Adam Smith gets
the last laugh
By P.J. O’Rourke
Published: February 10
200919:22http://www.ft.com/cms/s/0/2802e3a8-f77c-11dd-81f7-000077b07658.html
The free market is dead. It was killed by
the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great
Depression, the second world war economic controls, the Labour party victory of
1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s “third way”
and the current financial crisis. The free market has died at least 10 times in
the past century. And whenever the market expires people want to know what Adam
Smith would say. It is a moment of, “Hello, God, how’s my atheism going?”
Adam Smith would be laughing too hard to say
anything. Smith spotted the precise cause of our economic calamity not just
before it happened but 232 years before – probably a record for going short.
“A dwelling-house, as such, contributes
nothing to the revenue of its inhabitant,” Smith said in The Wealth of
Nations. “If it is lett [sic] to a tenant for rent, as the house itself can
produce nothing, the tenant must always pay the rent out of some other
revenue.” Therefore Smith concluded that, although a house can make money for
its owner if it is rented, “the revenue of the whole body of the people can
never be in the smallest degree increased by it”. [281]*
Smith was familiar with rampant speculation,
or “overtrading” as he politely called it.
The Mississippi Scheme and the South Sea Bubble
had both collapsed in 1720, three years before his birth. In 1772, while Smith
was writing The Wealth of Nations, a bank run occurred in Scotland. Only three
of Edinburgh’s 30 private banks survived. The reaction
to the ensuing credit freeze from the Scottish overtraders sounds familiar,
“The banks, they seem to have thought,” Smith said, “were in honour bound to
supply the deficiency, and to provide them with all the capital which they
wanted to trade with.” [308]
The phenomenon of speculative excess has
less to do with free markets than with high profits. “When the profits of trade
happen to be greater than ordinary,” Smith said, “overtrading becomes a general
error.” [438] And rate of profit, Smith claimed, “is always highest in the
countries that are going fastest to ruin”. [266]
The South Sea Bubble was the result of
ruinous machinations by Britain’s lord treasurer, Robert Harley, Earl of
Oxford, who was looking to fund the national debt. The Mississippi Scheme was
started by the French regent Philippe duc d’Orléans when he gave control of the
royal bank to the Scottish financier John Law, the Bernard Madoff of his day.
Law’s fellow Scots – who were more inclined
to market freedoms than the English, let alone the French – had already heard
Law’s plan for “establishing a bank ... which he seems to have imagined might
issue paper to the amount of the whole value of all the lands in the country”.
The parliament of Scotland, Smith noted, “did not think proper to
adopt it”. [317]
One simple idea allows an over-trading folly
to turn into a speculative disaster – whether it involves ocean commerce, land
in Louisiana, stocks, bonds, tulip bulbs or home
mortgages. The idea is that unlimited prosperity can be created by the
unlimited expansion of credit.
Such wild flights of borrowing can be
effected only with what Smith called “the Daedalian wings of paper money”.
[321] To produce enough of this paper requires either a government or something
the size of a government, which modern merchant banks have become. As Smith
pointed out: “The government of an exclusive company of merchants, is, perhaps,
the worst of all governments.” [570]
The idea that The Wealth of Nations puts
forth for creating prosperity is more complex. It involves all the baffling
intricacies of human liberty. Smith proposed that everyone be free – free of
bondage and of political, economic and regulatory oppression (Smith’s principle
of “self-interest”), free in choice of employment (Smith’s principle of
“division of labour”), and free to own and exchange the products of that labour
(Smith’s principle of “free trade”). “Little else is requisite to carry a state
to the highest degree of opulence,” Smith told a learned society in
Edinburgh(with what degree of sarcasm we can
imagine), “but peace, easy taxes and a tolerable administration of justice.”
How then would Adam Smith fix the present
mess? Sorry, but it is fixed already. The answer to a decline in the value of
speculative assets is to pay less for them. Job done.
We could pump the banks full of our national
treasure. But Smith said: “To attempt to increase the wealth of any country,
either by introducing or by detaining in it an unnecessary quantity of gold and
silver, is as absurd as it would be to attempt to increase the good cheer of
private families, by obliging them to keep an unnecessary number of kitchen
utensils.” [440]
We could send in the experts to manage our
bail-out. But Smith said: “I have never known much good done by those who
affect to trade for the public good.” [456]
And we could nationalise our economies. But
Smith said: “The state cannot be very great of which the sovereign has leisure
to carry on the trade of a wine merchant or apothecary”. [818] Or chairman of
General Motors.
* Bracketed numbers in the
text refer to pages in ‘The Wealth of Nations’, GlasgowEdition of the Works of
Adam Smith, OxfordUniversityPress, 1976
** The writer is a
contributing editor at The Weekly Standard and is the author, most recently, of
On The Wealth of Nations, Books That Changed the World, published by Atlantic
Books, 2007
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