Monday, January 13, 2014

The Wealth Of Nations, Book 1

I have started reading "The Wealth Of Nations", by Adam Smith, 1790. Note, this is public domain, so I downloaded it for free from the iTunes store. Definitely slow going, what with archaic language (how bout all dem commas?) and spelling, and with having to learn the British pre-decimal currency system, which I believe is as follows:
  • 1 pound === 100 pence (pennies)
  • 1 shilling === 5 pence => it's a nickel, 20 per pound
  • 1 crown === 5 shillings => it's a quarter
  • 1 guinea === 21 shillings === 1.05 pounds ??? I think guineas were gold, the others were silver or copper.
"Wealth" is 4 books, so I'm going to read and report on it 1 book at a time to maintain my sanity.

Book 1 is (no joke) "On The Causes Of Improvement In The Productive Powers Of Labour, And Of The Order According To Which Its Produce Is Naturally Distributed Among The Different Ranks Of The People". Really? That's what that section was about? Interesting, over 200 years old, and the 1st book is about how the benefits of worker productivity increases are distributed among the different classes. Sound familiar?

There are 3 classes identified:

  1. landlords, or land-owning gentry, whose income comes from rents on land. In addition to rent on land used for farming, there is also rent on ocean- and river-side land used for fishing.
  2. laborers, whose income comes as wages on labor, or as crops/produce if they are farmers;
  3. masters, whose income comes as profit on stock. He uses the term "capital" sometimes, but not "capitalist". A 2ndary form of profit is interest, "that derived from it (stock) by the person who does not employ it himself, but lends it to another". So our CEOs and finance types are both in this class.
Interesting how much has changed. A list of some of the things that were totally different in the 18th century:
  • The master craftsman / journeyman / apprentice system was still in place. Apprenticeships varied in length from 7 years in England to 3 years in other countries.
  • The Industrial Revolution has not happened yet, so the "industries" being improved are agriculture -- with the majority of the discussion being about raising corn vs cattle -- and cottage industries.
  • Currencies are based on gold and silver. Reading how in the 1630s and 1640s the opening of huge new silver mines in South America caused a glut of silver on the market, lowering its price and as such devaluing the currency, thereby raising the price of everything else -- shows clearly why this is a bad idea. Also, bullion of the metal must be price-controlled to cost less that the same weight in currency -- otherwise you would melt the coins down and sell it as bullion. This is why US pennies are currently copper-coated zinc. The copper in the pure copper pennies got to be worth 3 cents each, so that you could make a profit from melting them down and selling the copper. But now we have the dog wagging the tail rather than vice versa.
  • It was illegal for workers to organize. The workers were already pretty much getting the shaft:
    The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. ...

    We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action ...

    I recently read where Henry Ford was demonized by other industrialists for paying his workers 2x the current going wage so that they could afford to buy a Ford car. How did management forget this 1st order virtuous cycle, and instead embark on following Walmart on a race to the bottom?
  • Infant mortality rates were around 50%!!!
  • Is this really different now? We're not supposed to have a class system in the US, but this reminds me of something a Republican would say:
    Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage, or as an inconveniency, to the society?
    Well, at least he does convince himself that it is an advantage.
Other economic principles introduced:
  • Natural price: the sum of the natural wages, profit, and rent that go into the product. I think that here rent includes the raw material required for a product.
  • "The demand for those who live by wages, therefore, naturally increases with the increase of national wealth, and cannot possible increase without it." So no jobs growth without GDP growth.
  • "It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest." So a growth economy needed for wage growth is a universal? Example of rich non-growing country was China at the time. Huge inequality in such countries was also noted. Reminds you of our economy now. Krugman has mentioned recently how companies maybe don't mind the current slow growth and high unemployment because of the leverage it gives them over their employees.
  • Rents and wages are normally lower the further from population centers you are, but profits are generally higher. The joy of monopoly!
  • "The rent of land ... is naturally a monopoly price." Smith seems to look down his nose at the land-owning gentry at times -- so maybe "rent-seeking behavior" has never been popular?
    As during their whole lives they (merchants and master manufacturers) are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen.

    Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his.

  • Jobs that some people do for fun, like gardening, hunting, and fishing, don't pay as well as jobs that people don't do for fun. Other factors in job pay include difficulty or distastefulness of the required tasks, and the amount of training required to acquire the requisite proficiency in the required tasks.
He also seems to resent various government attempts to control trade. The most common form of government intervention up to that time seems to be the government fixing prices of certain staple items. But there were also laws limiting the number of apprentices and otherwise controlling this system -- he particularly seemed to be annoyed by what he felt were the excessively long 7 year apprenticeships required by English law. He also didn't seem to like tariffs and protectionism. Plus, there were regulations requiring all members of given trades to register with the town, making it easier for them to organize! Overall it didn't seem like he was against the principle of government being involved in the economy, it seemed more like he felt that the particular ways in which it was being done in his time were somewhat stupid and/or less than optimal.

The most boring (least relevant?) parts are where he argues (I'm sure against competing economists of his time) that corn production and pricing is what provides the best thing to track, rather than gold, silver or butchered beef prices. (Note -- Wikipedia says "corn" refers to whatever the current dominant local grain is, rather than to maize, which is what we call corn. This confused me, since corn was not intruduced into Europe from the Americas until late 15th-early 16th century. But then he talks about corn vs wheat, barley, and hops, so I'm still confused.) There are 10s of pages of this, and charts of corn prices going back to 1210, that he uses to analyze price fluctuation and inflation -- although the term "inflation" is never used.

I like the ending of Book 1 a lot though. An explicit warning against corporatocracy?

The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market, and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can only serve to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose 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.
You know, this is actually the strongest statement he makes against government involvement in the economy. So controlling business dominance of government apparently was a problem over 200 years ago. Hell, it has probably been a problem for as long as there has been business and government. "Money talks, bullshit walks."

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