Vernon Smith Interview

Chapman University March 9, 2026

Mark Skousen:

Welcome to, Chapman and my class, Financial Economics. Let me first, welcome you. I understand that in January you will be celebrating your 100th birthday, is that correct?

Vernon Smith: That’s correct.

MS: I think that’s worth the applause right there. Especially that you’re still active, I think that’s fantastic. I think that the last time you talked to me, you said your goal was to live to 112.

VS: No, I had an ancestor, a Lomax ancestor, that lived to be 105, and my object is to beat him. So I’m looking to live to 106, at least.

MS: Yeah, that would be fantastic. Well, as you know, today is Adam Smith Day, March 9th, the 250th anniversary of the Wealth of Nations.

VS: Yes.

MS: Let me ask you a question. You have recently written a book called Adam Smith’s Theory of Society. Tell me, what is your main thesis of that book, and which book, The Wealth of Nations or The Theory of Moral Sentiments… do you think they both work together, or do you think they, they tell different stories?

VS: Oh, they work together magnificently. And one of the great misunderstandings of Adam Smith is the myth that they didn’t work together. You see, in my book, Adam Smith’s Theory of Society, I’m primarily talking about the Adam Smith in The Theory of Moral Sentiments, but also, to some extent, the Adam Smith in the Lectures on Jurisprudence, and only to a rather much smaller extent, The Wealth of Nations, because I see The Wealth of Nations as simply working out his basic thinking about society in terms of economics, and I see that as fairly straightforward.

The more fundamental contribution is in what I call his “theory of society”. And what that concerns is how order in society emerges from the human propensity to create and follow rules that govern their day-to-day interactions. It’s a theory of rule formation and rule following that characterizes human action. It’s not utilitarian. Most of human action, according to Adam Smith, is driven by our desire to get along with each other in our neighborhoods and communities. From the time we are born, but in particular, by the time when we first start to school, Smith says that we start to learn the principles of self-command.

The concept of self-command is very important in Adam Smith, because that’s the reason for self-governing being of importance and the rules we start to learn. He says it begins in earnest about the time we first start the school.

Because, he says, our playfellows are not as tolerant of our expressions of anger as our parents. He says, our parents are much more forgiving. And so that’s when we enter the great school of self-command – it’s when we first have playmates.

And he says, no one can hardly live long enough not to continue to learn in this school of self-command. This is the key to understanding Smith’s way of thinking. Human society is able to survive civil wars, huge disruptions. At least where these principles of freedom are available, the society returns to normal, regular day-to-day growth and development. In my view, it’s an absolutely fantastic, magnificent model of human society, and it’s basically correct.

MS: Vernon, let me ask you a question about the invisible hand doctrine, which he uses only once in The Wealth of Nations, and only once in The Theory of Moral Sentiments, both in the middle of each book. How is it possible, according to Adam Smith, how is it possible that private self-interest, selfishness that man tends to be…How is it possible that you can convert that private interest into the public benefit, which is the main argument of the invisible hand? Isn’t that a very dangerous doctrine?

VS: Well, let me first point out that Smith only uses the term self-interest once in The Wealth of Nations – and that’s in regard to the conduct and behavior of the inferior clergy of Rome. He uses it nowhere else. What he talks about is people. He says, every man should be free, perfectly free, to follow – providing that he does not violate the laws of justice – should be perfectly free to follow his own interest in his own way. Smith’s phrase is “own interest in his own way”, not selfish interest. That’s one of the great misunderstandings of The Wealth of Nations. Almost everyone reads it and thinks it’s about the self-interest. But that’s not what Adam Smith says. Read what he says. Search on the word “self-interest” in The Wealth of Nations. It only appears once. On the other hand, search on “own interest”. And this is what he’s talking about, because our own interest includes and takes into account the interest of others because we have to live peaceably with others. We desire to get along with them. And this is what drives our propensity to create and follow rules starting from about the time we first have playfellows. So, I think it’s important that I sort of introduce the corrections that I think are important in understanding Adam Smith, because the more popular views, and even the many of the academic views are not really based upon a careful reading of Adam Smith, and particularly it’s not – and usually it doesn’t involve The Theory of Moral Sentiments at all. And that’s where he develops his basic theory of society, and what drives it, and what creates order in societies.

MS: So, Vernon, you quoted this statement about every man, “As long as he does not violate the laws of justice, is left perfectly free to pursue his own interests his own way. And to bring both his industry and capital into competition with those of any other man or order of men.”

VS: Yes.

MS: What’s surprising to me is that that’s found at the end of Book 4. In my version, page 651. It’s like it’s buried about three-quarters of the way through his book. Did you find it unusual that he took that long to develop his thesis, and he stuck it in the end of the book – instead of like most people who give their thesis, their basic concept in the introduction. Yet Adam Smith starts off with division of labor, and you don’t get to this system of natural liberty – which is what he called this model of his – until the end of Book 4. Do you think that’s a source of the problem with Adam Smith is that he wasn’t very well organized?

VS: Well, you know Mark, I think that you’re making a valid point. I think that he saw himself as having a lot of work to do before he got around to making that statement. You see, the basic theory of markets and of human action in The Wealth of Nations appears in the first seven chapters, because this is where Smith develops the idea that, wealth is created by specialization. He calls it the division of labor. But wealth is created by the specialization of all kinds of resources, and that process occurs through markets. He says that the division of labor is limited by the extent of the market. The greater is the extent of the market, the greater is specialization, and the greater is the creation of wealth – the engine for creating wealth. This is people discovering that they don’t have to produce all the items that they consume. They can get this from others. They have only to concentrate on the thing that they can earn the most income and wealth by pursuing, and then they can buy whatever else they need. So, Smith is sort of developing that idea. Moreover, this is an invisible force because people are not aware of it. People are subject. The real invisible hand, champion was Isaac Newton. Now Isaac Newton didn’t die until 1727. So, he lived a quarter of a century in to Adam Smith’s 18th century England and Scotland.

What had Isaac Newton done? He had showed that all the forces acting between heavenly bodies everywhere could be understood in terms of an invisible force of gravity that connected them. He had his basic equation that the force acting between two masses is proportional to the product of the masses, and varies inversely as the square of the distance between them. And the shadow of Isaac Newton was a long one, and was cast well across the 18th century.

What I see Adam Smith doing is working out for society and economy the effect of invisible forces that we’re not aware of, that humans create the rules and follow the rules that create order and enable prosperity. But, it’s not a conscious process in humans, and in fact, it takes place without them realizing the work that is done by people’s desire to get along with each other in their neighborhoods, and the learning of rules in order to facilitate that getting along with each other.

MS: So, you’re arguing that the invisible hand concept came from Isaac Newton and gravity being invisible, rather than the Calvinist view that it’s the invisible God. God is invisible, so we have to have a level of faith that he exists, and some have little faith, and some have no faith, and some have great faith. Could that not be the same? Couldn’t you apply the invisible hand doctrine in a religious way, as some analysts have?

VS: Well, Smith didn’t have any trouble with the idea that all of this is due to a benevolent God who is watching out for us. He is the architect also of nature which involves the day-to-day ground rules that we learn living with each other that enables us to get along. Smith saw really a creator. He’s got various metaphors and terms he uses. He talks about the great author of nature in capital letters. The great author that creates in us this capacity to follow rules and achieve order through our day-to-day interactions.

He sees God operating that. Smith was a deist who believed passionately in God. In fact, why else would he refer to our savior Jesus? He was a Christian. If you go through the theory of moral sentiments and look at where he’s discussing these things, he sees no contradiction at all between faith – believing in the God of Christianity – and all of these rules of order that he’s talking about for society and for economy when he writes The Wealth of Nations.

MS: Let me change the subject a little bit and talk about what Adam Smith’s The Wealth of Nations is most famous for, and that is his advocacy of free trade. This seemed to be a great victory of Adam Smith, and almost all economists are in agreement that free trade is what we should have. But now, today, we are seeing a whole new wave of protectionism, trade wars, America first, and so forth. What is your reaction? What do you think Adam Smith would think of today’s trade war?

VS: He wouldn’t be surprised, because he understood that politicians have to get elected and they are going to focus typically on the worker, and not the consumer. Smith is talking about buyers in general – both consumers and investors – the importance of them being free. The reason why you don’t want to impede, and interfere with trade is because trade is the basis through trade and markets that people discover and follow the forms of specialization which suit them best. If everyone is free to specialize as he sees fit, and therefore earn as much income as he can, that’s the other side of that is wealth creation. That’s not only making yourself better off, you’re making other people better off when they trade with you. So, it’s actually really quite brilliant, because he’s able to put his finger on the fundamental sources of growth, prosperity, and human betterment, also to espouse policies that further that. You want to interfere with that trade as little as possible.

MS: Are you an optimist, like Adam Smith, or are you a pessimist that we are going backwards towards protectionism – a Fortress America policy – or do you think that the cat is out of the bag, and that globalization is here to stay, and this is just a temporary glitch in the movement toward free trade?

VS: I’s a temporary glitch. You see, we take two steps forward and fall back a step. It’s not orderly and straightforward and obvious to everyone, but Smith saw, through all of that mist. I think if you read Adam Smith and The Wealth of Nations, you get a very clear and concise argument in favor of freedom of exchange. All attempts to interfere with that are always attempts to try to benefit some particular class, or group, or nation. Politicians typically are not able to think properly about this.

I think that Trump seems to actually believe that the trade deficit – importing more than you export – involves a deadweight loss to Americans, and of course it doesn’t. It in fact, it’s maximizing the benefit of consumers and gives no preference to American workers. Because, if you can buy something more cheaply abroad, that releases resources in your own country to allocate more effectively, and to invest more effectively. So, it’s a very simple proposition. But it’s not obvious to the average person, and the typical politician benefits by exploiting the fact that it’s not obvious to every person.

MS: But let me ask you about a classic quote, it’s not in The Wealth of Nations or The Theory of Mortal Sentiments. I think it was in 1755 that he said, “Little else is required to carry a state to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice.”

This brings up the issue of war. What was Adam Smith’s view of war? I mean, it seems like the West – the United States and Israel – are trying to force Iran into a liberal democracy, and they seem to be fighting this. So, what’s your opinion of this statement about peace, easy taxes, and a tolerable administration of justice? What’s Adam Smith’s view? What’s your view about war? Is war essential sometimes?

VS: No, those three items that Adam Smith’s mentions you’ll see are all important, and also, they need to come from the bottom. It doesn’t work for the government to try to impose things like this from the top. And, because imposing from the top is not the same thing as following them – following them naturally and then returning to them when you get deviated or pushed off that path – each person is best able to judge for himself how to allocate his resources and what types of employment to use. In doing this, he not only benefits himself, but he benefits others, because of the fact that anyone who trades with others, they share gains from trade. So, if I do better, then that enables others to do better that I trade with, because we all increase each other’s productivity and welfare through trade. And his recognition of this was his true genius, and his ability to write in an articulate way about it.

MS: Alan Greenspan, the former Fed chairman, has written a book called Capitalism in America, and in it he says that no country has adopted the Adam Smith model more than America, the United States, and that explains America’s exceptionalism in the world. He [Smith] actually predicted that America would at one point become one of the most dominant empires in the world. He actually uses the word “empire”. Do you think this is an accurate prophecy?

VS: It’s absolutely correct. The United States’ founders all had read The Wealth of Nations – Ben Franklin, Thomas Jefferson, Alexander Hamilton, Madison.  These guys all knew their Adam Smith – and that was The Wealth of Nations. I presume that many of them also probably had read The Theory of Moral Sentiments, although they don’t talk about it, because The Theory of Moral Sentiments doesn’t lend itself directly to economic policy issues in the way that The Wealth of Nations does. So, heads of state were the ones that needed to read The Wealth of Nations. And they did, certainly in the English speaking world.

I quite agree that American exceptionalism is very much due to the fact that our Constitution comes right out of the principles that you find in The Theory of Moral Sentiments – the idea that you are innocent until you’re proved guilty, the ideas like this – that center in the individual a certain trust on average to do the right thing. That is coming from these optimistic principles of social order that Smith articulates in The Theory of Moral Sentiments. And our founders had the genius to create a constitution with fundamental rights that are really based in a very essential way on what we now call classical liberalism – and classical liberalism was about 90% Adam Smith.

He had forerunners. It isn’t that he was alone. A lot of these ideas came up early, but he brought them together in an astonishingly effective way, and so it’s no surprise that his works are today still read. No educated person can claim to be… to have finished his education, or even hardly begun, if he hasn’t read The Theory of Moral Settlements, The Wealth of Nations, and I would add his Lectures on Jurisprudence. Oh, and his History of Astronomy, which is another great little book.

MS: So, you received your Nobel Prize for your work in experimental economics. You work with Bart Wilson on these areas. It’s a whole major part of economics now. What would Adam Smith think of experimental economics? Is this something he even conceived would be possible?

VS: You know, both David Hume and Adam Smith saw themselves as working in the area … Let’s see, what did they call it? They use the phrase “experimental explorations” – “experimental discovery”. What they’re talking about is cases. You base your theory on cases and the observable behavior as it comes to us in particular cases. Experimental economics just simply extended this into the lab. But both Hume and Smith would have been wildly happy to find that in my century someone developed that idea. And there was more than one. It wasn’t just me. I was one of about three that helped to develop this. You could actually create microcosms of interdependent worlds in the laboratory and study them at a level where you could exercise control over some of the variables and see what happens to others, and use this to articulate better theories, to test theories and to improve them.

MS: It’s interesting that Austrian economist Ludwig von Mises once said, “You can’t experiment in economics.” You remember when he said that?

VS: Yeah, that’s cause he never tried. I mean, it’s not that he never tried. He had a conception of experiment, which I think I would not follow. The thing is, experiments are simply just a way of trying out ideas, to test whether your thinking is right.

My thinking was dead wrong about markets. In my first experiment I had trouble believing the results, because they contradicted everything I thought I believed and had been taught, because mid-20th century economic theory was dominated by figures like William Stanley Jevons, who believed that to get a supply and demand equilibrium, everyone would have to have complete information – complete and perfect information on the conditions of supply and demand. And what my sophomores at Purdue taught me in the second semester that I was at Purdue was that that was baloney.

I had 22 people in that principles class. I took 11 of them. I made them buyers, and I gave them values. I assigned each of the 11 buyers a private value. They were informed that I would pay them in cash at the end of the experiment the difference between that value and the price they paid in the market if they were able to make a purchase. I gave the sellers a schedule of costs and I told them I’ll pay them the difference between the price at which they sell any item to another buyer in this room and that cost. I’ll pay them that in cash. So, I motivated them, profit-motivated them.

What was the mechanism of trade? I used an open outcry, two-sided oral auction – an oral outcry auction. Any buyer would be free to announce a bid, any seller an ask. Any buyer could raise the bid of any standing bid on the floor. Any seller could lower the ask of any standing ask on the floor. And you had a contract any time a buyer accepted the standing ask, or a seller accepted the standing bid. What’s interesting is that they got right into that.

Following those rules is so completely natural for people that you can read them instructions, and they just do it. They begin to trade and the very first contracts were already fairly close to the equilibrium, and later contracts went even closer. There’s no way that any economist anywhere, based upon extant theory of the time, would believe that that’s possible – that a bunch of sophomores could walk in the room, you could instruct them the way I did, and they could then find the supply and demand equilibrium, which they didn’t even know.

Each person only had a small fragment of the total supply or the total demand of each individual, and that’s typical of a market. No one in the market has pre-vision of everything. You’d have to have everybody know everybody else’s willingness to pay or willingness to accept, and they don’t.

Smith knew about auctions. There’s no place where Smith tells you, “Look, I’m going to tell you about auctions,” and then describes them. He doesn’t do that. But if you search on the word “auction” in The Wealth of Nations and in his other works, you find that he was very familiar with auctions, and he understood that in an auction of an item, the bids start low, and there’s lots of them, and as those bids rise, they become thin. And finally there’s only one last bidder, and he’s the winner of the item. The item is knocked down to him. Adam Smith understood that. I can show you passages where he’s talking about auctions, and it’s clear that he understands that.

I think in chapter 7 of The Wealth of Nations he talks about buyers and sellers haggling and bargaining in the market. The buyers all come with a willingness to pay. The sellers all come with a willingness to accept a maximum. These are maximums and these are bargaining strategies that they follow. He also tells you that if price starts low, it tends to be bid up by the action of buyers. If it starts too high, it tends to be bid down by the action of sellers competing with each other. So

Mark, that’s exactly what happens in an experiment, in a laboratory experiment if you study the data – what happens to prices, and how they move when they’re away from the equilibrium price. It exactly follows that pattern. Buyers are more active if the price is too low. Sellers are the more active agents if the price is too high. I didn’t know that when I did my experiment. I discovered that years later – that this guy, Adam Smith, in Chapter 7, had a good handle and being able to understand my experimental outcomes, and even predict.

MS: Vernon, we only just have a couple more minutes, and I did want to end with a question I sent you. I don’t know if you had a chance to look at it, but the question I want to ask you, and I think it would be of interest to all of our students is, “Since you’re 99 years of age, you’ve lived a long, happy life, you’ve taught at 10 universities or more. What’s the greatest lesson in life that you have learned?”

VS: You’ll learn the most when you are wrong. My whole career, is based upon being spectacularly wrong three times. The first time I was wrong was when I did those first experiments in the classroom and discovered that sophomores had no trouble finding the equilibrium. I would never in the world believe that that’s true. In fact, I resisted. It took me a while. I had to do more experiments. I couldn’t be satisfied with the one. I thought there was something wrong with that experiment. I had to do more. But my students in those experiments convinced me I was wrong. You don’t learn by being right, you learn by being wrong and asking why, and exploring why, and in that process is where all learning is. So, don’t be afraid of being wrong. Just don’t shrink. When you find yourself wrong, don’t shrink from trying to understand better why you were wrong, and what was wrong with your thinking, how your thinking has changed by discovering you were wrong.

MS: Thank you, Vernon, thank you very much, and let’s give applause.

VS: Okay. Well, thank you, Mark. It’s a great pleasure.

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Mr. Skousen holds a chair in free enterprise at Chapman University. His latest book is “The Greatest American: Benjamin Franklin, the World’s Most Versatile Genius.”