How Would Adam Smith Fix the Financial Crisis?David Munaver Bholat

“Though the principles of the banking trade may appear somewhat abstruse,the practice is capable of being reduced to strict rules. To depart upon anyoccasion from those rules, in consequence of some flattering speculation ofextraordinary gain, is almost always extremely dangerous, and frequentlyfatal to the banking company which attempts it.”—Adam Smith, Wealth of Nations ([1776] 1976), vol. 2, 279 1

Sir Isaac Newton: (not such a) Master of the Mint

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Economics without Economic History

The drama of the banking crisis…is unprecedented in the lifetime of almost all of us.

Governor of the Bank of England, 2008

The Worst Financial Crisis since the 1930s.Governor of the Bank of England,

1973

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“Northern Wreck”Britons in the queue, between the Rock and a hard place

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Banking Crises

Source: National Bureau of Economic Research (US)

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Motivations for Talk

• To emphasize the structural versus contingent causes of the current crisis.

• To save Smith from neo-classical appropriation.

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Adam Smith Those exertions of the natural

liberty of a few individuals, which might endanger the security of the whole of society are, and ought to be, restrained by the laws of governments…The obligation of building party walls to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

- Wealth of Nations Vol. 1, 345

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“Dark Age in Macroeconomics”

Paul Krugman

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Rea£ Profit$ of the Financial Sector (USA)

Source: National Income and Product Accounts

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Objectives of Lecture

1. Examine key themes in Smith

2. Apply Smith to the present

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Solutions derived from Smith

• 100 percent reserve banking

• Mutualise Financial Institution Ownership

• End contracts on intangible un-deliverables

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KEY FOCI

•DIVISION OF LABOR

• CLASS

• WEALTH AND WORK

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What is Wealth?

• Bullionists

• Mercantilists

• Physiocrats

• Political Economists

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Neo Bullionism

“Money is neither a material to work upon, nor a tool to work with.”

-Adam Smith, Vol. 1, 313

Structured Finance Innovation

Engineering ADDING VALUE

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Categories of Stock in Smith

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THE DIVISION OF LABORSmith on

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Division of Labor

• Territorial Division of Labor• Organizational Division of Labor• Technical Division of Labor

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Technical Division of Labor

“In the progress of the division of labor…the great body of the people comes to be confined to a few very simple operations. But…the man whose life is spent in performing a few simple operations…generally becomes as stupid and ignorant as it is possible.”

Wealth of Nations Vol. II, 302-303

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Smith on Profit$

“ As capitals increase in any country the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital.”

Wealth of Nations Vol. 1, 375

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Territorial Division of Labor

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UK Current Account Deficit

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‘Natural’ Growth “Unnatural” Growth

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CLASS AS A CATEGORYSmith on

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Smith’s Three Classes

• Landlords

• Laborers

• Merchants

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Redistribution of Wealth

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Smith on Class Interests

[The merchant class’] 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.

Wealth of Nations Vol. 1 , 277

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Smith on Profits

Our merchants and master-manufacturers complain much of the bad effects of high wages. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.Wealth of Nations Vol. 1, 110

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A Typology of Class:Or how did you make your money?

CLASS METHOD MONEY-NAME

Merchant Sell their product Profit

Laborer Sell their labor-time Wage

Landlord Lend their land Rent

Lenders Lend their money Interest

Capitalist Leverage others’ property

Windfalls

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Bank of AmsterdamFounded in 1609

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A Typology of Class:Or how did you make your money?

CLASS METHOD MONEY-NAME

Merchant Sell their product Profit

Laborer Sell their labor-time Wage

Landlord Lend their land Rent

Lenders Lend their money Interest

Capitalist Leverage others’ property

Windfalls

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WEALTH AND WORKSmith on

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Shares in Northern Rock

Tyneside

City of London

Rest of Britain

1997 493 5 329

1999 350 214 257

Change -143 209 -72

Shares in Millions

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Mortgage Lending by Purpose (UK)

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Fascist Reactions

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Crisis

Financial

Economic

Cultural

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Wealth and Work

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Two Sides of the Same Coin:Democratization of Credit/Tyranny of Debt

Household Debt as Proportion of GDP

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How Would Adam Smith Fix the Financial Crisis?David Munaver Bholat

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