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ADAM SMITH AND THE FAILURE OF LAISSEZ FAIRE ECONOMICS

August 27, 2013

ADAM SMITH AND THE FAILURE OF LAISSEZ FAIRE ECONOMICS

Adam Smith, the father of modern economics, published his ground-breaking book, The Wealth of Nations, in a conspicuous year – 1776. It was the same year Jefferson penned the Declaration of Independence from Smith’s native country, England. America at that time was a colonial possession of England, and colonial authorities had little if any jurisdiction to fashion economies or much of anything else. King George (the Crown) was in charge of economies, taxes, titles to expansions of westward real estate etc. America had few rights and no democracy to defend. King George was boss. He ruled by divine right – voters need not apply. God had spoken.

Smith had to be aware of the first really big bailout in that unfettered age of capitalism run amok and sponsored by the Crown – the 1772 bailout of East India Tea by the Bank of England with its “loan” of hundreds of thousands of pounds only four years before.  I am not privy to what the ordinary Englishman/woman who  had money in the bank received in return, but I hope it was better than what the ordinary American got for his/her recent multi-trillion dollar bailouts of big Wall Street banks, bondholders, insurers, shareholders et al., which was and is worse than nothing.

We are still paying for Wall Street’s perfidies in more ways than just bailouts and the Fed’s purchase of bad paper at par; we are paying in terms of a world-wide malaise directly caused by Wall Street’s (perhaps criminal) crapshoots. We are paying in terms of lesser export markets (which means more unemployment in our export sector), bipartisan cries for austerity in Washington (exactly the wrong way to go if we are interested in economic recovery rather than further enhancing Wall Street’s bottom line), increased inequalities in wages in our race to the bottom with Chinese and even cheaper labor – which reduces domestic aggregate demand in our own marketplace, enhances our unemployment rate,  reduces tax revenues to our treasury, increases bankruptcy filings etc.

I could go on and on, but the foregoing is indicative of our economy’s open wounds that are bleeding buckets, and where are political Washington’s tourniquets?  By adopting austerity measures, the political class has, as of old, decided to “bleed the patient.” This medical practice never worked in the history of medical science and it will not work in the so-called “dismal science” of economics. (George Washington never saw the year 1800 because he had a respiratory ailment, went to the doctor, who promptly “bled” him. Many feel it was not the respiratory problem but the bleeding that did the Father of Our Country in.)

Medicine and economics are not the same, obviously, but the underlying principle of the wrong prescription of treatment for a sick person or a sick economy is congruent. You do not bleed a patient with bronchitis, and you do not take away the means of economic recovery from a weakened economy in desperate need of stimulation, not more fiscal narcotics. Every day we sink lower and lower to systemic recession. We need a Keynesian approach to economic recovery, and we need it yesterday. Every day we wait will make recovery from our downward spiral longer and more costly.

 

Why will it cost more later? Here’s why. Interest rates are at historic lows. Interest rates (plus inflation)  are likely to be much higher in the future. We have bridges caving in and killing people in Minnesota, people who (in a soft labor market) eschew schooling, massive unemployment, reduced revenues to our treasury, and we are on the verge of allowing visas to foreigners to come here to do the skilled trades work we refuse to educate our own people to do etc. etc. etc., and what does austerity offer? It offers more of the same old “bleed, bleed, bleed” of laissez faire economics instead of the suturing and antibiotics offered by Keynesianism. Money for infrastructure renewal and repair will never be cheaper to borrow; we have millions of unemployed who need jobs repairing an infrastructure that is killing people. It is an historic opportunity to put people to work on work that desperately needs to be done on the cheap, and what do our proponents of austerity recommend? Less investment in public goods, even if it kills people. It’s as though a doctor prescribes arsenic for a patient suffering from arsenic poisoning.

Austerity and laissez faire aficionados in defense of their Wall Street friends and sponsors point to Adam Smith’s long ago dictum that the private pursuit of self-interest would lead, as if by an invisible hand, to the well-being of all, but they neglect to point out another such Smith dictum, which is, and this is a direct quote from Smith: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” It is clear that Smith’s famous “invisible hand” phrase envisioned an economy if which there were no anti-competitive practices, that everyone started at the same starting line, and, as correctly noted by Joseph Stiglitz: “People with higher productivity – a larger social contribution – get higher pay.”

That’s the theory (known in economics as the marginal productivity theory), but the reality, as Smith himself suggested 114 years before the Sherman Anti-Trust Act, was that people in the same trade meet for the purpose of collusion to increase prices. That sort of anti-competitive misconduct, of course, leads to restraint of trade and higher prices which, by the way, dominate the marketplace today. I never believed Smith’s invisible hand” mysticism (leave the market alone and it will self-correct – the root of laissez faire), and it is apparent that he had his own doubts as well with his statement that  people in the same trade meet to collude to raise prices “in a conspiracy against the public”.

That’s not invisible hand talk; that’s John D. Rockefeller and Standard Oil talk straight out of the Gilded Age, an era in which, among other things, the giant corporations would under price their gasoline or other prices, drive their competitors out of business, and then raise prices in a monopoly environment they created with their anti-competitive practices. It is apparent from a reading of Smith that he would not have approved of such games played by the rich and corporate class of that day (before Sherman and Teddy put an end to it), and apparent that he would condemn today’s even more grievous practices.

So where are we? Are we all starting from the same starting line, whether in Harlem or the Hamptons? Get real. Are our present-day laissez faire apostles of greed on Wall Street and other monopolists who are still talking about the invisible hand as applicable to no or little regulation of their activities still able to keep a straight face when testifying before congressional committees on taxes and corporate governance? Or is the deal a fait accompli as a result of the monopolists’ “campaign contributions” to our representatives in the back room? Your call. Whatever your view on whether the deck is stacked under some “invisible hand” pretext by the rich and corporate class, know this: That lack of regulation as practiced under laissez faire was central to 19th century bank panics, the Great Depression, the Great Recession and the catastrophic economic losses/bailouts of 2008, and that is fact, not theory. GERALD  E

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2 Comments
  1. Why is historic evidence of greed and monopolies lost on many people? I have the proverbial in-law, now retired and doing VERY well, thanks to his hard work and pulling up his own boot straps (a phrase he uses quite often). Whenever we talk politics ( once or twice a year when we visit each other), he immediately chastises me by saying my education is in theology, not economics! Then he goes on a long laundry list of how trickle down economics saved us from Keynesian inflation and downturn of the Carter years. He refuses (or denies) the high tax, strong union, healthy middle class (Jim Crow and civil inequalities not withstanding) of the years following World War Two. He seems to believe that Keynesian economics were a balloon itself waiting to pop, a pop that occurred, according to him, during the dismal economy of the mid to late 1970′s. I have referred him to Stiglitz and other notables on the other side of his arguments, but, alas, he views them as hopeless Keynesian communist!!! Quite frankly, I have many like my in-law in my church community who shrill and shake their heads in disapproval every time I speak of the communal and egalitarian visions of the poor man from Nazareth, a message that I speak every Sunday in one form or another. Seems that 1st century trouble maker for the wealthy and powerful just will not disappear from the pages of the New Testament! Thoughts?

    • I am now at my elder daughter’s house in suburban Bloomington, Indiana. Dee is a liberal Democrat and Holly (my younger daughter) claims to be a socialist. I think she is not a socialist when pressed for details, but in any and all events, they believe (as do I) that policy either on state or federal levels can make a difference. The good Lutherans in your (and all other) congregations will continue to shake their heads at delivery of such social concerns from the pulpit because they have been conditioned to believe the countervailing propaganda from Senator Bilbo of Mississippi (we need separate rest rooms so that syphilis-bearing niggers won’t give while women the disease) to more subtle forms of discrimination in housing and employment. We of the majority favor policies that benefit the status quo because we are members of the status quo. Your good parishioners can be forgiven their head-shaking. Like Pavlov’s dog, they don’t know they are victims of a propaganda woven into the social fabric. We had the same problem in a relatively democratic Rome where the status quo remained quiescent and allowed the dictatorship of the Caesars to emerge. The older your congregation is on average, of course, means that they have been exposed longer to the propaganda of Wall Street and the myths from the political class. I can only hope that your sermons (perhaps slowly at first) bring questions of hunger and discrimination into a right and wrong judgment rather than a judgment based on what’s in it for me context. You have a formidable task but you are not the first. Jesus had similar problems with a pharisaic society. Good luck! Jerry

      On Fri, Aug 30, 2013 at 5:41 PM, elderblogger

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