The Hidden History of Adam Smith, Father of Modern Economics

The Real Adam Smith: Morality and Markets

Directed by John Norberg (2016)

Film Review

This documentary traces the life and thinking of the father of modern economics Adam Smith. The apparent goal is to correct modern neoliberal distortions of Smith’s views on the free market and laissez faire capitalism. Unfortunately the film introduces a few distortions of its own – for example, it credits Smith’s revolutionary ideas for the current prosperity of the Western world. I believe there is far more evidence that Western prosperity has resulted from cheap fossil fuels, the North Atlantic slave trade, the ruthless Western colonization of the Third World, and the global North’s rapacious exploitation of planet Earth and human labor.

This film also erroneously credits Smith for the concept of the “invisible hand” that directs the (largely mythological) “free market.” According to University of Wisconsin History professor Laurence Dickey, it was actually one of Smith’s contemporaries (J. Harris in his earlier “Essay on Money and Coins”) who invented the term.*

In my view, the chief value of the video is the portrait it paints of Adam Smith as a moral philosopher of the Scottish Enlightenment who was chiefly concerned about the plight of the poor. In fact, Smith theorized that human labor was the main source of a society’s wealth a full century before Karl Marx.

Smith was an ardent opponent of the monopolies (such as the 250 year monopoly the British Crown granted the British East India Company), protective tariffs, and the 1773 Tea Act. Passed mainly to prop up the failing East Indian Company, this law taxed East Indian Company tea more cheaply than tea produced in the North American colonies.*

Smith published The Wealth of Nations in 1776, only months before the American War of Independence. The final section of his seven-volume treatise was highly critical of the immense wealth the UK was extracting from the colonies. He also disagreed with the Crown taxing their colonies without allowing them representation in Parliament.


*Page 260 of Wealth of Nations, edited and abridged by Laurence Dickey. See Reclaiming Adam Smith

**The Tea Act allegedly triggered the 1773 Boston Tea Party.

 

Corporate Welfare: How Billionaires Enrich Themselves at Our Expense

 

Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (And Stick You with the Bill)

By David Cay Johnston

Penguin Group (2007)

Book Review

This book is an encyclopedia of the complex system of taxpayer-funded subsidies government grants the business elite to curry their political support. This support occurs in three main ways: as campaign contributions, as jobs (at the end of a civil servant’s government career) and outright bribes. According to Johnston, corporate welfare is as old as capitalism itself. Adam Smith (who Johnston quotes frequently) refers to corporate subsidies as “bounties.” He warns against them in his 1776 Wealth of Nations.

The author, who views corporate welfare as a major cause of America’s growing inequality, details a number of examples in which federal and state subsidies transformed ordinary entrepreneurs into billionaires.

  • Sports stadiums – between 1995-2006 sports team owners persuaded state and local authorities to build more than 50 new major league stadiums and countless minor league stadiums. In many cases, the state or city seize private land via eminent domain on which to build the stadium. Johnston maintains that running a sports team is always a money-losing proposition – in nearly every case any profit is almost identical to the size of the subsidy. Former president George W Bush made his first millions by buying the Texas Rangers and using his father’s influence to pressure the city of Arlington to seize 200 acres of private land via eminent domain for a sports stadium.
  • Walmart – founder Sam Walton built his retail empire by hiring lobbyists (Johnston calls them “bounty hunters”) to grant him free land via eminent domain, to “gift” him the sales tax he collects from customers and allowing him to raise capital via low cost government-sponsored industrial bonds. In total, Walmart has been granted more the $1 billion of government subsidies in 1/3 of their stores and distribution centers. In addition, as of 2007 they had (legally) avoided $4 billion in property and state income taxes.
  • Health Maintenance Organization (HMOs) – Nixon launched the first non-profit HMOs in the early seventies. His goal was to reduce health care costs by enrolling patients in repaid care in where doctors worked on salary. In 1981, Reagan phased out the federal loans and loan guarantees Nixon enacted to help subsidize HMOs and allowed them to become for profit businesses.All over the country, CEOs sold and traded shares in HMOs built at taxpayer expense.The CEOs of non-profit hospitals and Blue Cross plans quickly followed suit. Johnston calls it the greatest legalized theft of public assets in US history.

The Inherent Right to Rebel

The Defense of Gracchus Babeuf

J A Scott

MW Books (1988)

Book Review

Babeuf’s speech available free on line at: Defense Speech

Babeuf was a whistleblower under Louis XVI, who in 1782 exposed corruption in the tax system imposed by the French aristocracy. He spent the years immediately preceding the French revolution (1789) either in hiding or in jail. On learning the Bastille had fallen, he joined the revolutionary struggle. In addition to launching a newspaper, he circulated numerous pamphlets and petitions calling for the abolition of private property and an end to the private expropriation of the commons and the division of society into exploited and exploiting classes.

In September 1792, he was elected to the revolutionary government, only to be arrested in 1795 by the counter-revolutionary forces that overthrew Robespierre. He was charged and found guilty of advocating for the re-establishment of the Constitution of 1793.

The book is the verbatim defense Babeuf presented to the court that sentenced him to death. He cites the writings of Plato, Sir Thomas Moore, Thomas Jefferson, Rousseau, Diderot and other Enlightenment thinkers to argue that human beings have a natural right to rebel against political and economic injustice and that violence, poverty and war all have their roots in the concept of private property.

He further argues that the natural function of society and social institutions is to protect the weak against the tyranny of the strong (whereas in reality they do the opposite). He contends that the 1789 revolution wasn’t complete because it allowed the wealth to continue to control all social power and government. He also (correctly) claimed that the election adopting the 1795 constitution was rigged and thus failed to represent the true will of the people.

For me the significance of Babeuf’s courtroom oration (which predated Marx by more than 60 years) was the surprising realization that Marx wasn’t the first to argue against the argue against the damage wealth inequality wreaks on society. It’s easy to forget that Karl Marx was but one of a long line of thinkers (which includes Thomas Jefferson and Adam Smith) who advocated against class exploitation.

The Hidden History of Money, Debt and Organized Religion

Debt the First 5,000 Years

David Graeber (2012)

In this presentation, anthropologist David Graeber talks about his 2012 book Debt: The First 5,000 Years

For me, the most interesting part of the talk is his discussion of the historical link between debt and the rise of the world’s major religions (Hinduism, Christianity, Confucianism, Islam, Buddhism, Judaism) between 500 BC and 600 AD.

As Graeber describes it, all commerce was based on credit prior to the development of coinage around 500 BC. In all societies, coinage arose in conjunction with the onset of empire building – traveling armies had to be paid in hard currency rather than credit. The result, according to Graeber, was the simultaneous rise of military/coinage/slavery* empires in Greece, China and India.

According to Graeber, all the major religions arose around the same time – as a “peace movement” opposing militarism, materialism and slavery.

Around 400 AD, when the Roman and other empires collapsed, coinage vanished, along with the standing armies that necessitated its creation. During the Middle Ages, nearly all financial transactions were based on credit. Until 1493, when the “discovery” of the New World initiated a new cycle of empire building, accompanied by militarism, coinage and slavery.

I was also intrigued to learn that Adam Smith stole most of his thinking about free markets from medieval Islamic philosophers. The Islamic ban on usury enabled the Muslim world to operate pure free markets that were totally outside of government influence or control. Trying to operate an economy without such a ban (or a system of debt forgiveness like the Biblical practice of Jubilee) leads to inevitable economic chaos and ultimately collapse, even with government intervention.

People who like this talk will also really like a series Graeber recently produced for BBC4 radio entitled Promises, Promises: The History of Debt.  In it, Graeber explores  the link between Native American genocide and the harsh debt obligations imposed on the Conquistadors.  He also discusses the formation of the Bank of England in 1694, the role of paper money as circulating government debt and the insanity of striving for government surpluses.


* In ancient times, the primary mechanism by which people became enslaved was non-payment of debt.

 

 

 

Telling the Truth About Debt, Austerity and Taxation

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The Joy of Tax: How a Fair Tax System Can Create a Better Society

by Richard Murphy

Corgi Books (2015)

Book Review

Although the topic is economics, I personally guarantee this product to be totally painless. Murphy describes economics in ordinary comprehensible language – unlike mainstream economists who treat economics like a religion that can only be understood by high priests – and who speak and write in obscure language so you can never be sure if they’re telling the truth or not.

In The Joy of Tax, UK Tax Justice Network co-founder Richard Murphy offers a radically pioneering approach to tax and fiscal policy.  Murphy is one of the first economists to link tax policy to the 400- year-old reality that nearly all money is created by private banks out of thin air.

For political reasons, most economists try to conceal that private bank loans, i.e. debt, are the source of nearly all money in circulation. According to Murphy, the recent admission by the Bank of England (Quarterly Bulletin April 2014) about the true source of our money makes it possible to debunk a number of myths perpetuated by mainstream politicians and economists. Some examples: that investment is only possible when there are sufficient savings in the economy, that government debt is bad and that austerity, balanced budgets and government surpluses are good.

A point Murphy emphasizes repeatedly is that government also has the ability to create money out of thin air. Moreover it has regularly exercised that right to stimulate a stagnant economy. In fact, because all money is created as debt, it’s essential for government to “create” money (by spending it into the economy) whenever private banks fail to create sufficient credit. If this didn’t happen, severe economic recession results.

In Murphy’s view, the primary purpose of taxation is to reclaim the money government creates to keep it from over-inflating the economy. He claims the conservative elites who rabbit on about repaying government debt are really making the case that only private banks should have the right to create money. Aside from making them enormously rich, this makes no sense. Private banks are incapable of acting in the public interest – by law they can only act in the interest of their shareholders.

Citing Adam Smith in The Wealth of Nations, Murphy maintains a rational tax system can deliver other important goals, such as reducing inequality, recovering externalized costs (e.g.  pollution, toxic waste) imposed by corporations and promoting economically and ecologically sustainable growth.

For the current tax system to accomplish these goals, it would need to be far less regressive. At present most of the tax burden falls on middle and low income taxpayers. According to Murphy, the global economy will continue to stagnate until the wealthy shoulder their fair share of tax.

To make our current tax system fairer, Murphy proposes to introduce a number of “progressive” taxes, including a financial transaction tax, a wealth tax, a carbon/pollution tax, a land value tax to fund local government and a special tax on corporations that fail to re-invest their profits. He also proposes to do away with the current welfare bureaucracy by introducing an Unconditional Basic Income (UBI).

Although most of these tax reform proposals are specific for the UK, they would clearly produce similar benefits for the US and other post-industrial economies.

Originally published in Dissident Voice

Behavioral Economics

Mind Over Money

PBS Nova (2010)

Film Review

Mind Over Money is an intriguing Nova documentary about the new field of behavioral economics. At present, banks and governments use complex mathematical models in making decisions about lending, investment, taxation and government borrowing. These models are based on the premise Adam Smith put forward in Wealth of Nations that the “rational self-interest” of groups of individuals causes economic markets to be perfectly self-regulating without government regulation or control.

While the economic “rationalists” who subscribe to this belief acknowledge that not everyone makes totally rational decisions about money, they claim enough do to enable bankers, governments and economists to 1) predict the behavior of markets mathematically and 2) guarantee the overall stability of markets without government interference.

In contrast, behavioral economists argue that most decisions around money are based on emotional and unconscious factors. They further argue that without government regulation, waves of irrationally sweep through the stock market and mercantile exchange (where commodities are traded), causing destructive speculative bubbles and crashes as they did in in 1929 and 2008.

John Maynard Keynes was the first economist (during the Great Depression) to raise concerns that destructive booms and busts result from irrational investing behavior. Because he could offer no clear explanation why this was happening, his views were largely dismissed.

Economist Robert Shiller echoed Keynes concerns in his 2005 book Irrational Exuberance, in which he predicted the 2008 global economic crash.

Thanks to a pressing need to understand the 2008 downturn (and prevent another one), social psychology research into spending and investing behavior is enjoying its own boom. The documentary describes a number of fascinating experiments that validate Keynes’s original claim that these decisions are largely controlled by emotional and unconscious factors.

For my own part, I question why we need to produce absolutely scientific certainty for something that’s blatantly obvious. In contrast to economists, Wall Street traders all readily agree that Wall Street volatility is driven by waves of emotion. It strikes me that Wall Street economists refuse to accept the behavioral basis of market activity because they have a vested interest in continuing the high priesthood of complex mathematical models.

The film implies that more market regulation is needed to prevent this type of market volatility. I disagree. In my mind, the best way to strip Wall Street of this vested interest is to strip banks of the power to create money out of thin air and restore money creation to public control (as Andrew Johnson and Abraham Lincoln attempted to do.) See An IMF Proposal to Ban Banks from Creating Money

 

The Innate Sloth and Indolence of the Working Class

Invention

The Invention of Capitalism: Classical Political Economy and the Secret History of Primitive Accumulation

By Michael Perelman
Duke University Press (2000)

Download Free PDF

The Invention of Capitalism is about the origin of an economic concept known as “primitive accumulation.” Marx defined primitive accumulation as the process by which precapitalist modes of production, such as feudalism and chattel slavery, are transformed into the capitalist mode of production. Using the term somewhat differently, Perelman describes it as the brutal process by which government denies peasants the means of subsistence to force them into wage labor.

Tracing the rise of capitalism in the 18th and 19th century, the Invention of Capitalism also studies the origin of the concept in the work of classical economists, such as Adam Smith, Ricardo and Malthus.

Forcing Workers to Accept Wage Labor

Nearly all the 18th century economists and social philosophers seem to agree that workers never voluntarily accept wage labor so long they have alternative means of providing for themselves. They all acknowledge, either directly or indirectly, that it’s natural for human beings to prefer “self-provisioning,” in which they own or rent a piece of land to produce their own food, clothing, fuel and other necessities. In addition to allowing them more control over their work, there is more leisure time associated with this lifestyle, as well as strong community ties that disappear with wage labor. Unless brutal force must be applied to strip people of the ability to provide for themselves, they never voluntarily agree to wage labor.

In Britain, “primitive accumulation” was largely accomplished through the Enclosure Acts, the Poor Laws and the Game Laws. The Enclosure Acts drove peasants off large tracts of land they had farmed communally for thousands of years; the Poor Laws forced disposed peasants into poorhouses and workhouses; and the Game Acts denied them the right to hunt (ie poach) or gather berries, firewood etc on unoccupied land.

Capitalism developed more slowly in Scotland, France, Italy, Spain and the British colonies, where the ruling elite was less savage in stripping the peasantry of access to land. These regions enjoyed a long transition in which factory workers performed wage labor and self-provisioning simultaneously, by raising crops and chickens and engaging in spinning and other crafts in their leisure time.

The Innate Sloth and Indolence of Workers

As Perelman quite ably demonstrates, most classical economists gloss over the brutal force required to establish a successful capitalist economic system. A few of the lesser known political economists (Perelman focuses in Sir James Steuart, one of Adam Smith’s rivals) are honest about need for laws that prevent workers from self-provisioning. They blame the need for such laws on an innate tendency towards “sloth and indolence” in workers and peasants (and indigenous peoples).

Perelman devotes special attention to the Scottish economist Adam Smith and The Wealth of Nations, as well as the political economists and social philosophers who influenced Smith’s work. He also explores attitudes toward primitive accumulation in the work of Marx, Benjamin Franklin, Lenin and Mao Tse Tung. The forceful primitive accumulation that industrialized the Soviet Union and Communist China occurred much more rapidly than in Western Europe or North America. This makes the Soviet and Chinese process appear much more savage. However a close look at British history suggests they were far more brutal, especially in Ireland and the colonies, than either the Chinese or Soviets.

Yields Drop Under Commercial Agriculture

The part of the book I found most interesting concerns the drop in crop yields that occurred with the shift from labor intensive “spade labor” to commercial agriculture employing horse driven plows and eventually farm machinery. This corresponds closely with modern research showing that plowing reduces yields by destroying soil fertility. Then, as now, it’s clear that the goal of commercial agriculture isn’t to produce more food but to extract more profit from other people’s work.

A Return to Self-Provisioning

Perelman’s research seems especially significant in the face of growing unemployment and part time and casual labor. A growing number of unemployed and part time workers use their enforced leisure time to plant veggie gardens, collect rainwater, preserve their own food and make their own clothes and cleaning and beauty products. In other words, the cycle of primitive accumulation is being reversed, as more and more people leave formal employment and return to self-provisioning.