Saturday, December 12, 2009

Stimulus and Smith

So I'm in the midst of reading Adam Smith's "The Wealth of Nations". I've got a fair number of other obligations these days, so I'm going through it bit by bit, it is taking awhile. I'm well into book four though, so I'm making progress. Listening to the recent debate over Obama's stimulus package has been striking, given what is actually to be found in this work. The overwhelming impression I get from the Republican arguments and the words of Smith is that the Republican position is firmly rooted in the ideas that Adam Smith is arguing against.

One of the main points that Smith makes is that the while we do generally consider an individual to be wealthy based on the amount of gold or other money that he has, this is actually only an approximate measure and it is wholly inappropriate for a nation. Smith was arguing against the Mercantilist view that the a nation should increase its wealth by accumulating more gold. Smith argued instead that to try to accumulate gold and silver beyond what was needed for coin for jewelry and for flatware and plate was pointless. Gold and silver beyond the needs listed above would invariable be taken abroad and used to purchase goods there that were either not produced in England or were of better quality or cheaper in some other country. Rather the wealth of a nation was measured by how often the gold and silver changed hands. His reasoning was that people exchanged gold and silver in return for some productive labor or service, to rent land or to acquire stock and that a nation was wealthy to the extent that these activities were common and poor if they were rare.

The upshot is that while Smith did not advocate anything like a stimulus bill (Smith predated Keynes by a century and a half), such a measure seems more consistent with Smith's views than opposed to them. If, as Smith maintains, the wealth of a nation comes in the frequent circulation of currency then taking action to keep money in circulation, a stimulus, would be in keeping with this philosophy.

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