique of Hume and Skepticism.

He was a successor to Adam Smith at the University of Glasgow and saw Hume as an enemy of sensible philosophy, but that's what caused him to write sensible philosophy in the idea of common sense, common sense philosophy was an important part of the empirical method, and remember that Hume, although we came to a different conclusion, talked about the experimental method in the sense that we go out and we observe and we look how people act. The Scottish Enlightenment then is defined by rational inquiry, moral philosophy, scientific exploration of a particular empirical type, and a belief in progress. Much of it anchored in everyday civic life in Edinburgh and Glasgow produced some of the most influential thinkers that we have had in philosophy and science. Let me say a little bit about the intellectual currents of the Scottish Enlightenment. First, and I've alluded to this a bit, but let me make it clearer.

The method was [Isaac] Newton, not Descartes, whereas Descartes had sought certainty through deductive reasoning, and that's part of what Hume was reacting to because he thought Descartes just had this all wrong. You can't learn things from reasoning, you have to learn them from observation. But the Scots followed Isaac Newton's empirical experimental method. So in Adam Smith's lecture on Astronomy, and I should note that we don't actually, Smith had his papers burned or 19 volumes that were burned in the year before his death by Smith's friends. It's big, thick, fat volumes of things that Smith had worked on. So it is a shame that Smith did not allow us to see his lecture notes. What we have instead is the transcription of lecture notes of some of Smith’s students and those of you that are faculty, just think for a second. If future generations, if what was known about you was a compilation of the lecture notes of your students, that would be terrifying, but that's what we have in Smith's lecture on astronomy.

Smith celebrated Newton's capacity to explain natural phenomenon without resorting to metaphysical speculation. So Smith said, or the student said that Smith said, “Philosophy is founded in the admiration of the works of nature and the desire to understand them. This anti rationalist, observation driven approach characterize much of Scottish thought, whether in natural science, moral philosophy, or political economy.” From the lectures on astronomy, we can see Smith's description of science lectures on astronomy is not really about astronomy. It is an essay on meta science. Here's how it goes. Humans, abhor disorder, in the natural world, there probably isn't disorder in the natural world, but if we perceive every event as being random or separate, it appears to be disorder. So disorder upsets us. We experience a feeling, an emotion, a sentiment of wonder. Wonder is the big motivating force in Adam Smith's theory of meta science inquiry Wonder initiates inquiry because we think, huh, I wonder why that is.

Theories when they're successful in explaining what seems like disorder, restore intellectual tranquility. And what's important is that we catalog a series of phenomena that we observe in the world around us, and then those give rise to general principles that that explain the phenomena. Notice we don't sit down and reason principles and then go and look to test them. What we do is we go and look at the world and the famous metaphor is Newton observed that an apple fell and thought, huh, I wonder why that is, and then began to think about other similar phenomena and came up with a unifying theory. But the empirical phenomena come first. Smith is an empiricist. He is an anti-rationalist and he shares that with Hume and many of the other Scottish Enlightenment thinkers. So discovery is emotionally satisfying, not merely utilitarian. So in this, as in many other things, Smith is positing a motivation for humans that is intrinsic.

We're going to see this over and over again. So the motivation here is just like hunger or thirst. Human beings have a desire to understand because the failure to understand is upsetting to us. We abhor disorder. We would like things to be predictable, and we're going to come up with theories that allow us to do a better and better job of predicting that, not because we're trying to accomplish anything else, but just for its own sake. Smith presents discovery not as cold detached reason, but as a psychologically driven response to wonder, grounded in the human need for cognitive order. Second, in terms of method, I want to emphasize this notion of pragmatism and progress. The Scots revolutionized political economy by studying how real institutions function rather than theorizing ideal states. In this, the Scots anticipate Ronald Harry Coase. Coase always said that the way to do economics was to go out and look and see how things actually work.

He was very skeptical of our ability to come up with a priori theorizing in Adam Smith's Wealth of Nations. We see this approach exemplified. He describes how markets specialization, even the pursuit of wealth, can promote collective prosperity. Famously, he said it's not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. But that's not an axiom, that's an observation. Smith tempers that with moral philosophy, recognizing that markets require ethical foundations and civic institutions for them to flourish. So for Smith, our own interest crucially includes a desire to be lovely. This idea of what our own interest is- it's like our desire for food or water or our desire to get rid of disorder. We are interested in being in a society where we are admired and for reasons that are admirable.

He doesn't really explain that it's just an important part of human. If you start though with Wealth of Nations and you just say, well, it's not from the benevolence of the butcher or the brewer, that doesn't mean there's no benevolence in the system. The system won't work without benevolence and exchange as we will discuss. What's important to recognize is that if you observe the system, you can see that it is not only from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from our regard to their own interest. Smith writes the Theory of Moral Sentiments to talk about what human interest is, and then when he invokes human interest in the Wealth of Nations, we need to recognize that he spent a long time saying what that is. It's not modern homo economicus. Third, there is also an assumption.

We've talked so far about the Newtonian method and about pragmatism and actually looking at how things work. There is a basic assumption about human nature. The third great precept of the Scottish Enlightenment about the basic goodness of human beings and the fact that commercial interaction and the acquisition of luxury were not necessarily vicious. That is they were not associated with vice. So unlike the moral pessimism of Bernard Mandeville who argued that private vice leads accidentally to public virtue or Rousseau's critique of inequality in commerce, Scottish Enlightenment thinkers thought the pursuit of wealth properly constrained within a system of propriety was not only compatible with virtue but promoted it. Now, Rousseau saw the basic human social emotion as pity in the discourse and inequality. In fact, Rousseau says, “It is of man, I have to speak, and the question for me is to show him as he must have come from the hands of nature, I shall consider him therefore in the first place in that primitive condition, which is prior to all kinds of society. Let us therefore begin by laying aside all the facts for they do not affect the question.” 

There is a reaction to that sort of Rousseauian method, if you can call it that. Rousseau is going to sit down and think about what ideal society should be. He's going to imagine an alternative that doesn't exist. We're going to put aside all of the facts, but they do not affect the question. Now that's logical because Rousseau is saying that society is corrupting. If you believe society's essentially corrupting, that's a pretty plausible source for reasoning. That's not what the Scottish Enlightenment thought. Scottish Enlightenment thought that civilization was progress. Francis Hutcheson, Smith's teacher, posited an innate moral sense that guided human conduct towards benevolence. So Rousseau thought that pity was the essential human condition and greed was the condition that is created by a society based on property rights.

Hutcheson thought that society was guided by benevolence and a civilization that grew up around benevolence, obviously has very different properties from the one that was so talked about for Smith following Hume, but was in a different way. He thought that the essential human nature characteristic was sympathy, and we'll talk more about that later. But Smith saw commerce not as corrupting, but as fostering civility and a good kind of interdependence, luxury and refinement far from degrading society elevated it. This outlook was based on real social interaction in commerce, distinguished Scots for more radical or utopian contemporaries anchoring their thought in both optimism and an empirical understanding of how the world around them actually worked. They didn't want to start over. They wanted to tweak the existing system to make it continually progress and work better overall. The Scottish Enlightenment reflected a deep belief in human betterment through reason, education, and virtuous institutions.

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But their optimism was pragmatic. Progress emerged not from grand designs, but from incremental improvement, social cooperation, and moral development. Their legacy is a framework combining empirical inquiry, moral reflection in political economy, shaping modern understanding of markets, governance and the human condition. So in the words of Adam Ferguson, in his Essay on the History of Civil Society, which was published in 1767, nations stumble upon establishments which are indeed the result of human action, but not the execution of any human design. This is a kind of evolutionary process, but it's an evolution that is driven by an intense desire towards progress. So progress, like virtue, is emergent. It arises from human interaction, not imposed by reason. Alone, laws and societies evolve not from planning, but from practice. Well, let me say a little bit about some of the key thinkers that emerge to influence the Scottish Enlightenment and Adam Smith in particular.

First one I want to talk about is Henry Home, also Lord Kames. Now I have to have a brief alert here. Henry Home is spelled HOME in Scots, HOME is pronounced Hume, and in fact, David Hume, we would say David Hume had changed the spelling of his name in frustration because the English people were always mispronouncing it and then to make things worse, Lord Kames is spelled K-A-M-E-S. So it's Henry Hume and Lord Cams, in spite of the way that it looks like how it's spelled, Lord Kames was a judge and philosopher who worked in law, morality, and history. His major works were Elements of Criticismand Sketches of the History of Man, and he advocated a theory of conjectural history, which explained human development through stages. It's called a stadial theory. He wasn't the only one that had this. He had written quite a bit about it, and the reason that it's important for our purposes is that Adam Smith argued with Lord Kames about this quite a bit.

In fact, Lord Kames argued with almost everyone. David Hume said that Lord Kames was interesting but was a very difficult person because he constantly wanted to argue about everything. The four stage stadial theory tried to explain the progression of human society through stages of economic and social evolution, and this kind of stadial theory can be found often in other Scottish Enlightenment thinkers. Now, it's quite different from the evolutionary kind of theory that we see in Hegel or Marx. So the fact that they have evolutionary theories, the mechanism there is quite different. Well, here's the four-part historical stadial theory that Lord Kames and others put forward. First is the hunter-gatherer stage-called them savages. They didn't mean anything by that. There was nothing racial. It just was the earliest and most primitive stage in terms of the development of the society. Hunter gatherer societies are small, they're nomadic.

They survive by hunting animals, gathering wild plants, properties, communal. There's little social organization or hierarchy or inequality. Second stage is the pastoral stage, and that requires obviously the domestication of animals. So societies begin to domesticate animals and start to have herds. They are primarily shepherds. Then people develop a sense of personal property and social structures begin to form, including early leadership and division of labor. There is some mobility in the sense that people will move their herds during the seasons, but there is some more wealth accumulation because it is possible now to carry with you partly because maybe you have pack animals, you can carry more with you instead of just what you can carry on your own back. A third stage is the domestication of plants and fixed agriculture. Agriculture and farming become the dominant economic activities. Permanent settlements are established and you get much stronger social hierarchies with more complex, you get private property, you get government, you get armies, law and government begin to take shape to manage property and disputes.

Now, it's important to recognize that the source of law is the need to reconcile disputes over what later we're going to call that Adam Smith says, the three aspects of justice are person, property, and promise. So if we have disputes over what you have done to me, my person, what you've done to my property, or whether you have reached a contract or agreement, we will need law to adjudicate and decide those disputes without violence. But we have to have person, property, and promise before we can begin to do that, and that really only starts in the agricultural stage. The fourth stage, the highest stage is commercial civilized society. You see trade markets and urbanization, division of labor becomes more specialized. There's legal systems, civil government, cultural advancements, financial system. This stage reflects the ideal of civilization and progress in enlightenment thought. That doesn't mean that this is true.

What it means is that you need to recognize that that four-part stadial theory underlies a lot of the work in the Scottish Enlightenment. Being aware of it may help you understand some of what's being assumed by a number of the writers that led up to Adam Smith. There's two people that I haven't said much about yet. One of those is Dugald Stewart. Lived from 1753 to 1828. He was a philosopher and educator. He wrote a book, Elements of the Philosophy of the Human Mind, and he used a rational psychology that was a kind of continuation of Thomas Reid, and Dugald Stewart did make some original contributions, but much of what he did that was important was to popularize the Scottish Enlightenment. For Adam Smith in particular, Dugald Stewart was a mix of St. Paul because he was an apostle and Thomas Aquinas because he was an interpreter or an extender.

There are people who would say, we might not really know Adam Smith if it weren't for Dugald Stewart because of this role in popularizing. Second, I want to say a little more about David Hume and his significance, partly because Hume was so important in his relationship with Adam Smith. There's a great book by Dennis Rasmussen about the Infidel and the Professor, that talks about the relationship between Adam Smith and David Hume. Adam Smith is the professor. David Hume is the infidel. It's very much worth reading, so I do recommend it. Well, David Hume was born Home, HOME. He changed his name in 1732. So when he was 21 years old, Hume changed his name from HOME to HUME. Although it kept the same pronunciation. He was both a philosopher and a historian. He was really a central figure in Enlightenment empiricism. His work on the history of England was a standard, in fact, the standard work for a while with multiple volumes, treatise of human nature and inquiry concerning human understanding all had big influence, partly in getting people to write extensively to correct it.

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He argued that all human knowledge derives from sensory experience, not reason alone, and in fact, he clearly argued that reason is the slave of the passions, that it is the passions that mostly drive our actions and reason is a slave of those passions and that it is well that it should be so, because reason is not to be trusted. The big important matter for us is the centrality of convention as opposed to contract and reason for Hume. David Hume rejected the idea that government legitimacy can derive from a rational explicit social contract as proposed by thinkers like Hobbes and Rousseau and Locke. Hume argued that governments arise gradually from convention, and this is part of that stadial theory. There's a spontaneous habitual practice that evolved to solve social coordination problems, particularly concerning justice, property and social order. So in his Essay of the Original Contract, which I strongly recommend, which was published in 1748, Hume makes clear his skepticism toward the notion that legitimate government depends on explicit rational agreement quoting almost all the government which existed present, or of which there remains any record in history have been founded originally either on user, patient or conquest or both without any pretense of a fair consent or voluntary submission of the people.

Hume sees contract theories as historically inaccurate and philosophically weak. Most governments originate in conquest, in accident, or gradual custom, not rational deliberation. So Hume believes that governments evolve from conventions- regular, mutually beneficial practices that emerge organically not by design. So as Hume puts it in the Treatise of Human Nature, this convention is not of a kind that is expressly entered into by a compact, but rises gradually and insensibly and acquire strength by a slow progression and our repeated experience of the inconvenience of transgressing it. So in other words, people recognize the utility, the value of cooperation. We all get more if we cooperate justice. Property and government emerge as stabilizing conventions. These practices become entrenched over time, not by rational agreement, but by custom and habit. The game theorist Kenneth Binmore famously credits Hume with having invented both the problem of the prisoner's dilemma then, but also having solved the problem of the prisoner's dilemma by showing that in an indefinitely repeated prisoner's dilemma, cooperation actually becomes the equilibrium strategy.

Now, Hume himself likens social conventions to rowing a boat, quoting two men who pull the oars of a boat, do it by an agreement or convention. Though they have never given promises to each other, that's from the Treatise. Well, if you and I are trying to accomplish the same thing, it makes no sense for us to transgress. We don't need to have explicit contracts because we have shared goals, particularly if we're in a setting where we have good reasons to work together. Hume used, not contract, but convention to justify the existence of government. First. This is based on four claims. First historical realism. Almost no government actually originates from consent. Most arise from conquest, revolution, or gradual evolution, and Hobbes had freely admitted that- asked why even pretend. Second, the utility, the value of convention, government stabilized property and forced justice and resolved disputes fulfilling essential social needs.

Third, gradual agreement over time. People comply out of habit, socialization and recognition of mutual benefits, not because of deliberate consent. So notice the difference between agreement and consent. We all agree that we have a government and this is how it acts. We never consented to it. It's not a contract in the sense that I signed it, but we all agree to it and we all largely obey its precepts. We also accept that the violation of the commands of the state can be punished, again because that's conventional. Perhaps most important. Hume was a leading anti-rationalist and in this many of the Scottish Enlightenment thinkers followed him. Hume claimed that complex institutions are the products of history and experience, not rational construction from first principles, and notice that this fits with an idea of convention much better than it fits with an idea of contract, sort of anti-reasoning where we write out an agreement and then we sign it with informed consent.

So legitimacy stems not from a mythical founding contract, but from practical success and consistent public acceptance of those rules. So for Hume, a social contract doesn't exist, but convention is enough. So he opposes the rationalist constructivist visions of Hobbes and Rousseau. He emphasizes empiricism and historical development rejecting the idea that institutions require rational conscious foundations. He thinks governments emerge from the practical necessities of human life, not philosophical ideas. Conventions evolve to solve social problems, providing order and justice. Legitimacy then depends on utility, stability, and public habitation, not explicit consent. He famously uses the ship analogy that highlights the fact that most people have no real choice about remaining under government, making contract theories unrealistic. His anti-rationalist emphasis on historical convention is a foundational argument for understanding political legitimacy as it was conceived in the Scottish Enlightenment. Let me read the ship analogy. I was talking here again.

This is in the essay on the original contract quoting. Now, my intention here is not to exclude the consent of the people from being one just foundation of government where it has place pause. So what he's saying is that consent would work, that would be fine. It just that we never actually observe it. Starting up the quote again, it is surely the best and most sacred of any. I only maintain that it is very seldom had place in any degree and almost never in its full extent, and that therefore some other foundation of government must also be admitted and that a man's consent may frequently be presumed where no formal expression of it is made nor any overt act of consent given. Properly speaking, can we seriously say that a poor peasant or artisan as a free choice to leave his country when he knows no foreign language or manners and lives from day-to-day by small wages which he acquires.

We may as well assert that a man by remaining in a vessel freely consents to the dominion of the master, though he was carried on board while asleep and must leap into the ocean and perish the moment he leaves her. Thus, the general obligation which binds us to government is founded on the necessity of order and the impossibility of society subsisting without some restraint. This obligation is not derived from any consent or promise of the individuals, but arises from the very frame of human and the necessity of human affairs. 

So the point is that this attempt to come up with some magical social contract fails. It's just not an accurate depiction of the origins of government and saying that there's an implicit contract is a mistake because it assumes that people have a choice that they don't have. But the good news is we don't need it because for Hume convention was enough.

So let me conclude the first segment of this first episode by saying that the legacy of the Scottish Enlightenment is that it reshaped Western thought by blending empirical inquiry, moral philosophy, and pragmatic political economy. Its thinkers championed progress, but of a cautious, evolutionary kind. What Adam Ferguson had called the result of human action, but not the execution of any human design. Their vision emphasized incremental improvement, social cooperation, and the moral development of individuals who achieved self-governance within civic life guided by a national government. Their legacy endures in our understanding of markets, government and education. It's understandable then while why Voltaire famously remarked with some admiration and with a little bit of irony, we look to Scotland for all our ideas of civilization. He did not mean that the Scots were civilized. The French felt and probably rightly, that their notions of food, music, art manners were superior to the Scots. What Voltaire meant was that the Scots had ideas about civilization and Smith's ideas were at the forefront of the waves of improved understanding. So now we'll move to the second part of this first episode, which is an overview of the model and approach that Adam Smith takes.