How Would Adam Smith Fix the Financial Crisis?
David Munaver Bholat
“Though the principles of the banking trade may appear somewhat abstruse,
the practice is capable of being reduced to strict rules. To depart upon any
occasion from those rules, in consequence of some flattering speculation of
extraordinary gain, is almost always extremely dangerous, and frequently
fatal to the banking company which attempts it.”
—Adam Smith, Wealth of Nations ([1776] 1976), vol. 2, 279
1
Sir Isaac Newton: (not such a) Master of the Mint
2
Economics without Economic History
The drama of the banking crisis…is
unprecedented in the lifetime of almost all of
us.
Governor of the Bank of England, 2008
The Worst Financial Crisis since the 1930s.
Governor of the Bank of England, 1973
3
“Northern Wreck”
Britons in the queue, between the Rock and a hard place
4
Banking Crises
Source: National Bureau of Economic Research (US)
5
Motivations for Talk
• To emphasize the structural versus contingent
causes of the current crisis.
• To save Smith from neo-classical
appropriation.
6
Adam Smith
Those exertions of the natural liberty
of a few individuals, which might
endanger the security of the whole of
society are, and ought to be,
restrained by the laws of
governments…The obligation of
building party walls to prevent the
communication of fire, is a violation
of natural liberty, exactly of the same
kind with the regulations of the
banking trade which are here
proposed.
- Wealth of Nations Vol. 1, 345
7
“Dark Age in Macroeconomics”
Paul Krugman
8
Rea£ Profit$ of the Financial Sector (USA)
Source: National Income and Product Accounts
9
Objectives of Lecture
1. Examine key themes in Smith
2. Apply Smith to the present
10
Solutions derived from Smith
• 100 percent reserve banking
• Mutualise Financial Institution Ownership
• End contracts on intangible un-deliverables
11
KEY FOCI
•DIVISION OF LABOR
• CLASS
• WEALTH AND WORK
12
What is Wealth?
• Bullionists
• Mercantilists
• Physiocrats
• Political Economists
13
Neo Bullionism
“Money is neither a material to work upon, nor a tool to work with.”
-Adam Smith, Vol. 1, 313
Structured Finance
Innovation
Engineering
ADDING VALUE
14
Categories of Stock in Smith
15
Smith on
THE DIVISION OF LABOR
16
Division of Labor
• Territorial Division of Labor
• Organizational Division of Labor
• Technical Division of Labor
17
Technical Division of Labor
“In the progress of the
division of labor…the great
body of the people comes to
be confined to a few very
simple operations. But…the
man whose life is spent in
performing a few simple
operations…generally
becomes as stupid and
ignorant as it is possible.”
Wealth of Nations Vol. II, 302-303
18
Smith on Profit$
“ As capitals increase in any country the profits
which can be made by employing them
necessarily diminish. It becomes gradually
more and more difficult to find within the
country a profitable method of employing any
new capital.”
Wealth of Nations Vol. 1, 375
19
Territorial Division of Labor
20
UK Current Account Deficit
21
‘Natural’ Growth
Agriculture
Industry
Trade &
Finance
“Unnatural” Growth
Trade &
Finance
Industry
Agriculture
22
Smith on
CLASS AS A CATEGORY
23
Smith’s Three Classes
• Landlords
• Laborers
• Merchants
24
Redistribution of Wealth
25
Smith on Class Interests
[The merchant class’] 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.
Wealth of Nations Vol. 1 , 277
26
Smith on Profits
Our merchants and mastermanufacturers complain
much of the bad effects of
high wages. They say
nothing concerning the bad
effects of high profits. They
are silent with regard to the
pernicious effects of their
own gains. They complain
only of those of other
people.
Wealth of Nations Vol. 1,
110
27
A Typology of Class:
Or how did you make your money?
CLASS
METHOD
MONEY-NAME
Merchant
Sell their product
Profit
Laborer
Sell their labor-time
Wage
Landlord
Lend their land
Rent
Lenders
Lend their money
Interest
Capitalist
Leverage others’ property
Windfalls
28
Bank of Amsterdam
Founded in 1609
29
A Typology of Class:
Or how did you make your money?
CLASS
METHOD
MONEY-NAME
Merchant
Sell their product
Profit
Laborer
Sell their labor-time
Wage
Landlord
Lend their land
Rent
Lenders
Lend their money
Interest
Capitalist
Leverage others’ property
Windfalls
30
Smith on
WEALTH AND WORK
31
Shares in Northern Rock
Tyneside City of
London
Rest of
Britain
1997
493
5
329
1999
350
214
257
Change
-143
209
-72
Shares in Millions
32
Mortgage Lending by Purpose (UK)
33
Fascist Reactions
34
Crisis
Financial
Economic
Cultural
35
Wealth and Work
36
Two Sides of the Same Coin:
Democratization of Credit/Tyranny of Debt
Household Debt as Proportion of GDP
37
How Would Adam Smith Fix the Financial Crisis?
David Munaver Bholat
38