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Guest Post: Adam Smith Would Neither Recognize Nor Approve Of Our Financial, Monetary, Economic Or Legal Systems

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By Washington’s Blog

The father of modern economics – Adam Smith – is used as a poster child to support the status quo that we have today. Smith is invoked as the patron saint of free market economics.

In fact, Smith would neither recognize or approve of our current financial, monetary, economic or legal systems.

I noted last year:

Americans have traditionally believed that the “invisible hand of the market” means that capitalism will benefit us all without requiring any oversight. However, as the New York Times notes, the real Adam Smith did not believe in a magically benevolent market which operates for the benefit of all without any checks and balances:

Smith railed against monopolies and the political influence that accompanies economic power

Smith worried about the encroachment of government on economic activity, but his concerns were directed at least as much toward parish councils, church wardens, big corporations, guilds and religious institutions as to the national government; these institutions were part and parcel of 18th-century government…

Smith was sometimes tolerant of government intervention, ”especially when the object is to reduce poverty.” Smith passionately argued, ”When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.” He saw a tacit conspiracy on the part of employers ”always and everywhere” to keep wages as low as possible.

Paul Krugman pointed out:

Adam Smith … may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime.

And Damon Vrabel wrote:

It seems ridiculous to point this out, but sovereign debt implies sovereignty. Right? Well, if countries are sovereign, then how could they be required to be in debt to private banking institutions? How could they be so easily attacked by the likes of George Soros, JP Morgan Chase, and Goldman Sachs? Why would they be subjugated to the whims of auctions and traders?

A true sovereign is in debt to nobody and is not traded in the public markets. For example, how would George Soros attack, say, the British royal family? [Vrabel is presumably referring to Soros' currency speculation against the British pound and other currencies.] It’s not possible. They are sovereign. Their stock isn’t traded on the NYSE. He can’t orchestrate a naked short sell strategy to destroy their credit and force them to restructure their assets. But he can do that to most of the other 6.7 billion people of the world by designing attack strategies against the companies they work for and the governments they depend on.

The fact is that most countries are not sovereign (the few that are are being attacked by [the big Western intelligence services] or the military). Instead they are administrative districts or customers of the global banking establishment whose power has grown steadily over time based on the math of the bond market, currently ruled by the US dollar, and the expansionary nature of fractional lending. Their cult of economists from places like Harvard, Chicago, and the London School have steadily eroded national sovereignty by forcing debt-based … currencies on countries.

We long ago lost the free market envisioned by Adam Smith in the “Wealth of Nations” [the book widely considered to be the foundation of modern economic theory]. Such a world would require sovereign currencies…. Only then could there be a “wealth of nations.” But now we have nothing but the “debt of nations.” The exponential math of debt by definition meant that countries would only lose their wealth over time and become increasingly indebted to the global central banking network.

Smith also knew that trust was a basic ingredient of a sound economy. As I noted in March:

In 1998, Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University, Professor of Neurology at Loma Linda University Medical Center, and a senior researcher at UCLA) and Stephen Knack (a Lead Economist in the World Bank’s Research Department and Public Sector Governance Department) wrote a paper called Trust and Growth, arguing:

Adam Smith … observed notable differences across nations in the ‘probity’ and ‘punctuality’ of their populations. For example, the Dutch ‘are the most faithful to their word.’John Stuart Mill wrote: ‘There are countries in Europe . . . where the most serious impediment to conducting business concerns on a large scale, is the rarity of persons who are supposed fit to be trusted with the receipt and expenditure of large sums of money’ (Mill, 1848, p. 132).

Enormous differences across countries in the propensity to trust others survive
today.

***

Trust is higher in ‘fair’ societies.

***

High trust societies produce more output than low trust societies. A fortiori, a sufficient amount of trust may be crucial to successful development. Douglass North (1990, p. 54) writes,

The inability of societies to develop effective, lowcost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the Third World.

***

If trust is too low in a society, savings will be insufficient to sustain
positive output growth. Such a poverty trap is more likely when institutions -
both formal and informal – which punish cheaters are weak.

Because strong enforcement of laws against fraud is a basic prerequisite for trust, I believe Smith would be disgusted by the lack of prosecution of Wall Street fraudsters today.

And Smith warned against the pitfalls of fiat currencies unpegged to anything real:

The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.

It is certain that Smith would rail against our current financial, monetary, economic and legal systems as violating the most important foundations of sound economics.

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31 comments

  1. attempter

    It seems ridiculous to point this out, but sovereign debt implies sovereignty. Right? Well, if countries are sovereign, then how could they be required to be in debt to private banking institutions? How could they be so easily attacked by the likes of George Soros, JP Morgan Chase, and Goldman Sachs? Why would they be subjugated to the whims of auctions and traders?

    Can any of our resident pro-banksters explain conceptually why banks are allowed to counterfeit money but e.g. the Mafia is not?

    And why is the attack on currency known as counterfeiting illegal (but not for private banks), while speculative attacks are just fine? Why aren’t the latter crimes? Why aren’t they considered acts of terrorism or war?

    Of course the real answer to all of these is that we live under a finance tyranny which has rigged the law and the propaganda of things like crime and war.

  2. Linus Huber

    Consider for once that instead of issuing debt the government simply prints the money each time they have a deficit. It definitely would be cheaper as under this condition, no interest payments would become due. It, of course, became immediately obvious how the currency is continuously being diluted but I do not think to build up any unsustainable debts is any better.
    The banksters have organized the system really nicely to their advantage.

    1. F. Beard

      It, of course, became immediately obvious how the currency is continuously being diluted but I do not think to build up any unsustainable debts is any better. Linus Huber

      The currency would not necessarily be diluted. That would depend on how wisely the government spent. Plus, some growth in the money supply is good regardless.

    2. Veri

      The United States only owns the printing presses. The Federal Reserve ‘prints’ money. How else do you think the Federal Reserve came about all those trillions to hand to banks?

      It is not called a ‘Federal Reserve Note’ for nothing. It is privately issued money masquerading as sovereign money. The Euro? A fictitious construct owned by no nation. Rather, The ECB.

      Banks produce money. Very few, if any governments, do not.

  3. JTFaraday

    Yeah, but outside a handful of conservative intellectual historians no one knows or cares what Adam Smith had to say. Much of what Adam Smith had to say became embedded in *liberal* economic assumptions in the 20th c, likewise upheld by now near-extinct moderate Republicans in an act of *true* bipartisanship, at which point it could be safely “forgotten.”

    Since then, Adam Smith has been under attack under the *sign* of “liberalism” by the Ayn Randians and ubiquitous social Darwinists who make up the right wing revolutionary front.

    When these people donate money to universities, it isn’t Wealth of Nations (let alone the Moral Sentiments) that they want to get on the curriculum:

    “If you’re going to spend a lot of money endowing a professorship, it’s only rational to ensure that the professor whose salary you’re paying advances your interests, right? After all, when the Kochs invested millions in George Mason University, they got the incredibly influential anti-environmental regulation nonprofit Mercatus Center out of the deal. The least FSU can do for its cash is teach “Atlas Shrugged” in a business ethics class. (Which is something that Randian-run bank BB&T has made happen, also at Florida State University.) (Yes, BB&T received billions of dollars of TARP money.)

    Today’s rich libertarian knows the real ticket to winning the future is filling schools with people who agree with you. (This hasn’t worked for the left, but that may be because they spent all their time in control of academia rigorously critiquing texts instead of just inventing pseudo-scientific justifications for gutting the welfare state and eliminating the tax burden of very rich people.)

    But is buying an academic a good investment? Sure! Just ask the DeVos family, who — when they’re not pushing “education reform” — are keeping Austrian economics afloat at their weird fake Michigan university. As Andrew Leonard reported yesterday, DeVos-funded ideas have made it all the way to the chairman of the House Ways and Means Committee!”

    http://www.salon.com/news/politics/war_room/2011/05/12/buying_professors_kochs

    Face it: Adam Smith, like Teddy Roosevelt, is a liberal pantywaist.

    1. Foppe

      Haha: (FTA)

      How many economists, exactly? Well, just two actually — and both of them happen to be employed at Northwood University, an educational titan described by one of the economists quoted in the article as “a private institution of higher learning dedicated to the principles of individual liberty, the free market, and limited government.”

      Northwood’s credo has resulted in ample support from such conservative philanthropists as Amway founder Richard DeVos. With campuses in four states but a total student body around the size of a large high school, Northwood University was memorably described in an entertaining Texas Monthly article in 1986 as an institution for “those who find Southern Methodist University too liberal.”

      This characterization is amply justified by a look at the curriculum vitae of professor Richard Ebeling, who was quoted in the ConnectMidMichigan story and who will be testifying Wednesday at a hearing before the House Financial Services Subcommittee on Domestic Monetary Policy and Technology (chaired by Rep. Ron Paul) “on the role of debt in the monetary system.” Formerly the Ludwig von Mises Professor of Economics at Hillsdale College, Ebeling is a strong advocate of a return to the gold standard and the author of several books on “Austrian economics.” For Ebeling, the accusation that President Obama is attempting to lead the United States down the path to socialism is moot: We are all already socialist — the mere existence of the Federal Reserve proves it: “Central banking is monetary central planning,” writes Ebeling. “The United States and, indeed, virtually the entire world operate under a regime of monetary socialism.”

      1. Because

        Ebling is also a freemason and ties to the Dupont(Koch) syndicate(Birchers).

        What he really wants is for capital owners to set the rule of law globally and get rid of “ancient” countries and cultures. It is not that far from Marxism in terms of monotheism. One caste rule. The Birchers were a “fraud” from the start. The whole global communist movement was as hoax. The Birchers led by Welch literally worked with Wall Street and used(really abused) a stupid native(mostly white) population for their schemes. Who was the handler of Welch? Nelson Rockafeller. Yes, the same Nelson Rockafeller who was the definition of “moderity”. While the Birchers attacked anybody who opposed the capitalists as communists, the Rockafeller foundation financed global communism. Helping push in Mao and Castro. When Ho Chi wouldn’t play their games and spit at them, the US mysteriously flew into Vietnam like wild animals killing anything in sight. After they could no longer keep the capitlist created soviet economic model going anymore, they turned to “radical muslims”. Hence, the 9-11 hoax. Financed by Koch and the Birchers.

        I am amazed they talk about “central planning” but don’t even represent that the capitalists centrally plan themselves. Heck, even the Federal Reserve was a creation of the capitalist class’s need to handle the transfer payment crisis of Fractional Reserve Banking.

        With the “mainstream” economists that follow Monaterism,Keynesian or neo-classical schools. The non-mainstream schools of Marxism and Austrianism like Ebling or Green. Of course the first 3 have become a bit “inbred” while the latter two isolated.

        Everybody has their pet theories on utopianism.

  4. Moopheus

    “A true sovereign is in debt to nobody and is not traded in the public markets.”

    Except of course that for as long as there has been both money and governments, governments have carried debts. Monarchs carried debts, both personal and national. Some literally lost their heads over it. (If we brought back that practice, I’d bet today’s “crisis” would get solved right quick!) Perhaps it is true that in Ye Olde Days, there wasn’t the same sort of open market for that debt as there is today, but so what? The only reason today’s monarchs can’t be attacked by bond vigilantes is that today’s monarchs are figureheads on state welfare.

    1. allisinblunderland

      Yes, monarchs carried debts, but as sovereigns they also defaulted on them with impunity. Check out England’s Edward III and the Spanish emperors. Sovereigns didn’t lose their heads for welching on their debts, which were normally due to foreigners, but for trying to squeeze their subjects too dry (France).

      Can an institution (government) that can be “disciplined” by a another institution (finance) be truly sovereign? If so, what does sovereign mean?

      Can it be that what we are living through now is a transfer of sovereignty from national governments to international financial institutions, analogous to the transfer of sovereignty from princes to kings at the end of the feudal age? Is that what’s going on with the Euro “crisis”? With the U.S. debt crisis?

      There was a time when kings had agents to collect their “tribute”/taxes for them. Financial institutions and their wealthy customers now have governments as their agents to collect the “tribute”/yield/interest due them as owners of the nation’s debt/(equity?).

      1. F. Beard

        There was a time when kings had agents to collect their “tribute”/taxes for them. Financial institutions and their wealthy customers now have governments as their agents to collect the “tribute”/yield/interest due them as owners of the nation’s debt/(equity?). allisinblunderland

        Well said!

  5. F. Beard

    And Smith warned against the pitfalls of fiat currencies unpegged to anything real: George Washington

    Ah, here’s a fly in the ointment. Government fiat is “real”; it is backed by the real ability of government to require that taxes be paid with it. The problem with fiat is not that it is unbacked but that we are required to use it for all debts, not just government ones – taxes and fees. Thus the US Government and the banks are able to impose a “stealth inflation tax” on the population.

    1. John

      We aren’t necessarily required to use dollars for all debts. Nothing legal prevents us from bartering or using bitcoin or some other currency. The fact is that dollars are accepted for everything, and everything is priced in dollars. Dollars are accepted because dollars are accepted.

      1. F. Beard

        We aren’t necessarily required to use dollars for all debts. Nothing legal prevents us from bartering or using bitcoin or some other currency. John

        Barter is impractical. As for Bitcoins or any other private currency, are not capital gains measured in Federal Reserve Notes? So what if FRNs decline in real purchasing power? Would that not register as a phony capital gain for Bitcoins or any other private currency that did not lose purchasing power?

        One way or another we are all forced to use FRNs or else we would use something else to avoid the “stealth inflation tax”.

    2. Moopheus

      “The problem with fiat is not that it is unbacked but that we are required to use it for all debts”

      Why is this a problem? I mean, for one thing, why does it really matter if money is “unpegged from anything real”? Money is a social construct, a human invention. A peg is completely arbitrary anyway. There’s no intrinsic connection between some material thing and the unit of currency we attach to it. It’s whatever we want it to be.

      1. F. Beard

        Why is this a problem? Moopheus

        I didn’t say it was. In fact, for ethical and other reasons, fiat should NOT be backed by anything.

    3. MontanaMaven

      But Adam Smith had a primitive view of money as a commodity like gold or silver. (Marx did too).

      I read somewhere (Probably “The Lost Science of Money” by Zarlenga that Adam Smith had relatives involved with the Bank of England, so he might have had a conflict of interest in promoting the idea of a bank that created money as debt.

  6. Schofield

    A great deal of human activity needs oversight in the form of check and balances because evolution continues to generate extreme selfishness in the form of sociopaths who always conspire to form a pathocracy. This we are now beginning to understand.

  7. Philip Pilkington

    Yes, Smith is certainly not the ideologue that many portray him as. But if you read him today you’ll find that he’s remarkably conventional — and old fashioned.

    He was no shill. But he tended to mix his economic arguments with ‘common sense’ appeals. Thus his theories may have stated one thing, while his moral sensibility would state another.

    Smith didn’t have any proper notion of consumption/demand and this was a dismal failing. You see this failing crop up everywhere in Smith, in everything he wrote. Look at his critique of fiat currency, for example:

    “The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.”

    Here there is only the ‘usurper’; the interest-thief. There’s no notion that fiat currency might ensure that more people could work, save and consume — only the notion that they might be ‘robbed’ by unscrupulous capitalists.

    This is typical Smith. He doesn’t consider that the issue of fiat currency might actually increase overall saving. Why? Because the worker and the consumer are only phantoms in Smith’s narrative. Only the capitalist has true agency.

  8. Ming

    I would expand Mr. Smith’s idea slightly further, that trust and trustworthness is the true social Capitol from which all other capitol orginates. When a culture of deceit and untrustworthiness develops, trust is destroyed…. And the nation, it’s strength and wealth and prosperity and happiness, will swiftly atrophy as cooperation declines and predation and conflict flourish.

    Trust is the central ingredient for why hunter gatherers were able to conglomerate into tribes and eventually into nations.

    1. rps

      Tribalism is as evident today under the flags of unified nations. I’m always struck by strangers asking “what are you?” My reply is a US citizen, Never enough, they want to know my ancestral tribes even if your descendants have been here for 200yrs. There’s so much flag waving other than the US flag in the USA and tribal cloistered communities within a Nation.

      1. rps

        Then again, the United States is not similar to many of the homogeneous nations. We are many tribes umbrellaed under one flag. The statue of liberty’s bronze plaque states, “Give me your tired, your poor, your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me,I lift my lamp beside the golden door!”

        Of course that was after mass genocide and land grab from the indigenous american tribes. And african descendants of slaves were excluded; neither owned as property or of citizen status. And the chinese slave labor chain gangs for the railroads. Hypocrisy hath no bounds

  9. Dan Woska

    The situation is one that I have often referred to as “monetary prejudice” or “economic prejudice.” The US Constitution clearly does not make any distinction between rich and poor, but does spell out the need for due process of law and the preservation of the constitutional rights of all Americans because the concept of “might makes right” otherwise takes away any leverage against monetary prejudice the average American maintainsthrough the US Judicial System.The sychophants of the Mega-rich await the crumbs from the tables of the Mega-rich while the working American who is 100% disenfranchised these days illustrates quite clearly the reason that “Economic Prejudice exists. If the Judicial system has been packed through the influence and efforts of the Mega-rich with individuals planning to turn the concept of stare decisis on its headby ruling for big business over the rights of the individual, I CAN ASSURE YOU THAT WE ARE IN DEEP TROUBLE BECAUSE because individual rights was the cornerstone of our Constitution. The people who fllooded the shores of the US from 1618 forward had all experienced and witnessed oppression by the Mega-rich and powerful and wanted to insure there was not a repeat in this country. Oh well, so much for that truth, when you have money you can rewrite history.

  10. Rodger Malcolm Mitchell

    Why do we care what Adam Smith said in a different time under different circumstances? Are we so devoid of fact and logic, we must instead bow down to the words of a man who died 200+ years ago?

    I always am suspicious of people who quote the bible and long dead philosophers:

    1. The quotes invariably are selectively chosen and selfishly misinterpreted.

    2. The issues and facts today invariably are different from the issues and facts of long ago.

    Again, anyone who cares what Adam Smith said has replaced the power of personal reason with the crutch of celebrity.

    Rodger Malcolm Mitchell

    1. rps

      “…must instead bow down to the words of a man who died 200+ years ago?”

      Adam Smith, Thomas Jefferson, Thomas Paine essays, MLK speeches, Dante’s Inferno, or perhaps the seven deadly sins are as relevant today as 200,300, 400,1000+ years ago. We look backwards for insight and understanding of why laws and regulations of human behavior are necessary; to protect against the erosion of society and the enslavement of humanity by the few. Again, we are alerted to the generational memory hole of lost common sense and understanding of those that lived this insanity before us.

      Human behaviors have not changed or the plot, only the cast of characters of each generation fluctuate.

      1. LZ

        Adam who? Let’s open a couple of accounts and mark them up! all the economic ill will be gone!

    2. David

      I wouldn’t quite say we bow down to his words, but it is certainly beneficial to look back on the father of modern economics. I mean, the guy pretty much invented capitalism.

      I think this quote explains Smith’s approach toward capitalism and government regulation fairly well…

      “…in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public…The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”

      It shows that Smith didn’t outright reject government regulation or assistance toward the economy, but that we should carefully examine any new law or regulation.

  11. Spencer Thomas

    Very good post. This seems to tie in with the contentions of Paul Craig Roberts about Ricardo on Free Trade and sovereignty as well: “David Ricardo, who explicated the case for free trade, rules out an economy’s capital seeking absolute advantage abroad instead of comparative advantage at home.”

    What other economic theories/ideas/models are still in active use that assume sovereign nations pursuing comparative advantage, but are applied to today’s world of free-flowing, globalized capital and far easier “regime shopping?”

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