The Nature of Money

Matthew Yglesias has another excellent post up today on what we mean by money.  He references this post by Paul Krugman and this comment on Krugman’s post by Kevin Drum.  All of them make good points that clarify the issues facing us today, issues which are complicated by the poor understanding people have as to what money is, what it does and its role in the economy.  Read all of them, they are informative.

Much of the public, and thus much of our public discourse, is confused over the nature and purpose of money.  A large portion of the population seems to view the quantity of money that we have on hand to be critical to a nation’s wealth and that we need to focus on conserving our money.  This is ironic as no less a figure than Adam Smith argued forcefully in The Wealth of Nations, that this view of money is completely wrong.  According to Smith (who I would say is quite right) is that the wealth of a nation is in the total quantity of useful products and services that it creates out of its resources of land, capital and labor.  Money is just a tool to facilitate the transfer of useful products from one party to another.  If more money in circulation would improve the economy (and  all indications are that it would) then we should print more money and get it in circulation.  

Adam Smith and Regulation

I’ve been reading The Wealth of Nations recently, I was rather interested in understanding what Adam Smith actually had to say, given the extent to which his views on economics are championed by conservatives. The most striking conclusion I have taken from his writing is that if his views were better known by conservatives and by liberals he would be reviled by the former and a champion of the later. For large numbers of people the passion with which the hold opinions of various philosophers, Smith prominent amongst them, is equaled only by their ignorance of the actual opinions of those philosophers. The absurdity of our discourse today is driven in no small part by this dichotomy.

For example, it is widely held among conservatives that the idea of market economics is totally at odds with any government regulations. Smith, it is clear, does not agree. He expressly recommends that government regulate the maximum interest that may be charged.

The legal rate, it is to be observed, though it ought to be somewhat above, ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten percent, the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest.

Adam Smith, The Wealth of Nations, Book II, Chapter 4

Adam Smith, at least, was no uniform opponent to regulation.

I note also, that this recommendation for government regulation is specifically to have the government enforce more sound management of money on the part of the citizens. That is, what is recommended here is a form of paternalism. Limits on the rate of interest are imposed on citizens to enforce parsimony with no other service provided in exchange.

The kinds of regulation recommended by modern liberal policy, on the other hand, can be defended, I believe, on grounds of exchange. That is to say that the regulation is imposed solely on the basis of the regulated accept the regulations in return for some other service provided by the state. For example, the restrictions on risk taken by large financial institutions are imposed on those institutions that have been incorporated under the laws of the United States. That condition of being incorporated provides an insurance policy for the managers and shareholders of those institutions on the loses that they may incur should the institution fail. This limitation of liability is an extremely valuable service.

To whatever extent regulations imposed by government to advance some general moral well-being are allowed, and Smith certainly considered them acceptable, it is even more acceptable when they are part of a mutual exchange.

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.

Adam Smith and Taxation

Excellent diary over at Daily Kos by bay of arizona. The subject is Adam Smith and progressive taxation which Smith favored. Smith has a lot more to say in support of progressive ideas than he does in support of conservative ideas, at least the way those ideologies are shaped today. I would urge progressives to read "The Wealth of Nations". Attempting to incorporate Smith's ideas into a progressive ideology would be a huge benefit to progressives and to the world.

Adam Smith redux

Gavin Kennedy at Adam Smith's Lost Legacy, a site I was unfamiliar with but which, based on my short perusal so far, is a site well worth reading, has a comment on my earlier post about Adam Smith. Gavin's comments are correct, I agree with what he has to say, although I believe that my main point still holds.

Basically, the passage I quoted went on at some length to the effect that the merchant and manufacturer are much better situated in knowledge and experience than are either the laborer or the country farmer to manipulate government policy to his or her advantage. Gavin's point was that while that was perhaps quite true in Smith's day, it is much less so today. All three of Smith's orders of men are today quite savvy at manipulating government policy to their advantage.

I did not mean to suggest that the merchant's and manufacturers still have that advantage as a general rule. My intended points were two fold. One point was that Smith's claim that the interests of the merchant and manufacturer are more often than not at odds with the interests of society as a whole and the general welfare of the nation. Adopting the policies and proposals of this order of men and women without very careful scrutiny is as foolish a move today as it was in Smith's time. Yet we have spent much of the past eight years doing exactly this foolish thing. Secondly, I wanted to advance Smith's other point that the proposals of the merchant and manufacturing class should be met with long study, close scrutiny and a healthy dose of skepticism. I would agree with Gavin's commentary to the extent of saying that the important practice is to address all proposals from any part of society with a healthy dose of critical review.

Adam Smith

I found the final paragraph of the first book to be quite striking. It is my contention that much of today's discourse is seriously distorted by the near universal acceptance of some points which are, in fact, completely false. One of these is the idea that modern Conservative/Republican philosophy is strongly tied to the principals of free market capitalism as espoused by the like of Adam Smith. So the following quote, the last paragraph, as I say, of the first book in the Wealth of Nations is quite illuminating. He has just repeated his long running claim that there are three orders within society, those who make their income from the rent of land, those who do so by wages from labor and those who do so off the profit of stock. He discussed that the interests of the first two orders are tightly aligned with the interests of the Nation as a whole and with society in general. In other words, the prosperity of those two classes rises most with the general improvement in the prosperity of the nation as a whole. Of the third class, I quote:

His [the person who lives off of wages from labor] employers constitute the third order, that of those who live by profit. It is the stock which is used for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operations of labour, and profit is the end proposed by all those plans and projects. But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension, of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. The interest of this third order, therefore, has not the same connexion with the general interest of the society as that of the other two. Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans an projects, they have frequently more acuteness of understanding than the greater part of the country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion), is much more to be depended upon with regard to the former of those two object, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufacture, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have upon many occasions, both deceived and oppressed it.

I would say that the summary of the past eight years of American policy has been to adopt the Conservative/Republican policy of a slavish and servile devotion to all proposals of exactly that order of men whose proposal Mr. Smith says rather "...ought always be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention." Mr. Smith's advice on this score has most certainly not been taken.