Adam Smith on Prodigality

Someone on Grad Student Madness HERE writes:

“Aristotle and Prodigality

In fact, we’re often told that the overall economy cannot function if thrift is too widespread. This is not a recent argument. Adam Smith, in fact, says as much at one point: thrift is good for the individual, but it’s disastrous for the economy. A consumer economy needs consumers, not tightwads. A more recent argument has been that the economy will not return to full health until consumer spending returns to what it was before- that is spending into individual debt. Conversely, these record levels of debt will make a lot of us into swine herders.

All of this is to say that industrial consumer capitalism is only a few centuries old and thus at odds with many of the traditional values of western civilization. A system that requires spending instead of thrift in order to satisfy manufactured needs in perpetuity; and which makes those fleeting desires, and therefore the individual will, the sole measure of our behavior, will therefore always be somewhat at odds with traditional ethical systems, which generally seek to limit the behavior of the individual vis-à-vis the family, the community, or the godhead. Moderation is good for the individual, but of ambivalent, if not negative value for the economy.

Of course, Aristotle and Aquinas don’t want us to live as ascetics either. (At least, not Aristotle) It is theoretically possible to reconcile the view of prodigality as a sin and the consumer capitalist economy if we agree that liberality is a virtue. One could spend a reasonable amount of their income, and give a reasonable amount to others; and satisfy both Aristotle and the chamber of commerce. The problem is that if a great number of us did this, the economy would have to seriously shrink. And so, the key to getting the western economies out of recession is promoting prodigality in a time of thrift. That is, promoting vice in a time of increasing virtue. Strength through shopping.

If I have to choose though, I’m going with Aristotle over Adam Smith.”

Comment
I am trying to find where Adam Smith said this:

“Adam Smith, in fact, says as much at one point: thrift is good for the individual, but it’s disastrous for the economy.”

It may have something to do with Smith’s point that the purpose production is consumption, not the interests of producers. But that idea is tenuously linked to Smith’s explanation of the ‘Great Wheel of Circulation’, which depends on the supply of productive capital, which is undermined by prodigal spending.

Thrift, or frugality, supplies the savings that when combined with fixed capital and the expense of productive labour causes commodities to be sold to consumers, preferably for a profit. From the profit, the entrepreneurs or undertakers are able to hire new rounds of productive labour, which when combined with fixed capitals (which do not leave the possession of the undertakers), produce further supplies of consumables. These are the source of economic growth in Smith’s view.

The author of the ‘grad’ essay is aptly regarded as ‘mad’ for his attributions. On his mental state, I could not possibly comment. May be a very clever philosophy student. ‘Too clever by far’ is probably more appropriate.

Not Sure About Chomsky's Version of Adam Smith

More on Noam Chomsky: Education is Ignorance (2 May) in W.E.A.L.L.B.E. here:

“[Smith] did give an argument for markets, but the argument was that under conditions of perfect liberty, markets will lead to perfect equality. That's the argument for them, because he thought that equality of condition (not just opportunity) is what you should be aiming at.”

Comment
I am at a loss to place this statement in Wealth Of Nations, not to recognise Smith as advocating it as an aim ‘you should be aiming at’.

If equality was a consequence of something happening which he observed (he was a moral philosopher, not an advocate) then it might be plausible but in mid-18th century Scotland I think he had more pressing concerns – mainly employment of poor labourers from incremental commercial growth – in mind than redistributive justice (a not well-known idea at the time).

When intensive poverty is the main experience, ‘equality’, however defined, may not have been an answer foremost in Smith’s mind. Nor is it clear why perfect liberty (which is not the same as laissez-faire, as understood by the some of the French Physiocrats at the time) should bring about equality.

The problem of markets in poor countries (like Scotland) was their relative absence, not their presence. But if you massage a visceral hatred for markets, as Chomsky appears to indulge, then nothing about theories of markets, or their ‘failings’ – their absence is also on the charge sheet against them – is allowed to appear in their favour. Markets are intimately involved in employment creation from productive investment out of revenue earned in earlier market exchanges.

Setting markets to work is not easy from scratch, as everybody who has observed where they are absent well knows (and leftwing thinkers, unimpressed with actual progress in getting markets to start, want to ‘kick-start’ with state subsidies, or protectionism – which inhibits market formation).

Chomsky believes markets are demeaning, inhuman, stupidity creating, and ignorance generating, and his remedy requires such a root-and-branch change in nearly everything that it ain’t going to happen on any scale quickly and threatens a far greater tyranny than Chomsky is willing to admit (though he may be more comfortable with tyranny for ends he approve of than most Classical Smithians and Lost Legacy would endorse).

Property is Civilisation

Fred Bauer writes (24 May) in the Blog, New Majority.com (‘Building a conservatism that can win again’) HERE:

“Republican Equality

Theories of the free market have long concerned themselves with the role of inequality. In The Wealth of Nations, Adam Smith famously argues that the development of advanced modes of production and commerce undermined the stark inequalities of the feudal world. The thirst of the rich for luxuries such as diamond buckles led to a breakdown of the system of feudal-agricultural dependence, in which wealthy landholders held not merely economic but also political domination of those below them.

Smith's argument has two salient implications for the current political right/classical liberals/conservatives: (1) certain forms of radical economic inequality can result in significant political inequalities (witness the petty tyrannies of medieval nobles), and (2) the functioning of the free market can serve as a way of mitigating these inequalities, of leading to a turnover of wealth, of making differences in levels of income less poisonous for civil liberties. The free market and inequality thus have a quarrelsome relationship: the market helps create inequalities, but it also undercuts the financial inequality of any given moment, allowing the rich to fall and the poor to rise. Inequality in results is a key characteristic of a market economy, and the very operations of a free exchange can prevent these inequalities from hardening into radical caste differences.

However -- and this is a crucial "however" -- the market itself, particularly in the wake of modern industrialization and certain forms of government intervention, can result in inequalities so vast that they begin to undermine a faith in free markets. And the growth of these radical inequalities can lead to a creeping sense of the hardening of financial differences. If one of the promises of the free market as a vehicle for an authentically liberal-democratic politics is in its ability to allow for social and economic mobility, increasing doubts about the existence of these mobilities also increases doubts about the efficacy of the market and its contribution to political equality. Radical inequalities and a sense of economic stagnation can in turn lead to a widespread rejection of the instruments of the free market and, more broadly, the free society.

The early twentieth century, that high tide of income inequality (the top .1% took home about 10 % of the national income in 1916), was also the high-water mark of the Socialist Party of America; Eugene V. Debs won 6% of the national vote in the fractious election of 1912.

Granted, the rise and fall of the SPA cannot be reduced to that single statistic, but wide income disparities perhaps set some of the conditions for this rise.
Aside from questions about social and economic ideals, this hard practical fact endures: in the modern welfare state, if a great majority believes that it can no longer economically advance, it has the political power to legislate the confiscation via taxation of the wealth of the rich. Now, this confiscation may not succeed in reducing inequality -- the grotesque inequalities of so many "workers' paradises" are built upon the failure of this confiscation to equalize -- but it can still be attempted. In addition to ethical objections about such a policy, a kind of economic hope as well as an economic fear serve to restrain this confiscatory enterprise.

The fear is that such governmental power could be turned against the members of a temporary majority; the hope is that the poor could, too, become rich, so they would want to be able to enjoy their wealth. But at a certain point, the fear of the misuse of power can recede before other, more immediate fears (such as starvation or death of exposure). Social mobility, on the other hand, feeds this hope. If one of the free market's benefits is social mobility, this mobility itself helps increase public support for the free market and protects it from overweening government.

The free market and government regulation are, then, both double-edged entities for issues of inequality. The free market can create radical inequalities through allowing a select coterie to dominate and entrench itself as an economic elite, but it can also unsettle entrenched elites and provide the hope of mobility through an open exchange; governmental regulations can prevent monopolies from forming and ensure limitations on the power of the extremely wealthy, but these very regulations can be tools for the hyper-rich to shut down the market and prevent competition.

Comment
When conservative-minded writers put their minds to work they often produce well thought out ideas. If only they translated into practical politics, but that’s another story.

Adam Smith’s writings on the decline of feudal-property relations in Britain shows an outstanding grasp of history and a deft hand at work, explaining the complex inter-actions between the ruling feudal lords and the newer, lower-order and despised trading merchants. Smith confined his remarks to silver buckle buying by some of the Lords (he lived in a man’s world), but we can be sure that much of the trinkets, brooches, rings, rare perfumes, silks and such like were destined for the Lords’ women.

Smith’s point was that the merchant traders brought luxury goods for the Lords to buy, who were increasingly tempted dispose of the main sources of their political power – their armed retainers – which troubled the leading Lord, the King, and those would-be Kings who eyed their throne, and oppressed the landed workers (hardly, incidentally, a ‘petty tyranny’; it served ‘petty’ ends, no doubt, but was brutal to its victims).

This was a long process, but the end result was an enfeebled aristocracy and a more vibrant merchant core, able to extract concessions from the king in parliament which gave them, eventually, an effective veto over the sovereign’s spending, legitimised by the outcome of a civil war. These Liberties constituted the constitutional monarchy that was 18th-century Britain.

Markets only continue what the consequences of the origination of property did way back in pre-history: create wealth (the 'annual output of the necessaries, conveniences, and amusements of life' and, inevitably, inequality. The great agricultural societies, growing from a long history of hunter-gatherer subsistence economies from 11,000 years ago in a small segment of the earth’s surface, were noticeable by their inequality, which extended way beyond economic inequality to political and religious inequality. Tribal property in territory preceded family and private property.

The great empires of Egypt, Babylon, India and China, were dominated by ruling elites that managed the hydraulic mysteries and seasonal timings of everything about everyday life for the vast majority of their peoples. The stone detritus of these former stone-built civilisations are spread across the Eurasian continents, north Africa, and in parts of central and south America.

Their predecessor stone-age tool detritus is spread all round the world, into modern times too, which was the subsistence mode of every human society that did not grow into shepherding and farming. Those, few, modern, aimlessly discontented, people who have notions of going back to what they call, the ‘simpler’ life of pre-history, seem to have no idea what that would involve, including the mass extermination of about 6 billion people.

For tens of millennia, the inequality of the world’s population remained constant, with a small elite monopolising the power, and almost everybody else living on subsistence and almost static per capita levels. That is until, again in parts of Europe, commercial society from the 14th century began, slowly, to revive after a thousand years of stagnation, Black Death, endless wars, and social strife, since roughly it was after the fall of the Western Roman empire.

And within four centuries, in Britain, economics, technological and social change, and the unprecedented steady, cinpound interest of the albeit minute rise in per capita incomes finally broke through the petty cycles of the 'Malthusian Trap', ironically almost coterminous with its identification by Thomas Malthus.

These events created social inequalities of a new kind – that between societies that developed institutions capable of ensuring the necessary conditions for continuous, though small, growth rates and those societies – the majority – not capable for various reasons of breaking out of their subsistence economies. The unequal poor in the commercial societies were incomparably better off than those in the unequal traditional societies, claimed Smith in Wealth Of Nations.

It is that comparative inequality that is the distinction brought about by the social evolution of early commercial societies into what became known as capitalism from the mid-19th century. It is a phenomenon that the Left do not acknowledge and the conservatives do not yet accept. There is nothing ordained about the existing arrangements of Big State capitalism or Big Welfare States that will ensure their continuation in their present forms.

The task of the philosopher, said Adam Smith, is to observe and seek to understand; it is not to do anything to intervene with panaceas and social engineering. Philosophers must be wary of becoming 'men (and women) of system' (TMS VI.II.2.17-18: 233-4)

Boudreaux on Smithian Growth

Donald Boudreaux, who blogs at Café Hayek, writes some of the best pieces in Blogland and everybody interested in economics should bookmark his site (HERE) /and visit it daily. His reports of his almost daily letters to US newspapers are little gems in the application of Smithian-type economics in contrast to the everyday rantings by politicians.

An article of his is picked up in Redorbit (HERE) 3 June: in a book review Knowledge and the Wealth of Nations: a story of economic discovery, by David Warsh:

“The work that launched economics as a distinct discipline is Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations. Note well the title, especially the first eight words that typically are left off when people mention this book.

That great Scottish scholar inquired into the nature and causes of prosperity. Worded only slightly differently, Smith asked, "What causes economic growth?" His inquiry brilliantly identified as the chief proximate cause of prosperity the division of labor. The jack of all trades becomes a master of none. So a world full of jacks is poor. But let each of those jacks specialize at performing a distinct task, and the same number of workers can produce a much greater quantity of output than they could produce when each was a jack.

A fuller account of this wealth-creation process, of course, must be told. Smith himself told much of it, as did David Ricardo and lots of-well, some-economists over the past 230 years. The sorry fact is that, for all its contributions to our understanding of economy and society, economics has only recently returned in a serious way to the Smithian question of economic growth. For most of its history, economics has revealed the logic of allocating a given stock of resources to satisfy a given set of consumer demands with a given stock of knowledge. The economics of growth-or what came to be called development economics-suffered. All too true was a remark I heard the late Fritz Machlup make in 1981 at New York University: "[Development economics attracts the least developed economists."

Unknown to Machlup and his students (and to most economists at the time), a turnaround was underway. Its leader was a young economist named Paul Romer from the University of Chicago. Romer (now at Stanford) is no typical Chicagoan. And what makes him least typical of that school is his recognition that externalities exist and often matter.

Externalities are effects of voluntary activities that spill over onto persons who are not party to the agreements that give rise to the activities. These effects can be negative (as when a factory dumps soot on the homes of nearby residents) or positive (as when a lighthouse guides whatever ships pass by). So-called "newgrowth theory" builds on the latter by explaining how capital goods and human capital not only increase workers' productivity, but also that this increase in productivity often occurs at a faster rate as more capital goods and human capital come into existence. That is, the productivity of existing assets often increases as these are combined with additional assets. Such assets, then, are said to produce "increasing returns"-which means that their rate of output (say, per worker) increases when they are combined with other assets.

Although Romer is the central character in the book, Warsh's summary of the economic theory of growth from Adam Smith's day to our own is wonderfully clear. Indeed, in my opinion this is the best part.”

Comment
David Warsh’s book is indeed well worth reading. And so is the follow up reading of the ideas, economists and their articles that he discusses. Visit his site Here. They can change your entire perspective on how economies grow, something that is lost in the sterile growth theory that I and my generation of economists (1960s-70s) were inducted into (Harrod-Domar, Solow, and such like). All economists should read Allyn Young, 1928. ‘Increasing returns and economic progress’, Economic Journal, 38: 527–42, which can be found on the Internet via Google).

Boudreaux, typically, focuses on the essentials of the argument, namely, increasing returns. Large swathes of microeconomics, since Ricardo, and in modern neoclassical economics, centres on diminishing returns; Smithian economics, in the propensity to exchange and the division of labour, centres on increasing returns, admirably set out in the Boudreaux’s review of Warsh’s Knowledge and the Wealth Of Nations.

I would add to Boudreaux’s potent comments in his review of David Warsh, that the essential deepening of the division of labour in the single plant that re-organises through specialisation of its labourers’ tasks, is the consequence for all firms that use that firm’s outputs as inputs into their own processes, their own unit costs fall too. And this occurs across the entire spectrum of industry, the more so as outsourcing spreads, and more roundabout modes of production proliferate.

Taking the trivial pin factory as the end of the growth process for that plant stops short of the full potential of competitive market economies. Adam Smith goes on to discuss the manufacture of the common labourer’s woollen coat, and shows just how extensive, even in the mid-18th century, were the supply chains within a small manufacturing base in a largely agricultural economy. Within all these contributing sectors, opportunities for raising productivity abounded in every part of them.

Take just one area: timekeeping. The Harrison Chronometer enabled Captain Cook to navigate with pin-point accuracy across vast oceans because with it he knew exactly on which degree of longitude he was sailing. Instead of confinement to parallels of latitude and within sight of land, he could head into the open sea with confidence and accurately plot on his charts exactly where he had been. The impact of this innovation in timekeeping opened the seas to safer sailing and shorter journey times, which improved the merchant shipping trades.

Thus, unconnected innovations, new dexterities in labour, tighter times of production and facilities to abridge labour, sharply increased productivity, within the existing technologies practised in Smith’s day, and led inexorably to the technological leaps that featured so strongly thereafter.
Growth theory need not be sterile, unless conceived of as an equilibrium process, fitted into models in which people are absent.