The Wealth of Nations, Book 5

Yay! I finished the 5th and final book of "The Wealth of Nations" a couple of weeks ago. What a slog! In addition to several dozen obsolete or archaic economic terms, around 1/3 of which were unknown to the iBook reader's dictionary, there were half page sentences with 30 commas, and a 4 page paragraph. Very hard to read.

I am just now getting around to blogging this because since the death of my 93 YO mother-in-law on March 16, 2014, I have been spending an afternoon-night-day in Louisville baby-sitting my 55 YO Downs Syndrome brother-in-law Bruce. It is easy but mind-numbing duty. 2 TVs playing MeTV -- awful 60's and 70's shows -- from 8am til 9pm. I could give you the hour-by-hour lineup, but I'll spare you. "Perry Mason" stands out for being fairly enjoyable, "Dragnet" is truly execrable. I am able to keep up on twitter/RSS/facebook and even do some reading. But no time to blog.

Additionally, last weekend we took a 4 day trip to Raleigh NC to go to Grandparent's Day at my granddaughter's school. We also went to the park and to the very nice Museum of Life and Science in Durham, and baby-sat Saturday evening while my son and daughter-in-law went out to the school gala. A very pleasant time. Here is a video of an art project at the school which features Lucy 3 times (rock star)! She is shown at 1:10, 1:15, and 1:35.

Book 5 of "The Wealth of Nations" is titled "Of The Revenue Of The Sovereign Or Commonwealth". The 1st chapter is titled "Of the Expenses of the Sovereign or Commonwealth". There are 4 of these:

1. Defense
   
2. Justice
   
3. Public Works and Institutions
   
4. Supporting the Dignity of the Sovereign (???)
   

For defense, we start with history-fu on the ability of different civilization types -- hunting, herding, farming, and industrial -- to be called to war. The progression is from everyone fights to militias to standing armies.

The fall of the Greek republics, and of the Persian empire was the effect of the irresistible superiority which a standing arm has over every other sort of militia. It is the first great revolution in the affairs of mankind of which history has preserved any distinct and circumstantial account.

On the expense of justice, Smith is pretty damn blunt, with some nice bashing of the poor:

But avarice and ambition in the rich, in the poor the hatred of labour and the love of present ease and enjoyment, are the passions which prompt to invade property; passions much more steady in their operation, and much more universal in their influence. Wherever there is a great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy to invade his possessions.

...

Civil government, so far as it is instituted for the security of property, is, in reality, instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.

So the justice system is designed to protect the rich from the poor. Sound familiar?

Then a truly classist explanation of why some people are superior to others:

The causes or circumstances which naturally introduce subordination, or which naturally and antecedent to any civil institution, give some men some superiority over the greater part of their brethren, seem to be four in number.

1. "the superiority of personal qualifications, of strength, beauty, and agility of body; of wisdom and virtue; of prudence, justice, fortitude, and moderation of mind."
   
2. "the superiority of age" -- respect your elders. Man, one thing about the tech world, there ain't a lot of that going around.
   
3. "the superiority of fortune". Money talks, etc. He again discusses how before there was manufacturing to make neat stuff, the only thing a ruler could do with excess harvests was to feed more and more supporters. But, once they could buy neat stuff instead, that was given up.
   
4. "the superiority of birth". If your grandpa was my grandpa's servant, why, it's natural that you should be my servant! Ah, the British mindset. It's too bad that they still keep the royal reality show running. I think that it helps keep remnants of this mindset in place. Even Americans seem to somehow like this type of classism -- look at the popularity of "Downton Abbey".
   

So much of this sounds so familiar. Why does the 10% support the 1% and the 1% support the .01%?

The rich, in particular, are necessarily interested to support that order of things, which can alone secure them in the possession of their own advantages. Men of inferior wealth combine to defend those of superior wealth in the possession of their property, in order that men of superior wealth may combine to defend them in the possession of theirs.

One thing that was interesting is that the justice system used to be a for-profit institution. You paid the judge for hearing your case. I guess eventually that didn't work out; rather, it lead to "gross abuses".

In those days, the administration of justice not only afforded a certain revenue to the sovereign, but, to procure this revenue, seems to have been one of the principal advantages which he proposed to obtain by the administration of justice.

Also justice started out with the king being the judge, before it became more convenient for them to outsource the function. Interesting too, Smith notes that this split lead to an early version of the separation of power between branches of government.

In order to make every individual feel himself perfectly secure in the possession of every right which belongs to him, it is not only necessary that the judicial should be separated from the executive power, but that it should be rendered as much as possible independent of that power.

The 1st type of public works discussed are those that promote commerce: primarily roads, bridges, waterways, and harbors. Smith was an equal opportunity basher of the rich as well as the poor.

When the toll upon carriages of luxury, upon coaches, postchaises, etc. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, waggons, etc. the indolence and vanity of the rich is made to contribute, in a very easy manner, to the relief of the poor, by rendering cheaper the transportation of heavy goods to all the different parts of the country.

Smith was a fan of local government more than national government. Maybe at the time there were not individuals or corporations rich enough to buy local government as seems to so often happen now.

The abuses which sometimes creep into the local and provincial administration of a local and provincial revenue, how enormous soever they may appear, are in reality, however, almost always very trifling in comparison of those which commonly take place in the administration and expenditure of the revenue of a great empire.

Smith really didn't seem to trust much of anybody. Here he is on corporate influence on regulation -- corporations love regulation when they can get it to stack the deck in their favor.

The usual corporation spirit, wherever the law does not restrain it, prevails in all regulated companies. When they have been allowed to act according to their natural genius, they have always, in order to confine the competition to as small a number of persons as possible, endeavoured to subject the trade to many burdensome regulations.

Is this next statement the precursor of Say's Law? Say was a French economist who lived from 1767 to 1832.

The increase of demand, besides, though in the beginning it may sometimes raise the price of goods, never fails to lower it in the long-run. It encourages production, and thereby increases the competition of the producers, who, in order to undersell one another, have recourse to new divisions or labour and new improvements of art, which might never otherwise have been thought of.

This is interesting: in Smith's time, for all his love of markets, he felt most corporations could not succeed without a monopoly, with the only exceptions being banking, insurance, and utilities.

The only trades which it seems possible for a joint-stock company to carry on successfully, without an exclusive privilege, are those, of which all the operations are capable of being reduced to what is called a routine, or to such a uniformity of method as admits of little or no variation. Of this kind is, first, the banking trade; secondly, the trade of insurance from fire and from sea risk, and capture in time of war; thirdly, the trade of making and maintaining a navigable cut or canal; and, fourthly, the similar trade of bringing water for the supply of a great city.

The 2nd type of public works discussed are educational institutions. Universal education for youths is assumed. Higher education was initially targeted solely at the production of clerics. It gradually included secular subject and generated the currently existing universities.

Smith advocates against tenure for teachers -- which given that he was a university professor of moral philosophy seems odd. But he really seemed to believe that everyone, in their heart of hearts, is a slacker, who will goof off if not forced to perform.

In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.

...

A private teacher could never find his account in teaching either an exploded and antiquated system of a science acknowledged to be useful, or a science universally believed to be a mere useless and pedantic heap of sophistry and nonsense. Such systems, such sciences, can subsist nowhere but in those incorporated societies for education, whose prosperity and revenue are in a great measure independent of their industry.

On education for people of all ages:

The institutions for the instruction of people of all ages, are chiefly those for religious instruction. This is a species of instruction, of which the object is not so much to render the people good citizens in this world, as to prepare them for another and a better world in the life to come.

Wow, what a waste, I'm glad we've mostly moved beyond that.

Smith discusses conservative versus liberal moral systems:

In every civilized society, in every society where the distinction of ranks has once been completely established, there have been always two different schemes or systems of morality current at the same time; of which the one may be called the strict or austere; the other the liberal, or, if you will, the loose system. The former is generally admired and revered by the common people; the latter is commonly more esteemed and adopted by what are called the people of fashion. The degree of disapprobation with which we ought to mark the vices of levity, the vices which are apt to arise from great prosperity, and from the excess of gaiety and good humour, seems to constitute the principal distinction between those two opposite schemes or systems. In the liberal or loose system, luxury, wanton, and even disorderly mirth, the pursuit of pleasure to some degree of intemperance, the breach of chastity, at least in one of the two sexes, etc. provided they are not accompanied with gross indecency, and do not lead to falsehood and injustice, are generally treated with a good deal of indulgence, and are easily either excused or pardoned altogether. In the austere system, on the contrary, those excesses are regarded with the utmost abhorrence and detestation. The vices of levity are always ruinous to the common people, and a single week’s thoughtlessness and dissipation is often sufficient to undo a poor workman for ever, and to drive him, through despair, upon committing the most enormous crimes. The wiser and better sort of the common people, therefore, have always the utmost abhorrence and detestation of such excesses, which their experience tells them are so immediately fatal to people of their condition.

Hah! So the rich get to laugh and joke and have fun, while the lower classes know that they'd better keep their noses clean and approach life with humorless solemnity! Kind of reminds you of southern christians. He then goes on about how all the little sects all find each other to be heretics and are constantly contending with one another. He lists 2 remedies to this problem:

1. "the study of science and philosophy" ... "Science is the great andidote to the poison of enthusiasm and superstition". We would today probably use the word "zealotry" instead of "enthusiasm".
   
2. "the frequency and gaiety of public diversions" I'm pretty sure we've got 18th century beat on that one.
   

A little bit of nice Catholic Church bashing. It's pleasant to see some Enlightenment thinking.

In the state in which things were, through the greater part of Europe, during the tenth, eleventh, twelfth, and thirteenth centuries, and for some time both before and after that period, the constitution of the church of Rome may be considered as the most formidable combination that ever was formed against the authority and security of civil government, as well as against the liberty, reason, and happiness of mankind, which can flourish only where civil government is able to protect them.

Smith cites the "good stuff" argument that decreased the power of the landed gentry as also decreasing the power of the Church (note the run-on sentence with 13 commas):

The gradual improvements of arts, manufactures, and commerce, the same causes which destroyed the power of the great barons, destroyed, in the same manner, through the greater part of Europe, the whole temporal manufactures, and commerce, the clergy, like the great barons, found something for which they could exchange their rude produce, and thereby discovered the means of spending their whole revenues upon their own persons, without giving any considerable share of them to other people.

Chapter 2 is titled "Of the Sources of the General or Public Revenue of the Society". So we now get the same excruciating detail that we got on 18th century import/export duties and tariffs on 18th century taxation schemes. There is more of the weirdness of insisting that gold, silver, land, and agricultural produce are the only form of capital that can be trusted. I wonder what he would think of modern derivative financial instruments?

The unstable and perishable nature of stock and credit, however, renders them unfit to be trusted to as the principal funds of that sure, steady, and permanent revenue, which can alone give security and dignity to government. The government of no great nation, that was advanced beyond the shepherd state, seems ever to have derived the greater part of its public revenue from such sources.

Man, they had a bunch of taxes back then:

• taxes on rent of land;
  
• taxes on the produce of the land;
  
• taxes on the rent of houses;
  
• taxes on profit (from stock);
  
• taxes on profit from certain industries;
  
• taxes on the capital value of lands, houses, and stock (property tax);
  
• taxes on wages;
  
• capitation taxes (based on current net worth);
  
• taxes on consumable commodities -- in 18th century Great Britain, these were particularly on salt, leather, soap and candles! Salt taxes date back to the Romans.
  
• taxes on luxuries, in particular sugar, alcohol, and tobacco. Given our obesity epidemic, we should really start taxing sugar like crazy.
  

Some countries had progressive taxes -- but some had regressive taxes:

In Silesia, lands held by a noble tenure are taxed three per cent. higher than those held by a base tenure. The honours and privileges of different kinds annexed to the former, his Prussian majesty had probably imagined, would sufficiently compensate to the proprietor a small aggravation of the tax; while, at the same time, the humiliating inferiority of the latter would be in some measure alleviated, by being taxed somewhat more lightly. In other countries, the system of taxation, instead of alleviating, aggravates this inequality. In the dominions of the king of Sardinia, and in those provinces of France which are subject to what is called the real or predial taille, the tax falls altogether upon the lands held by a base tenure. Those held by a noble one are exempted.

Here Smith almost sounds like a damn socialist!

A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be any thing very unreasonable It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

They also taxed churches in places. Sure would be nice to see that done here.

In the dominions of the king of Prussia, the revenue of the church is taxed much higher than that of lay proprietors. The revenue of the church is, the greater part of it, a burden upon the rent of land.

I found this passage somewhat eerie, with Smith anticipating our modern stateless plutocrats, patriots all:

The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax; and would remove his stock to some other country, where he could either carry on his business, or enjoy his fortune more at his ease.

Here's an example of the mind-numbing incomprehensibility found in this book:

In France, the greater part of the actual revenue of the crown is derived from eight different sources; the taille, the capitation, the two vingtiemes, the gabelles, the aides, the traites, the domaine, and the farm of tobacco.

The 3rd and final (!) chapter of this book is titled "Of Public Debts". Smith was in favor of government borrowing only during times of war.

It is only during the continuance of war, however, that the system of funding has this advantage over the other system.

I wonder if Keynes could have won him over? Deficit spending was popular throughout Europe at the time.

The progress of the enormous debts which at present oppress, and will in the long-run probably ruin, all the great nations of Europe, has been pretty uniform.

...

When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, though frequently by a pretended payment.

Pretended payments were typically done by devaluing currency, just as the best way to get rid of debt now is to inflate your currency until the debt reaches a manageable level. Smith was also interested in flattening taxes, but was a little wary that that would work.

A more equal land tax, a more equal tax upon the rent of houses, and such alterations in the present system of customs and excise as those which have been mentioned in the foregoing chapter, might, perhaps, without increasing the burden of the greater part of the people, but only distributing the weight of it more equally upon the whole, produce a considerable augmentation of revenue.

I thought that this was an interesting example of being a prisoner of one's own echo chamber: Smith's obsession with gold and silver currency persists, even as he talks about the American colonies doing just fine without it.

It is not, therefore, the poverty of the colonies which occasions, in the greater part of them, the present scarcity of gold and silver money. Their great demand for active and productive stock makes it convenient for them to have as little dead stock as possible, and disposes them, upon that account, to content themselves with a cheaper, though less commodious instrument of commerce, than gold and silver.

Phew, that does it. In summary, I think that it was worth reading this book, which is still referenced extensively. Just yesterday, David Brin, in a blog post about Piketty's "Capital in the 21st Century" was wishing for "smithian libertarianism" in markets to replace the rigged system we have now. I wonder if anyone has ever produced an edited version of "Wealth of Nations" with all the 18th century facts and figured? It would make a much more palatable read. But, seeing what has changed, and what surprisingly has not, I think makes this a good book with which to start my study of the "science" of Economics.

I was going to read Keynes "General Theory" next, but I think I'll go on and read the Piketty before that. But first, wow, May 15 and I haven't even started on the magazine stack that should have been done by May 1. For being retired, I sure seem to be busy! ;->