A Smarter Smith

I know…apparently I’m like a cat chasing a string. I’m addicted to sharing my opinion. I can’t stop.

I was reading through the UK papers this morning and noticed that John Maynard Keynes is alive and well  in the halls of the UK Parliament. They are contemplating a stimulus based on “infrastructure” spending over here similar to the wasted Obama “stimulus” (most of which went into the pockets of cronies and generated nothing “stimulative”).

There is a great site over here for the Adam Smith Institute. You remember Adam – he is the father of capitalism and the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. It earned him an enormous reputation and would become one of the most influential works ever published.

The Adam Smith Institute lists its goals as:

  • Fighting big government
    • Today the Adam Smith Institute faces new challenges. The industrial landscape has changed beyond recognition since the 1970s. Communism has fallen. And most politicians at least pay lip service to the free market ideas of choice, competition and enterprise. And yet in many ways government is bigger and more intrusive than ever, whether it is regulating businesses, interfering with lifestyle choices, or undermining historic civil liberties. Meanwhile public spending has grown out of control, and Britain faces a fiscal crisis unprecedented in peacetime. In short, there are many battles still to be won.
  • Our agenda
    • The Adam Smith Institute has a number of overarching objectives: to make liberty a consideration in every political argument; to win once-and-for-all the intellectual arguments against Keynesian economic policy; and to make people realize that our current fiscal path is completely unsustainable, as demographic change begins to take its toll on the welfare state. And it has a number of policy areas on which it is actively campaigning for far-reaching free market solutions – like flat taxes, free banking, and radically liberalized education.

Smith was born in 1723 in the town of Kirkcaldy in the Kingdom of Fife, a scant 15 miles from where I sit writing this in Edinburgh. Smith, being that he is widely cited as the father of modern economics and capitalism, was a champion of private enterprise and a enemy of public spending. Perhaps the most concise description of his position rests in his own words:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. [emphasis added].

Those who regard that statement as Smith’s central message also quote frequently Smith’s dictum:

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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

At the Adam Smith Institute blog, there is a great post by gent by the name of Guy Bentley. Bentley concludes:

It is a fallacy to believe that the government can allocate resources effectively to meet future economic needs, instead of entrepreneurs. What advocates of state infrastructure spending fail to grasp is that government cannot suddenly acquire the knowledge as to which parts of the UK’s infrastructure either needs repair, replacement or, indeed, which new projects should be undertaken. The economy is dynamic and never static. The government cannot predict what it will look like in 30 years time, whether there will be an increase of manufacturing jobs in the northeast or high tech in the midlands. This is simply not possible to anticipate into the next twenty or thirty years.

The argument commonly made for infrastructure spending is that it will have a kind of Keynesian multiplier effect. Private construction firms will be employed, idle resources will be put to use and money will start to circulate through the economy as people spend their newly earned wages. But this, again, is untrue. Government infrastructure drains the economy of resources and, even in the short term, stops resources from being used elsewhere. These decisions are difficult even for the private sector, which relies on price signals. Sometimes the private sector fails, sometimes it succeeds, but because it is the investor’s money that is on the line it has a reason to act rationally. Government lacks the information to act wisely, and the incentives to act prudently.

In Japan, large government infrastructure projects have failed to lift the country out if its low growth high debt slump. In the UK, many cities have built tramlines, which have almost universally turned out to be loss makers and failed to promote growth.

The Keynesian fallacy is that even if they can create economic activity in the short run and based on Keynes definition of “economic activity”, they can – but the money that is used for  stimuli must be subtracted from the economy in the form of borrowing or taxes. The fact is that government has no money but that which it first takes from the actual transactions of commerce. People can say that it can borrow, but when it does, it just creates a delayed liability that remains to be paid from the exact same sources – taxpayers. Government debt is just delayed confiscation – kicking the can down the road in hopes that the economy will be better when the bill comes due. They can also  inflate the money supply by printing more fiat money but in real terms, that is an inflationary policy that devalues the currency.

How much better is it for you to have two dollars in your hand today if it buys what one dollar did yesterday? You are no better off in real terms.

Do you know what the number one cause of business failure is in America? It isn’t lack of sales or profits – it is lack of cash flow. Not enough money flowing through the business to pay the bills as they come due…it is the same for government.

Keynesian economics counts on creating enough cash flow to outrun the debt load…and with our staggering debt and currency devaluation, it is impossible to run that fast.

The Keynesian approach to economic stimulus of Obamanomics is like having your chronically unemployed brother-in-law and his family move into your basement, eat your food, watch your TV and use your credit card to buy stuff for themselves. Doing so they create “economic activity” but at the end of the month, you are still the one who gets the bill, not them.

26 thoughts on “A Smarter Smith

  1. I was having a bit of a disagreement about capitalism. Lovegrove said that the Afghanistan drug lords are capitalists. I disagreed, because I feel that although there is a want, the product itself is illegal, therefore they don’t have to follow any rules of law or pay taxes. So then another guy says to me that he “knows of nothing in the definition of a capitalist or capitalism that mandates a legal structure of any kind for them to be operating in much less the payment of taxes.” To which I replied that I conceded on so much as the definition of the word, but the reality is that I know of no small business or corporation that is exempt from having to follow the rules of law and paying taxes. Am I wrong?

    By the by, M., I think I now know where you inherited your big brain….

  2. Remember that economic theory has nothing to do with legal theory. Even the drug dealers on our streets are capitalists – laws can distort free markets i.e. drive prices up due to threats of arrest, confiscation or other risks – but the market regulates for that risk by increasing the price to compensate for the perceived risk.

    Same with government intervention, the free market prices that intervention in and moves on.

    Operating legally is a facet of any economic theory, either capitalistic or communistic – they both adapt, just in different ways. Where capitalism spreads risk through price allowing the individual to decide if it is worth it or not, communism spreads the risk by forcing all to participate equally without choice.

    The Afghani’s poppy growers are most definitely capitalists.

    By the way, I have never met anyone who understood capitalism more than the members of the Communist Party hierarchy in China. They got it.

    • I disagree. It’s not like OSHA (e.g.) comes in to inspect them. And how do they benefit their infrastucture or society if they are not taxed? They are the sole persons deciding where their money should be spent. Then again, we’ve got a bunch of elected ding-dong dummies deciding where our tax money should be spent, so I see the point there. Surely you see my argument that the definition of the word as opposed to the reality of it are completely different. I can’t believe you’re siding with Lovegrove…..

      • In a capitalist system, taxes are a cost of doing business – just like buying materials or contracting for labor. That’s why there is no such thing as a “corporate tax” because this cost is just rolled in with the other business costs and is paid by the consumer.

        Capitalism as an economic theory has nothing whatsoever to do with social policy, governmental policy or any of the actions of government. Capitalism is designed to benefit the individuals engaged in the act of commerce and those they choose to share those benefits with. The theory being that everybody can engage at some level and those who can’t, should they deserve charity will receive it from those who do.

        Rousseau was one of the philosophers who first linked commerce to society in his writing on the social compact – what do we as individuals owe to society for what society provides in return – but he was actually preaching a form of collectivism, one that is at odds with self-determination. Black3 has written about it as did I here: https://therionorteline.com/2011/09/23/the-social-compact/.

        • Ah, but the individual DOES need society for capitalism to work, Utah. We need some form of enforcing contracts and of dealing with those who are dishonest in their dealings with others. Without some form of govt., capitalism doesn’t work. The struggle is in finding the balance and in making sure we build govt. of the idea that it is supposed to be a NEUTRAL referee who forces BOTH sides to play by THEIR agreement, not a “judge” who decides what’s “fair.”

          • Never said that capitalism didn’t need society, what I said was that the economic system of capitalism has nothing to do with government and social policy. Government can facilitate commerce by producing stable rules that provide consistency and a fungible exchange methodology (i.e. money) but to be a capitalist does not require paying taxes or to follow any rules other than those set by the market.

            Left alone, the market will establish its own rules – they may be counter to desired social objectives, but there will be governance systems formed independently of government based typically on derivations of relative value of exchange (worth), the varying abilities to quantify/appetites for assumption of risk and social mores.

          • OK, as usual, my bad. From now on, I will take a hint from some guy named “Smith” on the NH forum and ask for clarification when I have doubts.

            (watch for it, but just understand old Polish Marines learn slowly…VERY slowly)

  3. Nice job, Utah.

    I wish people could understand 2 simple lessons connected to Smith and Keynes:

    1 — If the economy was a “fixed pie” like the Keynesians like to treat it, how in the bloody Sam hill have we managed to grow over the years? Or do they want us to believe that Adam was made with all the wealth the world will EVER know in hi spossession?

    2 — To load down the future with debt for our extravagance is not only immoral, it justifies a future revolt by the young.

  4. I can see times where borrowing is advisable; after a natural disaster, in the event of war, or such. The trouble comes when we borrow against future earnings in order to do something Now!, instead of when we could afford it. Once we started using debt to fund welfare payments and 450+ separate barrels of pork projects, once representatives started the ‘you vote for mine, I’ll vote for yours, and damn the math’, we began sliding down the half-tube into insolvency.

    • Melfamy,

      True, but then, that is why we sold war bonds in WW II: to fund as we went. The other problem is, once they realized they never had to pay back what they borrowed, our politicians stopped worrying about borrowing and started using it as a source of bribe money to buy votes. Personally, I think they should ALL be charged and tried for SUBVERSION!

      “When the people find they can vote themselves money, that will herald the end of the republic.”

      –Benjamin Franklin

  5. B., Why do you back pdal? You have just proven my point that capitalism can only survive as a hindrance without a social economic system that will not support it. I still stand by the literal meaning of the definition of the wor itself is misaligned with the reality of the marriage between the two. Am I makina lick o sense?

    • Not a back-pedal. I see what Utah is saying. It is NOT that capitalism can survive without a govt., it is that capitalism has nothing to do with that society’s social desires. When a society starts to tell the market what it MUST do in terms of “social justice,” capitalism has died and you are living in a socialistic society that only resembles capitalism. True capitalism requires the govt. to do NOTHING more than act as a neutral judge between all parties to a contract, and every sale is essentially a contract.

      Utah is talking to something you seem to be missing, and I missed it too – at first. Now that he expanded upon his point, I see it. So I don’t see this as backpedaling since my point about the necessity for govt. is not denied by Utah, nor is his point negated by mine. They are compatible.

      • Exactly. I told you that the other Smith, the real Scottish one, was smarter. Now you just made me prove it.

        To me this discussion ties back perfectly to this:

        We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

        These are the conditions which the government is allowed to control to “promote the general welfare”, meaning to me that they are to do nothing other than to protect the environment in which we all can prosper according to our desires, our abilities and our circumstances (or in my case – pure dumb luck).

        • These are the conditions which the government is allowed to control to “promote the general welfare”, meaning to me that they are to do nothing other than to protect the environment in which we all can prosper according to our desires, our abilities and our circumstances (or in my case – pure dumb luck).

          Oh, I agree – and so did another man who was smallish in stature but large in presence:

          “With respect to the words general welfare, I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators.”

          “If Congress can do whatever in their discretion can be done by money, and will promote the General Welfare, the Government is no longer a limited one, possessing enumerated powers, but an indefinite one, subject to particular exceptions.”

          –James Madison

      • Thanks for explaining the process of your back-pedaling. My point was the philosophical meaning of the word as opposed to the economical system of the word. Philosophically, I reckon I could be called a Communist as I do give to charity in accordance with what I can contribute. I could also be called a Capitalist as I am self-employed. My point from the start is that there must be a synergy between the two (that being the philosophy itself and the economic system.
        And now, I’ll let you and M. get a room.

        • Communism is NOT giving to others according to what YOU think you can afford – Communism is when someone else MAKES you give according to what THEY say you can afford. Yes, yes, I know people will say this is not what Marx said Communism is, but Marx was on crack before crack was invented because there is NO WAY humans will EVER “volunteer” to live the way Marx foresaw – especially do so happily. Communism is nothing more than a,myth sold to the masses to get them to surrender their lives and labor to whatever ruler is peddling the poison. What amazes me is how many times history has proven people are willing to buy the snake oil.

          As for being a capitalist, that should PROVE to you that capitalism IS the natural order of human interaction. For some reason, this bothers the control freaks of this world. They decide for all of us that we shouldn’t live according to this natural order because – somehow – it is immoral and only THEY can determine the “proper” way for ALL of us to live. So, naturally, these self-appointed intellectual/moral elites take it upon themselves to FORCE their ideas on the world for the better of all mankind – even if they have to “crack a few eggs” in the process (i.e. KILL MILLIONS).

          • NO!

            English: do you speak/read it?

            Look, you seem to be trying to connect capitalism to paying taxes and following the law. There is no connection. My first reply to Utah was because I thought he was saying capitalism doesn’t require a govt./legal system. What you see as back-pedaling was me agreeing to Utah clarifying his position in regards to his answer TO YOU!

            Utah clarified his reply by saying he stood on his assertion that capitalism doesn’t have anything to do with morality or even the law, but that he DOES acknowledge the necessity of some structure to enforce contracts.

            Once I understood this, I agreed with his comment. This is NOT a back-pedal, just me dropping an objection because I realized I was objecting to something he didn’t say. I still believe what I said in my original post. So, if you see this as a back-pedal, then we are dealing with two definitions for the same term because, to me, a back-pedal is when you change your position. I haven’t done that.


  6. Sure. When has capitalism in the U.S. not been taxed or regulated by laws?

    By the by, I responded to your chauvenistic comment at the N.H. Sometimes, you really amaze me…..

    • So, if I do not have laws and taxes, I cannot have capitalism? Funny, as long as 1 person is appointed to enforce the terms of a contract, there is capitalism – even if there are no laws or taxes. So I’m not sure what definition you are using for “capitalism,” but I don’t recognize it, it “appears” as though Utah doesn’t and I have serious doubts as to whether or not Adam Smith would have.

      As for “chauvenistic comment at the N.H.,” – what are you talking about now?

      Never mind, I see you think I am (insert insult here) because I try to live my faith rather than thumb my nose at God’s commandments and live according to MY idea of wisdom. Well, Kells, this is not the place for this discussion, so why don’t you start a post specifically about how we should pick and choose what we want to accept from God and reject the rest in favor of our own opinions?

  7. By the definition of the word itself, you obviously can. If you want a legitimate business, though, there must be a marriage of capitalism with the accepting social-economic ideology to accompany it.

    I was referring to Red’s post about women in the Bible. Naturally, you became threatened….

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