Johan Norberg on “The Real Adam Smith”

By Caitlin Moroney and Patrick Reilly

May 16th, 2016

On May 16th, Free to Choose Media hosted Swedish journalist Johan Norberg at the University of Chicago’s International House for a screening of his new documentary The Real Adam Smith. Mr. Norberg, a Senior Fellow at the Cato Institute and the European Centre for International Political Economy, has written fifteen books and produced several films exploring global capitalism. His latest documentary focuses on Adam Smith’s ideas and their continued relevance.

Before the event, Global Voices interviewers Caitlin Moroney and Patrick Reilly spoke with Mr. Norberg about his career. This interview has also been published in the Gatethe partner student publication of the Global Voices Interview Series.

Global Voices: When you were younger, you were involved in some anarchist youth groups in Sweden, and your party actually won school elections. But more recently, you've built a very successful career championing classical economics and free-market ideals. How did you make that switch?

Johan Norberg: I think the major thing that made me change my mind was studying history. I used to have a very romanticized attitude about what the world was like before we had industrialization and globalization on a large scale, thinking that we all lived peacefully and in great health, and in harmony with nature and everything. Turned out that life was pretty awful, and [when] I read history and realized that, [I asked myself] where I would  have been without this kind of development. Probably nowhere. Because life expectancy was so low, I probably would have been dead by today. And then I started looking at the kind of institutions, the kind of technology that we take for granted. And then I realized that, look, there's something to this, with open markets, with specialization, with the kind of wealth creation that goes on with modern, open free markets. From then on, I began to build a more classical liberal attitude to life, and to the world.

Global Voices: What inspired you to make this film specifically about Adam Smith, and how his ideas are still relevant today?

Norberg: Some sort of depression, almost, realizing that, when I read Adam Smith, he talks about many of the misconceptions that are still incredibly frequent today when we talk about economics, [and] when we talk about the world. For example, [in] presidential campaigns, [there are] these misunderstandings on what wealth is, about everything from international relations to the idea that, for someone else to win, we have to lose out. That kind of zero-sum mentality is incredibly frequent, both on the left and on the right, it's both Sanders and it's Trump. They only talk about, “Who is the scapegoat?” Is it China or Muslims, or is it the rich?.

Adam Smith spoke to all of that. He talked about the basic possibility of harmony of interests between groups and countries and individuals if we had open institutions, transparency, rule of law, property rights, and so on. In a way, that makes you depressed, [seeing] that we have the same misconceptions, and the same myths around. On the other hand, it makes it all so interesting, to look at someone like Adam Smith and how he got his ideas, how he influenced people, and the enormous impact he had on the world. So I wanted to revisit that.

Global Voices: Speaking of a harmony of interests, in another one of your films, Power to the People, you discuss the challenges of meeting the growing demands for energy while still protecting the planet. Here in the US, we have a hard time bridging the gap between the left and the right on this issue. How do you think we might bridge that gap between conservatives with a free-market ideology and liberals who are advocating for more action on climate change?

Norberg: In a way, it seems like you're already succeeding. America is one of the few places that has really cut greenhouse gas emissions in recent years, and partly because of an opening up to more entrepreneurial and technological experiments in the energy sector. I'm thinking of hydraulic fracturing more than anything else, which has gone much further in the US than in other places. And that has also led to a reduction in the use of coal, which is the most dangerous energy source, not just for greenhouse gases, but for human health. So it seems like you're bridging that gap in the United States, already.

But at the same time, I think that the basic problem when it comes to energy is trying to pick winners, having politicians deciding which is the industry, the company that will be of importance in the future, and we will heavily subsidize that. Most people understand that politicians are not better than the market in sorting out what the best new business model in the future [will be], but for some reason we think that they will be smart enough to understand what's the best business model in energy, and that they'll deal with both nature and our energy needs and so on. And both the left and the right does this, it's just that they have [different] opinions on what's the best energy source. The left happens to think it's wind or solar power, the right happens to often think that it's nuclear power, but it's the same attitude, that they think it's superior to anything else. And I think that we just need a healthy dose of skepticism and of economics when it comes to the energy sector, realizing that we have no idea, I have no idea—I've studied this a lot—I have no idea what's gonna work in the long run to solve all those problems.

In that case, what we need is an open, level playing field where we try to internalize the externalities, to make sure that they pay the environmental costs, that then sort of let entrepreneurs, researchers, scientists, and people generally loose to experiment in those different sectors. I think that that's more successful than any top-down plan. For example, corn ethanol was the favorite of both Republicans and Democrats when they were in power. They heavily subsidized that, until they realized that it's incredibly costly, and it probably hurts nature more than anything else. Whereas fracking was seen, for a very long time, as something that would never, ever work, but turned out to be a better energy source.

Global Voices: In your Dead Wrong segment on inequality, you talk about how the important economic issue for governments to address is poverty rather than inequality. But in some countries--like Mexico, for example--the GDP per capita has increased, while the national poverty rate has been stagnant over the past few years. In this case, do you think that public policy experts should focus on combatting inequality?

Norberg: That's a good question. I would, however, need to rephrase it somewhat, because I agree that that's a problem if the general wealth level in a country increases, but the poverty level doesn't move at all. Adam Smith would agree, and say that the most important thing is that people who have very little are being raised out of poverty and getting greater opportunities in their lives. I would say, though, that it's something other than inequality that I'm worried about. Because you could have a situation where inequality is rising even though everybody gets it much better at the same time. For example, China was much more equal thirty years ago, it was a paradise when it came to the Gini coefficient. Everyone who thinks inequality's the most important thing must have loved that. And what has happened since is that everybody, almost everybody, is much better off. They've had the fastest reduction of poverty the world has ever seen. More than half a billion people [were] raised out of poverty. But at the same time, that has increased inequality, because some people have it much, much better. So the gap between them is bigger than ever. And then I would say,the gap is not what we should be most worried about. We should be most worried about [creating] more opportunities and less poverty. If we succeed in doing that, then inequality is not just not a major problem. Sometimes, it's also something that helps the development a lot. Because when you open up new opportunities, then some, for various reasons, because of their background, or [the fact that] they're working harder, or their skills, or just plain luck, they will use those opportunities more than others. And that's not a problem. We want more people to get those opportunities. But if you fail in doing that, if you're not moving the poverty level at all, then there's something else that must be wrong, and then you should investigate that.

Global Voices: In your experience, have you ever observed a community that lost its comparative advantage to another area and had to re-tool and re-train?

Norberg: I guess that happens, once in a while. In Europe, at the moment, we have a huge problem in many Mediterranean countries. Their comparative advantage, at least when they were trading with the rest of Europe, was in fairly labor-intense manufacturing of shoes, textiles, clothes, furniture, and things like that. That changed because we suddenly opened up the world to even bigger countries that began to deal with that. And then, suddenly, that's not an area that they can be very successful in. But if you wanted a positive answer [about] someone who succeeded in moving to another area, I don't think we're quite there yet. They've instead seen a massive de-industrialization, and made up for it with a bubble economy focused on real estate and debt in many areas. That's one of the reasons that we had the Euro crisis. Were you looking for a more positive answer? (laughs)

Global Voices: It would be nice.

Norberg: But those things do happen, very often. And I think it happens more often now than ever before, because for several reasons, more people are in the same game than ever before. [There are] more producers [and] more workers, but also consumers change their behaviors and their taste preferences, and technology's changing faster than ever before. So those things do happen. We can look at the car industry in the United States, for example. And then, [in cases like that,] what's important is having a dynamic economy where we're rapidly switching, where it's possible for capital and labor to move to areas where it's more efficient. Very often, however, we see the tendency to try to subsidize that old industry, or sometimes that region. For healthy, good reasons, we're trying to help those who've lost out, but in a way, that often subsidizes that failure, [and] subsidizes unemployment in that area, rather than helping people move to another place, and that's difficult. The metaphor is that, If you have a shipwreck, you're not trying to give them more floaters, or keep that ship afloat a longer time. You're trying to get them onto a seaworthy ship instead. That's what we should do with the economy as well.

Global Voices: In the second part of your documentary, The Real Adam Smith, you mention that trust has played an important part in the rise of businesses like Uber and Airbnb. What kind of a role is trust going to play in the market going forward, in the next ten years or so?

Norberg: I think it's always been incredibly important. That's one of Smith's insights as well. You need to have some sort of common understanding of what you're doing, of basic rules you're sticking to. Because you can do that by government intervention, generally, you can have a system of rules that applies equally to everybody, but not when it comes to quality, behavior, [and] all those things, because you don't have that kind of knowledge. For a long time, we did it by trademarks, and generally reputation. We saw the buildup of huge companies and chains, because they might not be as exciting as other options, but they're reliable, because they have the same kind of offer wherever you go. That's why you go to Starbucks. You know what you will get. There might be lots of places with much better coffee. Somewhere else, there certainly is, but how do you find them? Often you find the lousy place, where you get sick instead. So that's one way that trust has worked. You build those brands, you invest heavily in that brand, and you know that they would lose so much if they really tried to cheat their customers.

But what is happening right now with the digital and the sharing revolution is something else entirely. Suddenly, when I go to Chicago, to areas where I've never been, I can just look up what others think are the best coffee places, and I go there instead. So suddenly I find the best place, or at least a better place, without having to rely on a brand, on that huge investment. And I think that's incredibly interesting, because it really helps startups and it really helps smaller outfits in relation to others. When you look at the research on what has happened when we're starting to use different apps where customers rate things, it's that it has definitely helped the small ones. Whereas the big brands that have good reputations, that has not helped them out. But it helps these new ones. And I think that opens up an entirely new area for experiments, crazy experiments that will be much more interesting in the future.

Global Voices: Would you say that this phenomenon could encourage innovation in the marketplace?

Norberg: Yes, absolutely. There are good things with big companies. You can have much more specialization within a company, you have much lower transaction costs, and all those things, but the bigger you get, the more risk-averse you get, both when it comes to government bureaucracies and business bureaucracies. That's why we've seen over the past few decades, that many of the new innovations, the new technologies, the new offerings, they do not come from the companies that should have been at the forefront of those revolutions. Take, for instance, the digital camera. That whole development should have come from Kodak and companies like that, because they had the most investments, they knew the market, they understood the technology and everything, but they didn't because they were so heavily invested in the old technology. So instead, we have small companies in Japan starting to experiment, and Kodak and the others said, "Well, let's just stick to what we know, because this is what we're good at, this is where we make the money.” And then suddenly, the digital cameras are so good that Kodak is completely ruined. And the irony, of course, is that they were the ones with the first digital cameras. They didn't want to invest in that. The same goes for Sony. It should have had the iPods and the iPhones, but they were so invested in their own models that they didn't experiment with that [technology]. So we need those new startups. Now, with the whole sharing economy, the digital economy, the opportunity of finding an international market from day one, almost, makes it so much easier for all those startups, those rebels and new businesses to find the customers to really take a huge market share from early on. They don't really have to rely on the reputation, they only have to rely on good customers to talk about what they're doing. So I'm incredibly excited by that whole new opportunity.

Global Voices: What's your opinion on microloans? Do you think that model could take off, with people being able to loan small amounts of money to people starting small businesses all over the world?

Norberg: Yes, I'm very interested in microloans. I've followed Grameen Bank, and their Bangladeshi outfits quite a bit, but also Hand in Hand, which worked in many other places, even in very rough areas, like in Afghanistan. I'm very interested by that whole model. If you don't have the system of finance in a place, then relying on these kinds of outfits, and relying on a bit of a social pressure is very interesting. There might be problems, you might build up new debt, and so on, so I think that you also need some sort of simple business education, teaching people what they can do, what they should do with the money, teaching people how they can invest, how they can start to offer their goods to market, and so on. When that happens, I think, it's incredibly positive. Now, the question is, can we do that in richer countries as well? Especially in areas and groups that are undersupplied with financial services. I think that many of the peer-to-peer services, when it comes to finance, prove that it's something that really can happen, even though it's always difficult. When you start to do something like that, you see great failures, [because] you're experimenting. But... the old bank model is just sort of, "supply those who already have access to capital with more capital," and that's not necessarily the thing that has the most potential in the future.

Global Voices: You've just finished this new documentary. What's next for you?

Norberg: I'm both writing books and doing new documentaries. The next documentary is closely related to The Real Adam Smith, in a way. Now there's this temptation for everybody, from all sides, from left to right, to say, "Look, we want to go back to the 1950s, everything was safe and secure, we had an isolated economy and so on." So, okay, let's look at rich countries who are trying to do that. What I'm doing is going to New Zealand, to look at a country that experimented with a very closed economy in the 1960s, '70s, and early '80s. What happened? Well, of course, you can probably guess what happened. The economy tanked, and from being the third-richest country on the planet, they went to being the nineteenth-richest country on the planet. But more than that, the whole economy, the whole climate for business, for innovation, for new crazy thought just totally collapsed, because people stuck to the old models, and they weren't constantly pressured to improve, they didn't look at the best technology in other places, [or ask,] how can we improve our things by looking at that? So it was a really horrible experiment in many ways, and the economy almost collapsed as a result. And, you also look at the human cost of doing those things. We talk about capital controls in the abstract, but they really had capital controls, and what does that mean, if you can't just send money in your own currency to Britain? Well, it means that this old lady who wanted to subscribe to a British newspaper, she had to go to the Ministry of Finance and get permission to subscribe to this newspaper and send New Zealand money to Britain. So, I’m looking at at that as a cautionary example of what could happen. And also, I’m looking at how difficult it was for them to get away from that, the kind of reforms that they needed, that were very successful, but also came at a human cost, because then, yes, you don't have that slow restructuring every day, but then, suddenly, you have to change everything, and everybody loses their jobs instead. That's more painful, I think, than having this constant change.