Not Talking and Non-Debating on the Net

Over at Richard Murphy’s Blog, “tax and corporate accountability”, HERE:

There is a sort of ‘debate’ on “Tax Freedom Day for some”, a feature posted each year by the Adam Smith Institute that calculates when the ‘average’ taxpayer has paid all the income tax due for the year, which also ‘identifies’ when the rest of that imaginary person’s income is available for personal consumption and investment.

The headline date is slowly creeping deeper into the year as the government thinks up more way to reach into private purses, wallets and bank accounts. Yes, it’s a sort of ‘political hot potato’, embarrassing to the government and a supposed source of indignation to the Left.

I say ‘sort of debate’, because Richard Murphy and Tim Worstall, a Fellow of the Adam Smith Institute, the main protagonists are engaged in the Internet equivalent of not ‘talking’ to each other; or, at least Richard is ‘ignoring’ Tim, though Tim appear willing to discuss these issues with Richard.

[I should disclose that I too am a Fellow of the Adam Smith Institute - but I do not know if Richard is ‘not talking to me’.]

In the yesterday's ‘non-exchange’ between Richard and Tim, I offered three short paragraphs on one of the issues they are not debating, namely the taxation of the poor.

Briefly Richard favours taxing the income of the rich more and Tim favours not taxing the income of the poor at all. I agree with Tim. Whether the richer should be taxed more than the poorer is a separate issue, hence the 'debate' on Flat Tax.

Here is my brief contribution:

"Richard

Without diverting the discussion into that of ‘flat tax’, I think you should acknowledge that Tim, and others, including the Adam Smith Institute, propose that the poor be taken out of income tax altogether by raising the personal allowance (to £12,000 currently; higher if possible).

Lasting change in normal times should be in steps, not in great leaps, in Adam Smith’s view (including on tariff reductions).

What have you got against that reasonable and overdue proposal?

Gavin”

Adam Smith on Tax and Borrowing

William Watson writes in Financial Post (National Post in Toronto, Ontario), HERE:

“The Tories' negative stimulus”

“A still older tradition that we might call Smithian, though I don’t think Adam Smith ever made this case explicitly, might argue that if stimulus packages mean the government’s share of the economy will grow, that may actually cause net economic contraction since government will be much less efficient producing things than the private sector would be. So in fact an apparently contractionary package that reduces the size of government might actually end up being stimulative. This Smithian interpretation is the only one, so far as I can see, that could lead you to conclude the Tories’ Economic Statement is stimulative.

….The government is declining to borrow the monies in question and pay them to people who undoubtedly would go out and spend them. Ricardo, on the other hand, might think it a wash while Smith might see it as a gain.”

Comment
I have no comments on the merits or otherwise of the policies proposed in Canada to deal with the current financial crisis under my standing ordinance of not commenting on politics in countries other than the one I vote in. However, I am free to comment on policies that its proponents or local columnists associate with Adam Smith.

William Watson qualifies his statements with: “I don’t think Adam Smith ever made this case explicitly”, which is absolutely appropriate because it is true. In Smith’s day there was not a great deal of thinking about managing economies, or what we call macro-economics, or the government’s role in these matters.

Political economy had macro elements – the monetary system, the Bank of England (and the Bank of Scotland), the currency (gold and silver, and paper currencies, the individual banks, balance of trade, foreign trade of consumption, domestic trade, taxation, and the annual production of wealth or “necessaries, conveniences and amusements of life”) – but of government directed macro-policy, this was no such a ‘big idea’ at the time.

The government ‘sector’ was relatively small compared to the 20th-21st centuries (under 15 per cent compared to over 35 per cent), and its biggest item was ‘defence’ spending. If activity slackened off, unemployment rose (lost amongst the general destitution of the countryside and the towns), and farms and enterprises experienced bankruptcies, people didn’t look to government for relief.

When a ‘recent’ war ended, Adam Smith noted how, when

“a hundred thousand of soldiers and seamen were deprived either of employment or subsistence”, which was “a number equal to what is employed in the greatest manufactures”, that while there was “some inconveniency” suffered, the seamen “gradually betook themselves to the merchant service” and the soldiers ‘were absorbed in the great mass of the people, and employed in a great variety of occupations” (WN IV.ii.42: pp 469-70; Canaan p 436).

It did not occur to him to demand government action; it did occur to him to advise government to move from protected to free trade ‘gradually and slowly’ to allow time for these events to work themselves out with the least direct harm to those affected.

William Watson is appropriately cautious in ascribing views to Adam Smith about situations he did not face, but because Smith considered waste and prodigality abundant features of government spending, with consequent negative affects on economic activity, growth included, Watson makes a plausible case for describing a possible ‘Smithian’ policy of not increasing the budget deficit to allow government deficit finance to ‘kick-start’ a sluggish or declining economy. To the extent that this is a current Canadian ‘Tory’ policy such a stretch of plausible ‘Smithian’ ideas ‘fits' Watson’s analysis in his opinion piece.

However, I am not inclined to go along with this argument, particularly as Britain is in a similar policy quandary. Government expenditure carries with it some degree of inherent waste, but some level of it nevertheless has some level of productive (in Smithian terms) effects; employing labour that covers its costs, including capital, plus a profit. A road, bridge, runway, or sports theatre, built by private companies with government funds, that earns profits adds to economic activity. So some element of that sort of activity is productive and positive, but it is unlikely to be sufficient or timely (big projects take years not weeks or months).

The other side of the argument is strictly Smithian. Taxation reduces private incomes, and though necessary for society at some level for defence, justice, public works and education (and the ‘dignity of the sovereign’), it also inhibits private consumption and savings below that they would otherwise have been.

Where taxes are ‘too high’ (a subjective assessment) and where, in consequence, government-determined choices displace private-consumption choices by depressing consumer demand, and the government choices are ‘locked into’ non-spending, because of ‘non-lending’ (a problem with retail banking at present), it may be Smithian to lower taxation fairly dramatically.

Of course, this would still increase government borrowing and its deficit. But by lowering taxes through removing taxation of all incomes below £12,000 per individual, so that millions of the poorest people pay no tax, and the rest pay no tax on the first £12,000 of their incomes (as recommended by the Adam Smith Institute HERE and HERE), there is more than an even chance that the result would be a fairly certain stimulus to private consumption, which would do more to re-activate the economy, albeit still slow and gradually, but also quicker than uncertain fortunes of big spending projects coming on stream in 12 to 18months, or even longer, from government ‘big projects’.

Smithian economics does not lead to a ‘do nothing’ anti-depression strategy, nor is it opposed to a government deficit. It is the quality of the counter-measures not their use that separates the advocates of big government ‘big fixes’ from Smithian better sense.

Governments do not trust individuals to do what is right; they prefer the visibility of big projects, not least for their photo-opportunities – and if that is too cynical they only have themselves to blame from their habits of a lifetime.

It seems to me that such a policy as the Adam Smith Institute proposes is compatible with any good government, Tory or otherwise.

Adam Smith Did Not Regard Taxation as 'Evil'

Michel Pireu writes (28 November) in Business Day HERE:

“Laissez faire — the scapegoat of the crisis”

"The name of Scottish philosophy professor Adam Smith has been linked with the cause of economic freedom ever since he published his Inquiry into the Nature and Causes of the Wealth of Nations in 1776."

"He had a lofty view of the importance of the law of supply and demand, believing that it affected far more than the market. “The natural effort of every individual to better his own condition” was the foundation of all political, economic, and moral systems."

In Smith’s view, taxation was essentially an evil: first it was an infringement of liberty: second, it distorted the natural operation of the market."

He believed self-interest could be safely left to serve the common good. “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. In spite of their natural selfishness and rapacity (the rich) are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made, had the earth been divided into equal portions among all its inhabitants,” Smith declared.

Mainly from Ideas that Changed the World by Felipe Fernandez Armesto”

Comment
Michel Pireu is not quite being fair to Adam Smith and verges on being misleading about his ideas.

Adam Smith never believed that ‘taxation was essentially an evil’; he recognised the need to fund the essential activities of the sovereign state: defence, justice, public works and education (Wealth Of Nations, Book V).

These were essential for the continuation of society and for social harmony within it – without defence the society could be overrun by the depredations of neighbours (‘defence is of much more important than opulence’, WN IV.ii.30: pp 464-5); without justice the society would ‘crumble into atoms’; without public works to facilitate commerce, the society would not reach opulence; and without education, the poor in the society would be exposed to ‘the delusions of enthusiasm and superstition’ (WN V.i.f:61: p 789; Canaan, p 740).

Neither did he consider that taxation “was an infringement of liberty”. He was a strong believer in Natural Liberty as a philosophical approach to human rights for all societies, including those ‘despotical’, from the Natural Law theorists, Grotius, Pufendorf, Carmichael and Hutcheson.

But he considered that as the duties of government were clear, they had to be paid for and his first maxim of taxation was the ‘the subjects ought to contribute towards the support of the government, as near as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state’ (WN V.ii.b.3: p 825; Canaan, p 777)

Now, of course, certain taxes and certain levels of taxation, especially those that breached his maxims, ‘distorted the natural operation of the market’. But this never meant that taxes should be abolished. Indeed, as staunch a supporter of free trade as he was, he was also pragmatic enough to note that even with his overall view, Britain could not become a totally ‘free port’ without some level of tariffs or duties on some goods, because customs duties played such a large part in government revenues.

On self-interest, Michael Pirue (or his sources, Felipe Fernandez Armesto – did Pirue not check his secondary sources before making definitive statements about what Adam Smith actually said?) achieves his alleged quotation from Adam Smith by advertenly running two separate sentences from Moral Sentiments and Wealth Of Nations together without informing the credulous among his readers about what he had done, and thereby giving the wholly false impression that Adam Smith “believed self-interest could be safely left to serve the common good”.

Smith was never so imprudent (silly even) to assert such a thing.

The quotation from Wealth Of Nations about the ‘butcher, the brewer, and the baker’ comes from Wealth Of Nations (WN I.ii.p 26; Canaan, p 14) and the quotation about ‘natural selfishness and rapacity’ comes from Moral Sentiments, IV 1.10: p 184), and was about the delusion of rich landlords, not their exercise of self interest (and it has been discussed on Lost Legacy many, many times).

Adam Smith gave over 70 reasons why self interest cannot be assumed to always benefit societies and those in them in Books I, II, and II, of Wealth Of Nations.

He was not an ideologue; sometimes individuals benefited others (the propensity to exchange) and sometimes they didn’t (monopolists, protectionists, and such like – nowadays, polluters!).

Michael Pireu may want to reconsider the certainties by which he taints the legacy of Adam Smith. All he has to do is read for himself Smith’s works (or read Lost Legacy regularly).

Speak Softly About Big Ideas

Andrew Sullivan (‘The Daily Dish’) writes in The Atlantic, 22 Oct, HERE:

“Adam Smith On Spreading The Wealth”

“The intellectual father of market capitalism:

‘The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.’

Notice how he puts it: "not very unreasonable."

In my view, still lamentable. But also not a rigid rule, since real conservatives do not believe in rigid rules. My view - again - is that the obvious problems of the US economy right now are not the same as they were in the 1970s. I would prefer a candidate who would cut entitlements and defense to a candidate who raised taxes on the successful.”

Comment
They are not the same as they were in the 1770s either.

Taxation in Britain at the time that Adam Smith was writing and editing Wealth Of Nations did not include income taxes (that came later in 1798 - Smith died in 1790), and import taxes, tariffs and excise duties contributed a major source of government revenue.

In the item quoted by Andrew Sullivan (incidentally from WN V.ii.e.6: p 842; ‘Taxes on the rent of homes’) Smith was addressing readers, among whom were legislators and those who influenced them, who were likely to have to pay an increase in rent taxes.

Persuading any group of tax payers (or non-taxpayers) of the merits of a particular tax payment is hard at the best of times and as Adam Smith was neither a campaigning politician, nor a man of system, ‘wise in his own conceit’ (Moral Sentiments, pp 233-4), he states his proposition in modest language with a view to appealing to the widest constituency, for which the tone “It is not very unreasonable” is the appropriate language.

If Andrew Sullivan were to use similar language when he tries to persuade people with whom he deals, I dare say he might find himself reaching many more willing readers (or investors) than, perhaps, he manages today with a blunter tone of voice.