“Adam Smith’s answer is that human beings have a basic capacity to observe, to be aware of, and in due course to be moved by the feeling of others. He calls that sympathy.”

How did Smith’s insights into moral sentiments and governance transform the modern world? Do they offer answers to the deepest political challenges of the twenty-first century? Jesse Norman MP sits down with Mark Pennington to discuss his new book on the Governance Podcast.

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The Guest

Jesse Norman MP was appointed Minister of State for the Department for Transport on 12 November 2018. He was previously Parliamentary Under Secretary of State for the Department for Transport from June 2017 to 9 November 2018. He was elected as the MP for Hereford and South Herefordshire in May 2010.

Before entering politics Jesse was a Director at Barclays, researched and taught philosophy at University College London, and ran a charitable project in Communist Eastern Europe.

His books and monographs include ‘The achievement of Michael Oakeshott’, ‘After Euclid’, ‘Compassionate conservatism’ and ‘The big society’. His book ‘Edmund Burke: politician, philosopher, prophet’ was listed for the Samuel Johnson Prize, the Political Book Awards and the George Orwell Prize. He has also written regularly for the national press.

Skip Ahead

00:38: Why write a book about Adam Smith, and why now?

3:05: What is Smith’s view of human nature, and the role of empathy within it?

9:17: If you look at the Theory of Moral Sentiments, there’s the idea that moral order doesn’t need to come from a legislator [or from God] – it is a bottom-up account of how rules are developed.

12:15: One thing critics say about Smith is that he has a purely descriptive account of morality—it’s describing how people act in ways to seek others’ praise, but that doesn’t address whether the action itself is actually worthy of praise.

15:17: In the Smithian account of morals, how do morals change? If what others perceive I should do is not what I think I should do, how do I challenge that public view?

18:40: I think The Theory of Moral Sentiments can help us understand things like celebrity culture, or what goes on in social media. People looking for ‘likes’ on Facebook is very much praise and blame. But there’s a tension here: this is how moral norms are enforced, but Smith also talks about the “man within the breast,” the person who knows what is really praiseworthy.

21:35: In my view, what the invisible hand is referring to is a kind of social process, it’s an understanding that there are emergent properties in society, when people interact and then something emerges which is more than the sum of its parts and which wasn’t anticipated by its participants… it’s the unintended consequences of spontaneous order.

24:45: If you have a theory of the invisible hand, you might also have theories of how the invisible hand can break down. Economists have theories of market failure, but does Smith have a theory of moral failure?

27:45: When we’re talking about morality, yes we can point to celebrity culture as being a moral market failure, but what’s the alternative? Would the Smithian account favour a legislative response?

31:10: You’re very good at explaining that Smith is, in some ways, an egalitarian… the challenge is, and I think this is a problem that no one’s cracked—what do we do when people who acquire economic power then try to use the state to limit competition?

37:00: We know that financial markets have important information asymmetries… that’s a standard argument some people use to argue for regulation…. But equally, we know that regulation can be captured by big players. To solve a market failure, you end up with a governance failure.

40:28: One of the things I take from Smith is a scepticism about politicians… how do we constrain politicians?

Books Discussed in the Episode

The Wealth of Nations by Adam Smith

The Theory of Moral Sentiments by Adam Smith

Adam Smith: What He Thought, And Why It Matters by Jesse Norman

The Myth of Capitalism: Monopolies and the Death of Competition by Jonathan Tepper and Denise Hearn

Full Transcript

Mark Pennington: Welcome to the Governance podcast, hosted by the Centre of the Study of Governance and Society here at King’s College London. I’m Mark Pennington and I’m the Director of the Centre and Head of the Department of Political Economy, in which the Centre is housed.

For today’s podcast, we’re delighted to welcome the Right Honourable Jesse Norman MP. Jesse is the Member of Parliament for Hereford and South Herefordshire and today he’s going to discuss with us his recent and very interesting book on Adam Smith: What he Thought and Why it Matters.

Jesse, it’s great to have you with us today. I wonder if we could start off by you responding to a very basic question, which is, why write a book about Adam Smith and why now?

Jesse Norman: Thank you very much indeed, Mark, and thanks very much to King’s for having me on the podcast.

I should say just in the strict interest of historical accuracy that I’m not a member the Privy Council. So I’m not the right honourable, I’m just a plain MP. But having said that, let’s crack on.

Why Adam Smith? Why now?

Well, several reasons.

The first reason is because Smith remains an absolutely towering figure in the world of political economy and I think it’s very important to, in a world which is short of figures of authority and in which his name has been routinely invoked and often traduced by people coming from different parts of the political and ideological spectrums, it’s important to be clear on what he really thought.

And that often means just disabusing the left and the right and different parts of the centre, of the neoliberals or libertarians, the Marxists, of some of the ideas that they may have and some of the caricatures, many of the caricatures they have – the myths, if you like.

The second reason is because I very strongly believe that Smith has very important things to tell us now about an enormous range of issues. And also of course how to think about those issues.

So I think he has implications for thinking in moral reflection, moral philosophy, in political economy of course centrally, in the way in which economics is taught now in universities and sometimes in the received opinion of economics you find in policy think tanks and in government.

But of course also, crucially, in sociology, and an awful lot of the part of the book is to rescue the part of Smith people forget about, they ignore or they don’t reflect on, which is the sociological Smith.

Then finally, at the end of the book, to say well actually, there is a whole series of important issues now that we can start to address, understand better, describe better and hopefully in due course start to advance solutions to by using these ideas, by drawing on them and by stimulating further reflection.

Mark Pennington: You mention sociology and actually one of the first set of questions I’d like to look at would be your understanding of Smith’s theory of human nature and of what you might call sociality. One of the myths that you tackle in the book is the notion that Smith works from a model that assumes that the primary human motivation is some form of material self-interest. You explain that he has a far richer account of human nature which focuses as much on the capacity for people to be empathetic as it does on narrow self-interest. I wonder whether you could summarise what you think Smith’s theory of human nature is and the role that empathy plays within it.

Jesse Norman: Yes, of course. Let me take this as it were historical description first and then we’ll come to the analytical question.

For me Smith has a good claim to be considered the founder of sociology just as he does the founder of modern political economy.

And I’ll come to the reasons why in the case of political economy.

In the case of sociology, it’s because before that great 19th-century trio of Marx, Weber and Durkheim, you have Smith thinking very hard in the Theory of Moral Sentiments, his first book, written in 1759, about the nature of human beings and the interactions they have with each other. That’s really above all a work of moral psychology and social psychology, more than it is a work of moral philosophy as such.

And what does Smith actually think?

Smith is very keen by implication to rebut the Hobbesian view, the highly contested but nonetheless highly influential 17th century view, that mankind was essentially self-interested, that that self-interest was itself the basis for a theory of sovereignty via a social contract, people giving up a degree of self-sovereignty because their lives in that context were “solitary, poor, nasty, brutish and short” is the phrase.

Giving up that sovereignty to a leviathan in order to, as it were, create a social structure within which society could flourish.

Smith has a very different picture to that. He’s very close to Hume, his great friend and mentor. You’ll recall that Hume has a devastating counter to the Hobbesian idea of a social contract, which is that if it was not possible for people to agree the nature of social contract before having society at all, then why is it necessary to posit such a social contract at all? Clearly an institution existed, that is the institution of promising.

In other words, human beings have to have that natural sociality that allows promising as an institution to arise. This is really an Aristotelian moral account of human nature. It allows for a very important reorientation away from this highly materialistic and selfish conception of human nature towards what you rightly described a much richer human psychology.

That then allows Smith in turn to ask the question, well given that– and this is equally a Burkean idea — given that human nature is to be in society and in due course in civil society, then how can that be and how in fact do social and moral norms – standards – arise within that society? Smith’s answer is that human beings have a basic capacity to observe, to be aware of, and in due course to be moved by the feeling of others. He calls that sympathy.

It’s not sympathy in the in the extended sense that we would feel. It’s more of a psychological capability rather than emotion as such. But it does yield the capacity to put oneself in other people’s shoes and to ask yourself the question, what would it be if I was observed by them and by others as I observe them?

Therefore what you get is an other-directed idea of human moral psychology, human standards, human norms and values.

The contrast is between that and what you might call an inside out theory – God gives human beings their moral ideas, their moral expectations, they then act those out. This is saying actually we just get them from each other and its deep foundation is the Humean idea that we can give an account of human nature, we can give an account of the science of man in all its different dimensions without having to include a premise about the existence of the reality of God.

We can just do it– humans are all there is. We don’t need to be disturbed or panicked about this very disenchanted idea, but we have to come to terms with it and we have to include it in our philosophy. Then what is so fascinating when you get to the 19th century, if you’ve got some sociologists listening, is that you find of course this then reflected in Germany in the Kantian idea that there nevertheless is a transcendental realm, a moral realm of duty, universalizable duty.

Then that gets rebutted by this Nietzschean idea that God is dead. There’s no such thing as a transcendental idea and that becomes the foundation for Weberian ideas of man and society.

Mark Pennington: Can we just go back to what you said about Hobbes, because what I, and I think what a lot of people take from Smith and the Theory of Moral Sentiments is that he has an account that moral order doesn’t need to come from legislators [or from God]. It’s a bottom-up account of the way rules are developed. So if you think about it, for example, when children come into the world, they are often incredibly selfish creatures. But when they interact with other children, when they steal their toys, they find they get hit or abused in some way, and they discover what the norms of acceptable conduct are.

They discover through interaction, through receiving praise, through being castigated when they act against what might be an acceptable moral standard of what the appropriate form of conduct actually is. So you actually have a sense of morality and the enforcement of that evolving bottom-up through the interactions of the different participants. Is that an accurate account?

Jesse Norman: Yes, I think it’s a very nice account and it does several things as it hints at the in some respects game-theoretic ideas that come out of a bottom-up view of human behaviour. As you know, you can get theories of norms as distinct points of equilibrium arising out of that kind of theory.

But it also does something interesting, because Smith isn’t living in a time detailed accounts of individual psychology or the like. But what he does is tell enormously persuasive and interesting simple stories about humans, how humans actually interact.

They are so obviously generalizations of human experience that they have a kind of evidential status in a funny way. It’s very interesting way of doing this kind of research. It’s not anecdote, it’s not evidence, it’s something in between. Paradigm example, if you like, something of that kind.

The other thing is, you’re absolutely right that for Smith the fundamental human driver on the moral side is the capacity of sympathy. The driver is what he calls “a man desires not merely to love, but to be lovely” – that is, a fit and proper object of love in the eyes of others.

The reason why that is important is precisely because it’s in that context of public praise or blame that the internalisation of praise or blame as a moral norm takes place. He gives us what I think is still a remarkably interesting and productive and fruitful account, and in many ways possibly a true account of how human moral sensibility arises out of that feeling of praise or blame.

As you know there’s a lot of literature in sociology about the transitions in cultures from shame cultures to guilt cultures where this internalisation takes place at a social level as well.

Mark Pennington: One thing that critics sometimes focus on in this kind of an account is the argument that, and this is one I think you do address in the book, that it might be said this is a purely descriptive account of morality. So it’s describing how people act in a way which is to do what they think others are going to praise them for. But that doesn’t address whether the action itself is actually worthy of praise.

How do you respond to this charge that some would put, that what Smith has here is really a purely descriptive account of how norms are formed and enforced, but it doesn’t really tell us whether or not what is formed and enforced is good in its own right?

Jesse Norman: Yes, I have a lot of sympathy with that view. It was put to him during his own lifetime by a man called Gilbert Elliot and he struggles to try to address it, and that’s important.

One can’t help feeling that his account, however plausible it is, can’t be entirely dissociated from a substantively Christian account of moral behaviour and virtues, even though he is not, in any public professing way in his writings, an advocate of any particular religion. I mean, he remains studiously aloof– he talks about our maker, our divine creator.

So I have sympathy with that, and out of that reflection comes this standard response, of which Kant in a way is a perfect example, which is that really we’re locked in a world of relativity and what we looking for is an anchor that says that these things are morally good in themselves and we need a procedure that is taken away from history that allows you to do that, and that’s what universalizability of moral injunctions and the idea of duty in Kant is designed to do.

Where I think it starts to get more interesting is if you can show the extent to which embedding this kind of descriptive theory of norms and the evolution of norms allows for processes akin to natural selection to select pro-social norms. Because then I think you are moving towards things that are good.

Now, they may not be good for more than a population, they may struggle to get outside that degree of localisation, but it still gives you a mechanism for choosing the better over the worse. The other thing I think it does that’s quite helpful is that it allows you to say, to run the arguments in reverse. Within some things, here are pro-social norms that are actually antisocial.

There is a subsection of a gang culture, where all the same procedures and forces are working, but are generating norms that are ultimately antisocial. and I think that’s quite an interesting idea as well and in some respects the strength of the theory.

Mark Pennington: In the Smithian account of morals, how do norms or morals change? Who is the agent of change? If we’re in a situation where we have a bad equilibrium or people just think that what I should do is not what I actually think I should do, how do people challenge that? How do they move in such a way that we start to get some kind of incremental shift in the content of what people think is actually acceptable behavior?

Jesse Norman: I mean that is an enormous question and I’m not sure that Smith has a developed account of how norm change occurs.

If we were looking at it from a modern perspective, it’s not hard to see some factors that would have an effect. A change in law would be a way of changing norms. The charismatic politician is a way of shifting norms.

But what’s really interesting is how sometimes norms shift just by the emergence of a dormant subculture of mutual esteem within an existing group, without any top-down or shaping. We see this again constantly. And sometimes it goes backwards but often it goes forwards.

One of the things that’s so interesting to me about the whole approach is that it is so fruitful for thinking about what we see in today’s world – echo chambers of localised mutual support becoming influential norms more widely – often on the basis of the loudness of the voice and the passion of the group rather than its intrinsic superiority.

The other thing I think is really interesting is the tremendous sense of self-righteousness, often abetted by views about meritocracy which goes alongside it. We see this everywhere in Brexit, on both sides of the Brexit argument. It’s such a perfect example we can’t not touch on it.

This overwhelming feeling that people have of the need for self-justification. The overwhelming need that comes out of Smith’s idea of people’s desire to be lovely in the eyes of others, to ratify, to validate, to be able to say I was right all along and never to change their ground.

Again I’m finding this really interesting contrast. I’ve been thinking about Weber, and he has this distinction between pluralism and polytheism.

A pluralist society has a multiplicity of different values and ends. In a polytheistic society, everyone is theologically committed to some set of values in conflict with others, not really prepared to entertain other reflection, and therefore impermeable boundaries growing between the different tribes and that’s something we see so much.

I’m almost tempted to say we have an ideo-theistic approach, because everyone thinks that they and they uniquely have a view which is right and no one else can question it. That’s of course insane.

And it’s completely contradictory to all of the deliberative processes of democracy that we’ve evolved in this country and in other countries, which are precisely designed to put views in contrast with each other and to explore difference.

Mark Pennington: Talking about recent events, I think the Theory of Moral Sentiments can help us understand things like celebrity culture, what goes on in social media, because this is very much, people looking for likes on Facebook, is in a way praise and blame.

But there is a tension in Smith where on the one hand he thinks this kind of mechanism is the way moral norms are enforced, because people want to do the right thing. But he also talks about the man within the breast, the person who knows what is really praiseworthy and that strikes me as the kind of person who will stand up for what they believe is right, not necessarily just what others think is the right thing.

So there have to be some actors who are actually willing to take the flack. There have to be moral entrepreneurs who initially, if you want to get new norms, are willing to go against the tide and stand up for something different that they believe in, in the hope that over time, other people will start to copy them.

Jesse Norman: I think that’s right, it’s very interesting, and you can run a series of arguments about this.

Smith has this idea of the impartial spectator and the idea of that, and in a way it’s in anticipation of what Kant makes into universalizability, the impartial spectator is designed to rule out the merely idiosyncratic in a judgement about an individual person versus a wider group, or in the individual circumstances of a judgement.

Now the trouble with that is, that it is very easy for that to shade into being a little homunculus type conscience. Then you can getting into the difficulty of asking what determines the moral code of the homunculus and suddenly you’re into what looks like a bit of a regress. You have to be careful about how you erect that. That’s ultimately where I think the non-divorceability of his view from a Christian ethic comes in.

There’s another interesting thing, and I think no one’s really explored this but I think it’s really interesting, the idea that you can link this to political economy. In the book, I talk about how theories of reputation as capital can create a momentum within a person’s character that might lead them to say, actually no. They’ve built up a lot of internal and external brand reputation in certain directions.

They say, “Actually no, I don’t believe that, that’s not what I stood for historically, I’m going to stand against that.” And that’s again I think a recognised phenomenon, and I talk about Smith’s view, a very interesting one, in the book– and actually there’s something interesting also about this in Tirole, as we’ve got Tirole’s book on industrial organisation on the table, but there’s some interesting current work looking at some of these ideas.

Mark Pennington: To talk about the famous notion of the invisible hand, which isn’t actually mentioned that many times as you point out very well. In my view, what the invisible hand is referring to is a kind of social process, it’s an understanding that there are emergent properties in society, when people interact and then something emerges which is more than the sum of its parts and which wasn’t anticipated by its participants…and this is what he has in terms of his theory of ethics or morals– it’s the unintended consequences, or what some people call a spontaneous type account of how morality develops.

There is a parallel then with how an economic order can arise. You have a theory of a moral order, and you have a theory in the Wealth of Nations of an economic order… but they’re both operating on the idea that a significant amount of social order comes about even though people aren’t intending it, and perhaps even *because* in some circumstances people aren’t intending it. Is that accurate?

Jesse Norman: Yeah, I think that is. I mean one of the things I do in the book, probably more than in any other book, one of them is to make the reader work a little harder on the philosophy and to understand some of the underlying commonality between the different parts of Smith’s view.

Because I think what he’s giving us is in a way his shot of the science of man and it’s an integrated conception of and theory of human behaviour. As you say, the same kinds of principles are operating in each one.

So in political economy we get the theory of barter and exchange yielding spontaneous order of shared economic benefit. In the case of morals, you get an exchange of regard or esteem, yielding the shared moral benefit of moral community.

Then thirdly and no one really picks it up, but he’s got the same kind of argument being run about ideas and language, so communicative exchange as generating intellectual community, and community of ideas and thought and word.

I think it’s the same fundamental mechanism yielding the same outcomes, a sense of the collective, a sense of unexpected, unanticipated benefit.

As you say, Smith is explicit about this in the Wealth of Nations in regards to political economy, that one couldn’t necessarily have achieved had one gone out there, if those people hadn’t made it part of their intention, but arguably might not have achieved it if they had.

Mark Pennington: When we talk about political economy, I want to talk about what Smith’s views on markets actually are, which I think you’re very good at explaining. Before we get into that, if you have a theory of the invisible hand, you might also have a theory of how the invisible hand can break down.

Economists have theories of market failure which I’ll talk about in a moment– Does Smith in the moral arena have a theory of spontaneous order failure or moral failure? So these processes by which norms are selected- can they sometimes go wrong in the same way that a market can misfire or go wrong in certain circumstances?

Jesse Norman: It’s a very interesting question the way you set it up. He certainly does think things can go wrong. The counterpart of the human desire to love and be lovely is what he regards as a debasing excitement and interest in the fortunes of the rich and the great and the powerful.

And that again links perfectly to celebrity culture when you build that with this little theory of micro norms you have been talking about.

But the fascinating thing there is he is so good at thinking on both sides of the equation that he recognises that this can yield an empty materialism, if people just pursue wealth on the basis of trying to emulate the rich and powerful.

But he also thinks that that is the fundamental driver that sustains competition and the striving that makes markets work.

And this is part of one of the things I try to do in the book, to reorient the reader away from this myth that Smith is a kind of devout believer in free markets at all cost, whatever they are, towards the focus being on effective competition.

One of the worries I have up to the present day is that many politicians in Britain and some in my own party obsess about this evanescent idea of a free market without ever specifying what such a thing might be or how it might work or whether freedom in every market would be desirable.

At the same time we miss the problem that actually competition is being eroded in many markets and there are one or two rather good books that have just come out recently explaining – one of them would be Tepper’s book on The Myth of Capitalism – on just how competition is very rapidly eroding, both in the US and here and in some respects in European countries as well.

That’s a real problem, and one of the reasons for thinking so hard about this is to try and reorient policymakers towards trying to crack these competition issues.

Mark Pennington: that might be a good point to move over to thinking about economics here. My thinking on this is that we can point to in the moral realm market failures, and you could point to in the economic realm, market failures – the idea that the invisible hand doesn’t always work that well.

But for me, one of the things that comes out of Smith and you might differ on this point, is, compared to what? So when we’re talking about morality, yes we can point to celebrity culture as being a moral market failure, but what’s the alternative? Would the Smithian account favour some kind of legislative response to that?

My feeling in reading Smith has always been that although he would point to the fact that these bottom-up processes are very imperfect, he would also be very sceptical of the idea that from the top down you could try to interfere in them in a way which is going to perfect them in some sense.

Jesse Norman: Yes, we may not be able to push the parallels in between the moral and the political-economic in every dimension. To take the political-economic point for the time being, once you think in terms of vector competition, then the taboo on state interventions – which is very evident in Smith when he thinks about encumbrances to trade, from the clergy, from the Guild, from the government – starts to fall away and it becomes possible to see, and Smith is perfectly clear, that there are cases in which government may need to take action in order to improve well-being and in order to improve the functioning of the market.

Classic example, in the interactions that take place between the workers who are dis-aggregated and the masters who collaborate, he is fully aware of the risk of cartelisation and believes that the whole function of legislation is, whenever there is legislation that benefits the workers versus the masters, it should always be preferred.

That’s an incredibly strong line if you think about it, especially for somebody supposed to be a libertarian economist– and that’s because he’s got quite a different way of understanding the relationship between the state and what we would call the private sector, in a much more evolutionary way, in a way that I think is interestingly linked to an idea of commercial society.

Just go back to the moral side, it’s hard to see how the effective agent would be the state. Smith and Hume have this fascinating argument, where Hume makes a marvelous argument about the church. Hume says, look we’re very keen to avoid enthusiasm and religious extremism, so having a nationalised church is a thoroughly good idea, because whenever anything is nationalised it loses its vigor and energy.

But Smith’s not having any of that. Smith thinks the way you get at it is by having individual preachers on the street corners of the churches duking it out with each other in a competitive way. We now know that actually that’s an argument for extremism and you don’t get the consolidation that might bring order with it, and the power of the extremes is so great in a kind of, both ends against the centre of the bell curve type way in the social and economic environment, that they get more power than they should.

Mark Pennington: In a sense that sounds like a problem that we don’t necessarily know how to solve. In reading the book I am thinking of another one that I found very challenging that I don’t have an answer to.

You’re very good in explaining that Smith is in some ways an egalitarian, he’s very pro-poor, he’s very concerned that merchants and manufacturers will conspire against the public. He’s concerned about power asymmetries. And one of the arguments that he’s putting forward for a broadly market economy, with some governmental functions but limited governmental functions, is that that environment is one in which the poor are likely to do better. Their bargaining power would be greater than it would otherwise be.

He’s not in favour of material equality, but he’s in favour of an equality of status which he thinks a competitive system provides to people. In some ways that’s quite similar to a republican type argument, that people need to be treated with respect, and you look at the institutional preconditions for that.

The challenge is, and I think this is a problem that no one’s cracked, what do we do when people who have acquired economic power then try to use the power of the state to limit competition? Now there’s a big debate within political economy about the lack of competition you described. Where does that come from? One view is that it’s endogenous to the market, and there might be cases where that is the case, where you’ve got big network-type industries, where you move towards there being one dominant supplier like Facebook or whoever it may be…

But there are many other cases where you can say market imperfections arise because special interests are able to lobby for favourable regulations…so when Smith talks about merchants and manufacturers meeting together to conspire against the public, he’s thinking about the role that politicians play in abetting that process. Is there anything we can do to deal with that?

It seems to me that you get very contradictory views. You have a left wing view which is really that, we need to stop these people getting to the position of power in the first place, that they can have this lobbying power. You have a right wing view which I would say is more, well, if you get the state out of these areas then you remove the prize that the lobbyists are actually seeking. Neither of them seem entirely convincing to me. I don’t know whether you have a route out of it?

Jesse Norman: Well let’s just be clear about a couple of things. First of all, the phenomenon you describe is absolutely something that Smith understands and talks about in the Wealth of Nations. We can describe it in modern language as being a business and government getting too close together and a business extracting rents by manipulating legislation in a way that reduces competition, prevents insurgents, limits other forms of new market entry, and the like.

And that is a fantastically familiar phenomenon in some respects, abetted rather than reduced by technology.

And then you have a further question, which is, technology platforms arise as monopolies, or quasi-monopolies.

Now I think the key thing to think about is, Smith has got a theory of how markets work, but he’s actually got multiple theories for how markets work. Smith runs economics theories for markets that you might consider to be “haircuts and hamburgers” markets. But he’s far too clever not to realize, as many economists later have realized, is that every single one of these markets is different.

There may be points of commonality between them, but you can’t just lift and shift your thinking in an uncritical way or pretend that the maths does it alone for you. You have to really attend to the nature of markets and sometimes the specifics can really change what analysis is applied and what diagnosis is applied.

And so for example, to think that haircuts and hamburgers market prescriptions apply equally to asset markets… is just a mistake.

So, I think Smith forces us to be more particular about where the problem occurs and what measures you have to take to cure this problem of rent extraction and governments getting too close.

Having said that, we can be perfectly clear that other mechanisms that allow business and government to blend closer together would be things he would reject.

The passage of laws that doesn’t ask a question abetting existing insiders, those things he’d be thoroughly hostile to. Subsidy, spending, tariffs that have that effect, all those trade-related type things – that’s quite a substantial burden body of modern economic thought just in those three areas at all.

The line of thought of course bears further extension when you get to the platforms, and what it implies is a much richer conception of competition policy; you need to be much more sophisticated about how you deal with competition issues posed by Facebook versus those posed by Google or Amazon. I think the remedies, actual potential, are going to be different in each case.

Mark Pennington: Let’s take another case. There’s a very interesting section in the book on financial regulation. Financial markets, to take your point that no two markets are the same, we know from a lot of economic analysis that these are markets where there are important information asymmetries. That’s a standard argument that some people use to argue for regulation in this field, to kill the information asymmetry. But equally we know that when you have regulation it can then be captured by the incumbent players.

So instead of the regulation actually dealing with the market failure, it creates a different kind of market failure or a governance failure. Now, I don’t see and I don’t think you necessarily even give an answer– because if we talk about the financial crisis, you point out that financial regulation prior to 2008 had been growing. It’s not that there had been a bonfire of controls. So if the regulation isn’t dealing with the market failure because we’ve got these capture issues arising, what is going to address that failure?

Jesse Norman: I think the truth you’re aiming at is that there’s no one-size-fits-all recipe that you can just apply to markets that cures both of the problems you’re describing. That inevitably pushes you towards more of a connoseurial approach that’s problematic politically because it implies a degree of discretion. There are some areas where we do give financial discretion precisely because it’s so complicated and fast moving that you could never have legislation that would pass fast enough, and therefore you have to have empowered regulators.

The failure of 2008 was one of two kinds– one was an intellectual slackness, unawareness, over-optimism within government generally about the possibility of threat from this source, and the second was a lack of effective supervision. The regulations were there, but the effective supervision wasn’t.

I love these situations where you’ve only got one fact you need to know to explain something. The only fact you need to know to explain the 2008 crash is that bank leverage in Britain had been 20 times equity for 40 years… That’s the intellectual mistake compounded by regulators who weren’t tough enough, who weren’t asking basic enough questions, and in some respects, the fascinating experience in financial regulation has been that in some areas they have complexified and in other areas they’ve gone the opposite way.

So we’re moving more towards a kind of maxim based view that you just shouldn’t allow leverage to get over a certain level in your banking system because it can destroy value too quickly.

Mark Pennington: I can see how you’re keen to emphasise that Smith isn’t an idealogue, that he’s kind of a pragmatist… Let me push back a little bit. One of the things I take from Smith is a scepticism of politicians. There’s that famous quote which I don’t remember entirely about people who claim to trade for the public good. And you can say that politicians are people who claim to trade for the public good. If we’re committed to Smith’s notion of egalitarianism, politicians are no different to anybody else, they seek praise, not always justifiably, and this can often lead them to intervene in public affairs in a way that creates mischief.

How do we constrain politicians? If we need to in certain circumstances constrain market actors because of these market failures, Smith’s very aware of political failure or government failure; how do we constrain politicians to make sure they don’t do damage through their own activities?

Jesse Norman: That’s a marvelous question. I think you’ve got several things. Institutions that are not looking to please politicians but retaining the ethos is an important aspect to it.

Of course Smith is extremely dismissive about what it takes to be the political desire to just tack between expedience and seek praise where they can find it.

He’s also surprisingly complementary about the genuine statesman who acts out of principle, recognising — this is the obvious difficult kicker — that principle may not be applicable in every context. Sometimes they can call for different remedies and people can be contradicted or praised– a more Burkean thought in a way, that circumstance gives to every political principle its colour and distinguishing effect.

I think Smith would have sympathy with that view. I think you’ve got the wider thought though, which that is actually, you asked earlier what is the contrast for Smith between the morality of the marketplace or the agora and a higher morality. And it’s clear he does have such an idea in mind. It’s a kind of stoic morality with the cardinal virtues of prudence and temperance being in front of it.

I think it is interesting that those are also the qualities he associates with the statesman. Almost the person who he’s most critical of is what he calls the man of system who thinks he can apply a rule to people as though they were chess pieces.

The reason I find that so interesting is because it fits with what I take to be his fundamentally evolutionary conception of a political and economic society, with all of these forces working within them.

That pushes the emphasis of the debate away from capitalism in some static way towards commercial society, processes of the emergence of market activity, the dignification of private property, the codification of that by the state, then the use of that to establish new thresholds of private enterprise and activity.

I see this in government today. I’ve just taken through the House of Commons the Space Bill, which allows you to say, well this particular private individual can set up a space base in a spaceport in Britain and off that space rockets can either be blasted or takeoff via aircraft and they can put bits of metal we call satellites into space and they can drive a revenue from that.

Now that couldn’t exist without being dignified by the state and there are many other examples of that process of informal rights becoming codified and recognised and giving rise to capital activity.

And so I think that evolutionary conception of commercial society is in a way the deepest legacy that we get from Smith.

Mark Pennington: Adam Smith and outer space. That might be an interesting point at which to conclude the conversation but I’d just like to say thank you very much Jesse for having this discussion today.

Here in the Department of Political Economy, we are very much concerned about reuniting politics and economics. I think your book on Smith and I hope the discussion we’ve had today, really shows the value of that, so thank you very much.

Jesse Norman: Well listen, I want to thank you not just for chairing a department that I deeply believe in, in an area I massively support, but also for what has been done by some measure the most intellectually testing interview I’ve had since I published book, which is great and I love it and I’m incredibly grateful.

Mark Pennington: Thank you very much.

About CSGS

The Governance Podcast is a project of the Centre for the Study of Governance and Society (CSGS). Housed in the Department of Political Economy at King’s College London, CSGS examines how both formal and informal rules of governance operate and evolve, and how these rules facilitate or imperil peaceful, prosperous, and ecologically secure societies. The Centre supports research asking broad questions about social and political power and is especially interested in comparative research assessing the performance of alternative governance in ‘real world’ or ‘non-ideal’ conditions. The Centre convenes a regular research seminar, holds academic conferences and book events open to the public, and hosts seminars focused on questions relevant for policy-makers and a general audience.