On the Wealth of Nations Page 7
The 13 Habits of Highly (It Is to Be Hoped) Ineffective Government Economic Planners
1. Be vulgar and obvious.
The point of government economic planning is, presumably, to better the condition of those whom the government governs. The trouble comes when economic planners start thinking about what that better condition should be. Easier access to mass transportation? More parks and green spaces? Improved educational opportunities? The governed, Smith declared, already know the answer: 'An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious.'1
2. Let John Q. Citizen do all the work.
Smith emphasized the 'private frugality and good conduct of individuals' and 'their universal, continual, and uninterrupted effort to better their own condition'. He argued that it was 'this effort, protected by law and allowed by liberty … which has maintained the progress of England towards opulence and improvement'.2 But since England 'has never been blessed with a very parsimonious government, … [it] is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people'.3
3. Make the whole government as unproductive as the economic planners are.
Government is supposed to be unproductive. Adam Smith divided labor into two types: 'One sort of labour … adds to the value of the subject upon which it is bestowed.'4 Government is the other sort. There's nothing wrong with this. 'The labour,' Smith wrote, 'of some of the most respectable orders in the society is … unproductive of any value.'5 He didn't mean their labor had no value; he meant it didn't produce any physical item. 'Unproductive' labor doesn't result in the physical things – goods, capital, raw materials – that are needed for the production of other physical things. And it is by physical things that we live. No piece of legislation, however well written, will keep you warm outdoors in the winter. (Although not passing some legislation, such as the Kyoto Climate Accord, may.)
'The sovereign, for example,' wrote Smith, 'with all the officers both of justice and war … the whole army and navy, are unproductive labourers … The protection, security, and defence of the commonwealth, the effect of their labour this year, will not purchase its protection, security, and defence for the year to come.'6 In other words government is a service, and it should never be mistaken for a factory that furnishes us with all our jobs, homes, and discount blood pressure pills. Whenever a politician is heard to say that government spending is 'an investment', he should be told to get a job.
Later economists, such as, in the early nineteenth century, J. B. Say, felt that Smith undervalued the economic contributions of services. And he did. The eighteenth century had servants, not a service economy. It was hard for a man of that era to believe that the semi-inebriated footman and the blowsy scullery maid would evolve into, well, the stoned pizza delivery boy and the girl behind the checkout counter with an earring in her tongue.
Smith was trying to make a – probably unnecessary – logical distinction between goods and services. But if Smith undervalued private services, this is more than compensated for by the overvaluation of public services made by 'public servants', past and present. The stuff that government consumes must, ultimately, be provided by the people who make and do stuff. Smith noted that 'unproductive labourers' are 'maintained by the annual produce of the land and labour of the country. This produce, how great so-ever, can never be infinite, but must have certain limits.'7 And certain limits are precisely what government should have.
4. Keep government spending in check. Let other spending run wild.
'Great nations,' Smith wrote, 'are never impoverished by private, though they sometimes are by public prodigality and misconduct.'8 The reason for this is that 'the man who borrows in order to spend will soon be ruined, and he who lends to him will generally have occasion to repent of his folly. To borrow or to lend for such a purpose, therefore, is in all cases, where gross usury is out of the question, contrary to the interests of both parties.'9 But Smith had never heard of credit cards. Looking at my MasterCard bill, gross usury is by no means out of the question.
5. Wreck the balance of trade.
Adam Smith, hearing the same frightened complaints about balance of payments as we hear today, slapped the face of trade deficit hysterics: 'But though so great a quantity of gold and silver [or US Treasury bills, or what have you] is thus sent abroad, we must not imagine that it is sent abroad for nothing, or that its proprietors make a present of it to foreign nations.'10
6. Everybody hates lower trade barriers. Lower them anyway.
Broader prosperity requires broader markets. Early in book 1 of Wealth Smith wrote, 'As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.'11
To give a contemporary instance, Palestinian terrorists use division of labor to make bombs that they are eager to exchange for death and destruction in Israel. But the extent of their power of exchange is limited because Israel is not in the market for being blown up, so the terrorists have to strap the bombs to themselves.
Perhaps, come to think of it, this isn't the happiest example to have given. Although it does show that, as good as international free trade is in the abstract, some very bad things do come across borders. That's why any expectation 'that the freedom of trade should ever be entirely restored' is, as Smith believed, 'absurd'. And Smith himself couldn't resist being a bit of a puritanical scold on the subject of foreign trade: 'Purchasing … such goods as are likely to be consumed by idle people who produce nothing, such as foreign wines, foreign silks, &c … promotes prodigality.'12 Our importation of navel-exposing foreign pants consumed by idle teens probably falls into this category. It's best to stick with Smith's original slap in the face.
7. Human capital – it ain't just PhDs.
In addition to expanded markets, economic growth depends upon labor's use of capital, or 'stock'. At the beginning of book 2 Smith lists different kinds of stock including 'the acquired and useful abilities of all the inhabitants or members of the society'.13 These are certainly as important to economic development as your savings account, and more important than mine. But in the language of modern economic planning, 'promoting human capital' tends to mean large-scale government intrusions upon the education and training of everyone the government can get ahold of. President Bush calls his intrusion No Child Left Behind. What if the kid deserves to be left behind? What if he deserves a smack on the behind?
Adam Smith was only a tepid advocate of public education. As he went on to explain in book 5 of Wealth, he thought that some government subsidy of education was needed so that 'even a common labourer may afford it.'14 Teachers, however, should be 'partly, but not wholly paid' by the state. 'In modern times, the diligence of public teachers is more or less corrupted by the circumstances, which render them more or less independent of their success and reputation,'15 wrote Smith, making his modern times sound like ours. And Smith believed that certain very prestigious institutions of higher learning were teaching 'a mere useless and pedantic heap of sophistry and nonsense'.16 Was UC Berkeley even around back then?
The educational programs of modern governments aim at turning out droves of eminent specialists. No doubt specialists are useful to division of labor. But Smith meant us to appreciate something that is more ordinary and (even with marginal utility factored in) more valuable than a specialist. By categorizing 'useful abilities' as capital, Smith was returning to a principle put forth in the consideration of the division of labor in book 1. Every man should be given the respect accorded to an eminent specialist, even 'the common ploughman, … regarded as the pattern of stupidity and ignorance'.17 Every man is a specialist in what he needs and wants. And the most stupid and ignorant man is more than that. 'No apprenticeship has ever been thought necessary to qualify for husba
ndry,'18 Smith wrote. (Or, as we'd put it – no Rhodes Scholarship, postgraduate degree, or MacArthur genius grant is required to hoe cabbage.) And yet, Smith pointed out, countless highly specialized books have been written about agriculture. 'And from all those volumes we shall in vain attempt to collect that knowledge of its various and complicated operations, which is commonly possessed even by the common farmer; how contemptuously soever the very contemptible authors of some of them may sometimes affect to speak of him.'19
Just a few years ago the 'common ploughman' of China was thought to possess no human capital at all. Today he's reckoned to be the most potent economic force in the world. It's not because a billion Chinese peasants got MBAs.
In 1944 Friedrich A. Hayek published The Road to Serfdom, history's second most important book about economics. Hayek's denunciation of economic planning was dedicated 'To socialists of all parties'. In his chapter titled 'The "Inevitability" of Planning', he wrote that 'there could hardly be a more unbearable – and more irrational – world than one in which the most eminent specialists in each field were allowed to proceed unchecked with the realization of their ideals.'20
Adam Smith and Friedrich Hayek warned us about the marvelous South Korean educational system and allowing Woo Suk Hwang to proceed unchecked with the bogus cloning of human embryonic stem cells.
8. Buy retail.
Adam Smith was one of the few deep thinkers – wives excepted – to ever come to the defense of retailing. 'If,' he wrote, 'there was no such trade as a butcher, for example, every man would be obliged to purchase a whole ox or a whole sheep at a time. This would generally be inconvenient to the rich, and much more so to the poor.'21 And even a two-lawyer family with a Sub-Zero freezer might have quite a time getting an ox in there.
And yet, distaste for retailing is nearly universal. There is the aristocratic horror of being in trade (other than the military trade of butchering humans). And there is the bourgeois horror experienced by those who got caught being in trade by the likes of Stalin. 'Mom and pop stores' and the 'corner shop' are sometimes extolled, but the places where everyone buys everything never are. In rural New England where I live, the conservative preservationist kooks, who want every 7-Eleven replaced with a collapsing barn, join amiably with the liberal back-to-nature dopes, who think highway potholes should be protected as wetland resources. Together they have ensured that it's an hour's drive to the nearest Wal-Mart. 'The prejudices of some political writers against shopkeepers and tradesmen, are altogether without foundation,' Smith wrote. 'They can never be multiplied so as to hurt the publick, though they may so as to hurt one another.' The wise enemy of Wal-Mart wants one right in town – with a Target next door.
9. Modern life is stressful, overscheduled, and job-obsessed – keep it that way.
Don't fall into the UN Universal Declaration of Human Rights trap, where everyone is declared to have 'the right to rest and leisure'. Look where it's gotten the UN. 'Our ancestors,' Smith wrote, 'were idle for a want of a sufficient encouragement to industry. It is better, says the proverb, to play for nothing, than to work for nothing.'22 What our ancestors played was 'hunt the witch' and 'kill the Jews' and 'send the kids on the Children's Crusade'.
The life of earning has merits that the life of spending what others have earned lacks. As pointless as existence in the workplace cubicle seems, it's not as pointless as hanging out at the mall. To illustrate this tenet Smith compares cities where the business is government with cities where the business is business. 'In those towns which are principally supported by the constant or occasional residence of a court [read George Bush or Tony Blair], and in which the inferior ranks of people are chiefly maintained by the spending of revenue, they are in general idle, dissolute, and poor.'23 Idle and dissolute in London. Poor in Washington, DC. By contrast, 'In mercantile and manufacturing towns, where the inferior ranks of people are chiefly maintained by the employment of capital, they are in general industrious, sober, and thriving.'24 Of course nowadays that would be in Guangzhou.
10. Don't put your money in a safe place.
And if you can't think of anything better to do with your money, spend it. Smith wrote that 'every man of common understanding will endeavour to employ whatever stock he can command, in procuring either present enjoyment or future profit.'25 Indeed, he wrote, 'A man must be perfectly crazy who, where there is tolerable security, does not employ all the stock which he commands, whether it be his own or borrowed of other people.'26 But, continued Smith, 'In those unfortunate countries … where men are continually afraid of the violence of their superiors, they frequently bury and conceal a great part of their stock.'27
The survivalist madly provisioning his off-the-grid compound, the hapless retiree buying gold advertised on TV, the lonely recluse hoarding string, aluminum foil, and pre-1965 silver dimes – they are not as crazy as the political and economic systems that make them think they need to do this. And 'afraid of the violence of their superiors' is not too strong a phrase for people who've been through an IRS audit.
11. Get all confused about globalization.
The complexity of economics can be calculated mathematically. Write out the algebraic equation that is the human heart and multiply each unknown by the population of the world. In his commentary on farmers Adam Smith proved, whether he meant to or not, that economics is unknowable. What rednecks do in the barn is deeply recondite (and who knows what else). The hopeless perplexity of economics is the best hope of keeping us humble when we are perplexed by it. If we think we have a theory that untangles the economic skein, we are kittens with a ball of yarn – killer kittens if we want to tie up others with that yarn and drown them in the well of idealism.
The danger of trying to deduce specific economic policy from general economic theory is something else that Adam Smith proved, in a manner that humbled himself. The last dozen or so pages of book 2 concern what we would call globalization. The man who created modern economics was as muddled as any modern on the subject.
Smith began with a Khmer Rouge praise of agriculture: 'Of all the ways in which a capital can be employed, it is by far the most advantageous to the society.'28 He followed this with a misunderstanding of the international capital market: 'The capital of the manufacturer must no doubt reside where the manufacture is carried on.'29 Smith partially corrected that misunderstanding in the first sentence of the next paragraph: 'Whether the merchant whose capital exports the surplus produce of any society be a native or a foreigner, is of very little importance.'30 And in the paragraph after that Smith managed to both misunderstand and not misunderstand at the same time: 'It is of more consequence that the capital of the manufacturer should reside within the country … It may, however, be very useful to the country, though it should not reside within it.'31
Smith emerged from his bewilderment about domestic and international capital long enough to expose the folly of economic planners in developing countries who think self-sufficiency in agriculture, manufacturing, and transportation is the way to prosperity: 'To attempt, however, prematurely and with an insufficient capital, to do all the three, is certainly not the shortest way.'32 But Smith didn't know that the United States would soon provide a contrary example. 'Were the Americans,' Smith wrote, 'to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods … they would retard instead of accelerating the further increase in the value of their annual produce.'33
For the following 150 years America would impose tariffs on foreign manufactured goods at rates ranging from damn high to higher. Of course America would become the exception that proved the rule by making use of a vast internal free market. Also, it's scarier to think that Smith was right about the effects of American protectionism than to think that he was wrong. Consider an America that had gotten as rich in the 1850s as it is now – with nothing to spend the money on but more slaves and larger hoop skirts, horse whips, and pistols.
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ving rendered the utilization and flow of capital incomprehensible and left us confused about developing economies, Smith went on to immerse himself in obscurities concerning rate of return on investment: 'But the returns of the foreign trade of consumption are very seldom so quick as those of the home-trade.'34 By emphasizing the value of quick profit Smith argued against his own argument in favor of agriculture. Making money by farming is, exactly, like watching grass grow. Smith was also touching upon the theory of 'velocity of money', which would be fully stated by John Maynard Keynes in the 1930s and which no one has ever understood, Keynes included.
Smith finished his section on globalization with an observation about human ingenuity in the exercise of market freedoms that rendered everything he'd just written about capital meaningless: 'We see every day the most splendid fortunes that have been acquired in the course of a single life by trade and manufactures, frequently from a very small capital, sometimes from no capital.'35
12. Ignore the experts.
Smith wrote, 'Five years have seldom passed away in which some book or pamphlet has not been published … pretending to demonstrate that the wealth of the nation was fast declining.'36
13. Especially, ignore the economists.