This is a transcript of episode #049 on Adam Smith. Check out the episode page HERE.
Today's episode of Philosophize This! begins in a very normal city in the southern deserts of Arizona known as Nogales. If you walked through the streets of Nogales, Arizona…depending on which part of it you were walking through, you wouldn't think it was much different than where ever you live currently. You would see families and houses and children playing…but in this otherwise unassuming city lies a question…a question that may be the most fundamental question we, as humans could ever ask about civilization itself. And to the citizens of Nogales, Arizona this question stares them in the face…day after day.
Because what you would see if I took you up onto the hillside of Nogales, Arizona…you know…the topography of the area is such where there is a hilly, mountain-like region that acts like sort of a crown around the head of the city where you can get a pretty good line of sight in all directions…what you would see on the right hand side is the beautiful city of Nogales, Arizona in the United States. And then as your eyes scan to the left you would see about fifty feet of cleared path, a small, flimsy fence…sort of poetically illustrating how flimsy these lines are that we draw…and then on the left hand side of this fence you will see the city of Nogales. But this isn't Nogales, Arizona…this is Nogales, Sonora in the republic of Mexico.
I'm serious! There's even a picture you can look up and see it…I'll put it on the episode page at philosophizethis.org…because apparently that's what you do when you're a podcaster…and it's a picture from this very hillside…
Now, physically speaking this is the exact same town…as far as physical barriers are concerned its only separated by about fifty feet and a flimsy fence. The REAL separation between these two geographic areas… lies in the lives of the average citizens that have to LIVE in these different areas.
The average citizen of Nogales, Arizona has life… really good by global standards. The average income is around $30,000 per year. Everyone has access to roads that lead to neighboring towns that aren't crumbling. They have electrical lines, phone lines, a sewer system, public education…not to mention a functioning police department where the laws of the land are actually enforced. The bottom line is… people living in Nogales, Arizona… live their lives everyday feeling as though the government is working for them, not the other way around. They don't live their lives in constant fear of being assaulted or robbed or extorted or any other of our favorite pastimes.
Now just a few steps away, the average citizen in the city of Nogales, Mexico is much different. The average income here is about $10,000 per year. Yes, people have access to public education… but the quality of that education is severely worse. Couple that with the fact that most of the people living here have to drop out of school early on just to earn enough money to try to rub two pennies together… and what you're left with is a city where the majority of people over the age of 18 don't have a high school diploma.
Across the board… the health of the citizens is far worse than their Arizonian neighbors. Infant mortality is higher, instances of sickness and disease are much higher… and let's say that you wanted to start turning this place around…let's say you wanted to start a business to try to bring a little value to the lives of the people living in this town… it would be an incredibly difficult, volatile and corrupt process through everything you had to do. Even if you just wanted to leave the city and get out… you'd still have to do it traveling on roads that are in horrible condition and difficult to navigate.
What a massive difference just a few short steps can make. But why is it this way?
Why is it this way?
Let's just take a second to talk about how enormously important this question is. Think of what's at stake: the quality of life of billions of subsequent people yet to be born? The already diminished quality of life of the billions that are living now or have already lived? Are there many questions more powerful than this to consider when we're building a society?
Look, Nations aren't just born wealthy or poor. So the thinking by the people that ask this question for a living is…the fact that that's true must mean there is some thing out there that happened over the history of the country…some thing we can identify that determined whether a nation eventually became rich or poor. Can it be broken down into a single mistake these countries made along the line? Is it a combination of things? What makes a nation look like Norway instead of looking like the Congo. What makes a nation look like Canada as opposed to looking like Bangladesh. Why are some countries so much more wealthy than other countries?
Forget about just us starting our hypothetical island society…if you even care a LITTLE bit about limiting the suffering of other human beings…you have to see how important this question is that separates Nogales Arizona, from Nogales Mexico. Although it may be wishful thinking…if there is some mistake that was made out there…if there was some mistake that the Congo made at some point in history and we could identify exactly what that mistake was…then we'd probably want to know about it wouldn't we? We're probably gonna wanna make sure anyone starting a society in the future… knows the answer to this question.
Not to mention…if we can identify the problem…does that mean we can arrive at a solution…to the problem? Is it too late to right the course of the ship in Nogales, Mexico? This question… is a crucial one for us to explore on this show…because if one of your goals on this planet is to find a way to serve other people…there aren't many other areas you can focus your time on that with a single eureka moment …potentially… could change the lives of billions.
Anyway, it would be dishonest if I didn't start this discussion out by saying that there is far from a clear answer to this question…we're not going to come away from this episode with an infallible explanation for why some countries are wealthier than others…but just because there's no clear answer to the question…doesn't mean every opinion out there on the matter is equally valid and it certainly doesn't mean… we haven't made significant progress when it comes to answering this question accurately.
Now there are a LOT of different answers thinkers have historically given to this question. But as we look at their answers… I want us to all look at the assumptions… that were made by these people. I want us to all look closely at the mistake that they made in their thinking…because it's a mistake I've been guilty of in the past… and it's a mistake that we COULD ALL easily make if we don't continue to question and reassess our beliefs with vigilance…and that mistake is this:
You arrive at a conclusion about something that is not entirely verifiable, but you believe it anyway because it SEEMS to be true. You accept this conclusion that you've arrived at as a premise for FUTURE conclusions to be built upon. You continue to stack these conclusions on top of that premise…story after story until you have an entire skyscraper built on top of it…but if that premise ends up not being true…the entire building comes crumbling down.
You'll understand what I'm talking about in a second, so over the years..people have come up with all kinds of fun answers to the question of what makes certain nations wealthier than others. Uh, Montesquieu. French political thinker…he's the guy that came up with the idea that there should be a separation of powers in government…obviously heavily influential on the constitution of the United States. Well as good as THAT idea was that he had…they all weren't gems in the mind of Montesquieu.
His idea? For why some nations are wealthier and better off than others? People from hot climates are just…lazy. That's right, just look at them! With their sun and their golden brown skin…let me enlighten you guys…when you live in an area of intense heat…the last thing you want to do is invent the iPhone…no once you catch your dinner…you know…your daily scorpion…its time to relax. The heat takes a lot out of you…but conversely…these people In colder climates… they just get bored if they aren't doing something…they start building castles…they start wearing chain mail. Keeps the blood moving.
But this is just one of them! Economists throughout history have given all kinds of reasons…some say the reason countries are rich is because they were at one point a colony of England! Some say it all comes down to luck…that some countries just initially settled in an area that had more natural resources than others. The point is…there's no shortage of arguments, the vast majority of them have been dismantled and proven wrong long ago.
This is obviously a very wide conversation, but if you talk to an economist in today's world here's basically where we're at: it's usually some variation of the idea that the wealth of a nation is directly related to the quality of it's labor force. Now that's an interesting distinction there. The QUALITY of a labor force. How can we find out what makes the quality of one labor force better than another?
Now, it would be very easy to get deep down the rabbit hole of this discussion right now, but this episode isn't about modern economics…its about the father of modern economics…Adam Smith. And by the end of this episode we're going to come back to this discussion of the quality of a nations labor force…we're going to come back to Nogales, Arizona…but for reasons you'll understand at the end of this episode…right now… I want to take you on a trip back in time.
Back before our modern standard of living, before Medicare and Medicaid, before the civil war….in many cases before the constitution of the United States was even written. I want to take you back to a time in Europe when people were a little confused about what actually made a nation wealthy.
Now, even though it is absolutely nothing like what actually happened in the history of the world…I always picture all the rulers from all the European countries coming together. You know…a bunch of dudes in tights…bunch of angry sociopaths laughing, syphilis eating away their brain…anyway…they're all sitting around having a chat about their respective countries and one of these kings that's having a particularly bad day that day pipes up and says…yeah mountains…mountains yeah that's cool…my country's richer.
Needle scratches everyone stops and looks at him…wait a second…who does have the richest country? We gotta figure out a way to find out who has the high score! GO! GO! GO! … and what emerged was mercantilism. That's such a stupid way of putting it. Okay, so before the enlightenment in Europe some people asked the question of what makes a country wealthy. The answer they came up with was that a country was wealthy in relation to how much gold it had in its reserves. It's the equivalent… of saying that the wealthiest person is just the person that has the most money in their bank account.
…We can kinda see where they're coming from, I guess it makes sense…but in retrospect…it's not that simple guys from the 1500's. You know, if you have two people in a room… one of them has $5000 in their bank account and a job that pays six figures a year…and the other one has $10,000 in their bank account but has a condition that makes it so that they can never work again…who is the wealthiest person in that room? Rough example, but it illustrates the point that how much money you have on hand is not all there is to it when it comes to how wealthy you are.
But these people believed it! And imagine you're living in the 1500's…and you believe it and now you're assigned the task of arriving at economic policy…like they were. How do you think this premise affects your decision making? If you truly believed that the wealth of a nation is determined by how much gold you guys have in the reserves, and your job with this economic policy is to extend the wealth of your nation as far as possible…can you think of any way this could go wrong here? Can you think of any way this might… lead to some PROBLEMS down the road?
This is what I was talking about before with the faulty foundation that we build a skyscraper on top of…and it's the kind of thing that applies across basically ALL thinking. If the foundation of your beliefs in some area is based around a faulty premise…whatever it might be…you could be misattributing success to the wrong thing all along…
You could be making decisions and planning for a future under the assumption that this premise that you have is true…and when you carry out these "policies" that you've arrived at with the premise in mind, you could actually be sabotaging yourself. Confirmation bias is a hell of a drug.
For example, I'd compare it to our body and the way that we eat. Let's say that you're surfing the internet…if people even surf the internet anymore…and you come across one of those multicolored, blinking banners that tells you that this SINGLE MOM HAS FOUND THE ULTIMATE SHORTCUT TO HEALTHY LIVING!
So you click on it, and read it and it convinces you beyond a shadow of a doubt that Vitamin C is the way to go. You can't live without Vitamin C and with every piece of food that you shovel into your mouth you should think of nothing….but the vitamin C content…that's how you get REALLY healthy. Don't worry about A, B, D, E, potassium, magnesium, selenium, NO! Vitamin C.
Well if that was the health premise that you believed and you were assigned with the task of making eating policies for your body, you know…rules that you follow when you're considering putting ANYTHING into your body…if you truly believed that the more vitamin C you ate, the healthier you were… why wouldn't you make a policy that every meal put in your gullet should be centered around getting the maximum amount of vitamin C.
Well this might be an okay policy for the first day. Or even the first couple days, but eventually your body is going to become deficient in other areas. Eventually this policy of Vitamin C at all costs is going to start making you feel sick…eventually…it will kill you.
Well apply this example to economic policy before the age of enlightenment. If you truly believed that the goal of economic policy should be to get as much gold in the reserves as possible, then you're probably going to create policies that aren't — in retrospect — GOOD for the economy, but ones that… keep as much gold in the reserves as possible…and these policies…like the vitamin C policy…eventually made these nations feel sick and deficient in other areas.
The thinking by the people at the top levels of government was, IF our nation's wealth is just contingent on how much GOLD we have in the reserves…then why would we ever WILLINGLY send gold to another country at all? Why would we ever import ANYTHING that we didn't absolutely have to?
Buy American…right? But this is the 1500's version of the buy American thing… taken to the absolute extreme. If it was even possible for you to make something or buy something domestically, the governments didn't want you importing it. Because… BY IMPORTING it and buying it from another country…your sending our gold to that country…making THEM wealthier. Why would we ever want that? Limit imports…encourage exports.
Well, the people at the top of government knew this could only be done to a certain extent… there was no way a single country could produce EVERYTHING they ever needed…the governments job was to make sure things didn't get off the rails too far…to set regulations and restrictions and prevent citizens and businesses from importing too much stuff.
Oh and by the way, the whole time they're doing this they can frame it as something that is ultimately good for the average person too, not just the vault of gold the government has. They can say…look…buy domestic…for the sake of job security! This whole importing business is a slippery slope! If no one buys domestic goods and everyone's just importing stuff cheaper from other places, how are we going to keep people employed domestically?
Well, it's time to pull out your tinfoil hats everyone because there's something we need to consider moving forward here…actually it's not really tin foil hat worthy, it's incredibly plausible that this could have happened. There is a large group of people in today's world …that look back on Mercantilism and this age of economic policy and say that none of these people at the top of government back then REALLY believed that the policies of Mercantilism were actually going to help. None of these people actually thought that limiting imports and encouraging exports was REALLY going to contribute to the wealth of a nation in the long term…what these say REALLY happened is that captains of industry in these respective countries were in cahoots with the leaders of government and that they stood to benefit from the restriction of imports because it meant less competition for them in this emerging global marketplace.
The Geo-political climate in Europe during this period in history is extremely volatile…more than ever before… in the history of Europe the governments of these countries were dead-set on war and territorial expansion. So much of their task during this time was fund raising… to accumulate enough gold to be able to fund these giant military expeditions…I mean this is the first time in the history of many of these countries that they have navies and ground forces that aren't temporary. Typically… it's just been an assembly of people that come together when they're needed…but during this period in time we're starting to see the emergence of full-time professional forces funded by the citizens….not just to fend off attacks, but to expand their borders. The beginning of this era of competing nation states is starting to change the way we see the countries that surround us.
So if you're the captain of the shoe industry in the 1500's. If you're the Mitt Romney of shoes back then and all of a sudden there is this emerging global marketplace that you have to be competitive in…that's gotta suck. I mean for the longest time you've had the only game in town…I've had people's feet in a headlock, right? MY SHOES!…I don't have the machines or systems in place to compete with how these other, more efficient countries make shoes…I'm just not as good as them. So… how do I make sure things stay the way they are right now? Oh, I just walk on down to the city hall…head into the back room and…
How bout this…in exchange for me paying taxes and levies..and by the way you're taxing my income here so the more money I make the more money YOU make…how bout in exchange for me paying into this system that funds your wars and expansion plans…YOU GUYS in the government enact policies that restrict imports so that I don't have to compete with other countries?
Now if you think this sounds like a wack-job conspiracy theory…Really is it that crazy to think about this happening? I mean, think about all the other areas where progress was made during these couple hundred years we've been talking about …and think about how much the old ways of thinking have always been rooted in, not what people legitimately thought was best for the whole, but in what makes a small collection of people at the top the best off.
Think of the reformation of the church. Think of the lives that people lived BEFORE the reformation of the church. I can't think of many people that would stand for these conditions having already lived in today's world…there is no personal relationship that you have with god. No, god has decreed this code of conduct… in a language that you can't read, in fact… no one can read it or interpret it accurately but this very small collection of people at the top of this church hierarchy. I mean, many of the priests at the heads of these local congregations didn't even speak Latin! They just knew that nobody else spoke Latin and they got up there pretending to be reading from the bible and just making noises that SOUNDED like Latin…and then they'd say "Okay well there's your lesson in morality for the day. Go ahead and put your donations in this hat and I'll retire to my harem of concubines because don't forget, I am the moral authority!"
…It's not hard to imagine how this MAY have not been set up in the best interests of everyone…how maybe it heavily favored a small collection of people at the top of the industry. How about the area of government? Rousseau, Locke and Hobbes…what conventional wisdom were they railing against? Oh yeah, a small collection of people at the top telling the population at large that they were genetically predestined to rule over them. That there was a divine right of kings decreed by God and that their job as citizens was to obey God and serve their king.
My point is, it's not CRAZY to think… that economic policy might have been structured the same way before the age of enlightenment. This application of reason to all of these long held institutions…has there ever been anything that served to benefit the population on such a wide scale more than this? The bottom line is: the economic theory of Mercantilism was a faulty premise that a skyscraper was built upon. And honestly, it doesn't matter whether it was ignorance or corruption that lead to it being adopted. You can take your pick. But the way that you view these decisions drastically changes the way you interpret some of these policies that these countries put in place.
One of the tenets of Mercantilism WAS to limit imports, but the policies enacted on behalf of it, extended into a lot of other areas… all centered around dishonestly propping up domestic business to give it an unfair advantage over competitors in the global marketplace. For example, they would use taxpayer money to financially back new industries in their country… then they would often times make those new industries exempt from any regulations or taxes…giving them a huge advantage… and then from there they would set up monopolies and prohibit anyone from exporting anything that could possibly be useful to another country trying to compete with them. Any tools, equipment, machines and even people who were skilled at their professions. They didn't want those people to go to another country and use their skills to make some other country richer.
Then you have these broad, sweeping laws that were just crippling if you wanted to trade anything. In England there was something called the Navigation Act in the year 1651…and…it made it so that if you were a country in Europe, and you wanted to trade with England in ANY way…those things that you were importing needed to be brought to England ON an English ship…or even less likely…a ship registered in the country that those goods originated from.
In France, Louis the 14th famously conferred a tremendous amount of power to his minister of finance Jean Baptiste Colbert. From the 1660's to the 1680's this guy DRASTICALLY increased the tax or the "duty" you needed to pay if you wanted to bring something into ANY French port for trade. So anyone that wanted to buy something from another country had to buy it from people that not only had to pay this giant tax, but also had to assume all the costs of transporting it. It made it very hard to be competitive.
Well Adam Smith takes a look at this ludicrous world that's unfolding in front of him, and by the way we'll talk about all these things in more detail and how they apply to our island in the next episode, but he comes along and he makes a lot of good observations about this flawed economic climate.
The first big thing that he points out is that, this idea.. of it not being good to import something because it sends gold out of the country…is flat out wrong. In fact, he says…it benefits us greatly to buy something from a country that produces it more efficiently than we can. If they have systems and technology in place that allows them to produce… shoes faster and cheaper than us, why would we use a giant chunk of our finite number of workers to inefficiently make shoes? Why not buy our shoes from them…use THOSE workers to specialize in some other field and use the extra money we save to buy other stuff or invest in researching new fields? Free trade benefits BOTH parties… is what Adam Smith is getting at.
Another revolutionary concept he arrives at that dismantles Mercantilism is the idea of economies of scale. Basically, because we'll talk about it more next episode…its the idea that there are certain fixed costs associated with any sort of production that are drastically more efficient when you are producing more units.
The other major criticism Adam Smith proposes is against this toxic relationship that exists between government and the chiefs of industry. He makes a case that sure, its great for those people at the top, but it hurts the population at large. Again, something we'll talk about more next time and a lot as we head into the philosophy of this new corporate world that's emerging.
So why is there such a clear difference between Nogales, Arizona and Nogales, Mexico? When you say that it has to do with the QUALITY of their labor force…it almost sounds like you're blaming it on the people. It almost sounds like you're saying…they just aren't working hard enough in Nogales, Mexico. But is the reason why people don't work hard always out of laziness? Why aren't the citizens of Nogales, Mexico going out there and working hard and innovating new things and trying to improve their lot in life?
Well, nobody knows the answer to this question for certain, but if you take a page out of the book of Adam Smith and subsequent economists…they say it comes down to the incentives that the government puts in place. Look at how humans typically act…why would anybody work harder than they absolutely have to if there was no incentive to do it?
One of the biggest incentives a government can provide to its citizens is a strong sense of law and order. Why innovate? Why try to serve others? Why take risks when any risk you assume to try to improve your lot in life is ultimately, probably going to be stolen from you? Better question, if this is the case, why wouldn't the government insure this basic level of protection to the people of Nogales Mexico?
Kinda reminds you of the inner cities in America…why would anyone work to try to pull themselves up by their bootstraps if after they do it, someone's just going to steal their boots?
Now some of you are gonna say, oh Stephen West, you're being naive! These governments don't actually care about the quality of life of the average citizen, all they care about is extending and sustaining their regime of power and reaping the benefits of more money!
But I would argue against these regimes. If what you want is more money to sustain your power…you know…more GOLD in the reserves…then doesn't it benefit you to improve the lives of your citizens? The formula is clear. If they feel their lives are safe, the quality of your labor force improves. If the quality of your labor force improves…they make more money…which you tax and then in turn, make more money for your giant vault of money that you dive into like you're scrooge McDuck.
One things for certain about the differences between Nogales Arizona and Nogales Mexico…it's not the peoples' fault. There's just no incentive for them to do anything else.
Thank you for listening. I'll talk to you next time.