What Adam Smith might say today...

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Farmer Brown
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What Adam Smith might say today...

From the Financial Times website, Feb. 10, 2009.  I think some might enjoy and/or learn from this:

 

Adam Smith gets the last laugh

By P.J. O’Rourke

Published: February 10 2009 19:22 | Last updated: February 10 2009 19:22

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The
free market is dead. It was killed by the Bolshevik Revolution, fascist
dirigisme, Keynesianism, the Great Depression, the second world war
economic controls, the Labour party victory of 1945, Keynesianism
again, the Arab oil embargo, Anthony Giddens’s “third way” and the
current financial crisis. The free market has died at least 10 times in
the past century. And whenever the market expires people want to know
what Adam Smith would say. It is a moment of, “Hello, God, how’s my
atheism going?”

Adam
Smith would be laughing too hard to say anything. Smith spotted the
precise cause of our economic calamity not just before it happened but
232 years before – probably a record for going short.

“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,” Smith said in The Wealth of Nations.
“If it is lett [sic] to a tenant for rent, as the house itself can
produce nothing, the tenant must always pay the rent out of some other
revenue.” Therefore Smith concluded that, although a house can make
money for its owner if it is rented, “the revenue of the whole body of
the people can never be in the smallest degree increased by it”. [281] *

Smith was familiar with rampant speculation, or “overtrading” as he politely called it.

The
Mississippi Scheme and the South Sea Bubble had both collapsed in 1720,
three years before his birth. In 1772, while Smith was writing The Wealth of Nations,
a bank run occurred in Scotland. Only three of Edinburgh’s 30 private
banks survived. The reaction to the ensuing credit freeze from the
Scottish overtraders sounds familiar, “The banks, they seem to have
thought,” Smith said, “were in honour bound to supply the deficiency,
and to provide them with all the capital which they wanted to trade
with.” [308]

The phenomenon of speculative excess has less to do
with free markets than with high profits. “When the profits of trade
happen to be greater than ordinary,” Smith said, “overtrading becomes a
general error.” [438] And rate of profit, Smith claimed, “is always
highest in the countries that are going fastest to ruin”. [266]

The
South Sea Bubble was the result of ruinous machinations by Britain’s
lord treasurer, Robert Harley, Earl of Oxford, who was looking to fund
the national debt. The Mississippi Scheme was started by the French
regent Philippe duc d’Orléans when he gave control of the royal bank to
the Scottish financier John Law, the Bernard Madoff of his day.

Law’s
fellow Scots – who were more inclined to market freedoms than the
English, let alone the French – had already heard Law’s plan for
“establishing a bank ... which he seems to have imagined might issue
paper to the amount of the whole value of all the lands in the
country”. The parliament of Scotland, Smith noted, “did not think
proper to adopt it”. [317]

One simple idea allows an over-trading
folly to turn into a speculative disaster – whether it involves ocean
commerce, land in Louisiana, stocks, bonds, tulip bulbs or home
mortgages. The idea is that unlimited prosperity can be created by the
unlimited expansion of credit.

Such wild flights of borrowing can
be effected only with what Smith called “the Daedalian wings of paper
money”. [321] To produce enough of this paper requires either a
government or something the size of a government, which modern merchant
banks have become. As Smith pointed out: “The government of an
exclusive company of merchants, is, perhaps, the worst of all
governments.” [570]

The idea that The Wealth of Nations puts
forth for creating prosperity is more complex. It involves all the
baffling intricacies of human liberty. Smith proposed that everyone be
free – free of bondage and of political, economic and regulatory
oppression (Smith’s principle of “self-interest”), free in choice of
employment (Smith’s principle of “division of labour”), and free to own
and exchange the products of that labour (Smith’s principle of “free
trade”). “Little else is requisite to carry a state to the highest
degree of opulence,” Smith told a learned society in Edinburgh (with
what degree of sarcasm we can imagine), “but peace, easy taxes and a
tolerable administration of justice.”

How then would Adam Smith
fix the present mess? Sorry, but it is fixed already. The answer to a
decline in the value of speculative assets is to pay less for them. Job
done.

We could pump the banks full of our national treasure. But
Smith said: “To attempt to increase the wealth of any country, either
by introducing or by detaining in it an unnecessary quantity of gold
and silver, is as absurd as it would be to attempt to increase the good
cheer of private families, by obliging them to keep an unnecessary
number of kitchen utensils.” [440]

We could send in the experts
to manage our bail-out. But Smith said: “I have never known much good
done by those who affect to trade for the public good.” [456]

And
we could nationalise our economies. But Smith said: “The state cannot
be very great of which the sovereign has leisure to carry on the trade
of a wine merchant or apothecary”. [818] Or chairman of General Motors.

* Bracketed numbers in the text refer to pages in The Wealth
of Nations, Glasgow Edition of the Works of Adam Smith, Oxford
University Press, 1976

The writer is a contributing
editor at The Weekly Standard and is the author, most recently, of On
The Wealth of Nations, Books That Changed the World, published by
Atlantic Books, 2007

Copyright The Financial Times Limited 2009

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: What Adam Smith might say today...

Sorry about the garbage text at the beginning - I don't know what I'm doing wrong.  Anyway, the article is intact - just skip the stuff that's not in English - or any other language!

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