Travel and Debt

September 26th, 2011 at 7:35 pm

Heavy travel tomorrow so light posting at best.

Also, deep into a long treatise on the concept of debt, a concept I fear is poorly understood to the point where we keep screwing ourselves up in all kinds of ways over it.

However, let me excerpt one piece of my essay, because I think these Adam Smith quotes are just so damn righteous:

Though Greenspan and others invoked Adam Smith’s insights regarding market incentives, it’s fascinating to contemplate the dressing down Smith would be compelled to deliver regarding contemporary theories on self-correcting financial markets.  As recounted in John Cassidy’s essential book, When Markets Fail, “Smith and his successors…believed that the government had a duty to protect the public from financial swindles and speculation panics, which were both common in eighteenth- and nineteenth-century Britain.”

Smith even presaged Minsky’s later typology of the debt instability cycle, documenting how Scottish banks essentially leant into bubbles by providing cheap credit to overleveraged businesses that “only enabled them to get so much deeper into debt, so that, when ruin came, it fell so much the heavier both upon them and upon their creditors.”

And where today’s policy makers, backed up by today’s Smith-quoting economists, tore down regulations like Glass-Steagall–measures they argued limited the freedom of financial institutions to “innovate,”–Smith himself clearly saw the need to regulate these institutions to head off the very contagion that he recognized centuries ago.

“Such regulations may, no doubt, be considered as in some respects a violation of natural liberty.  But these exertions of the natural liberty of a few individuals, which might endanger the security of the whole society are, and ought to be, restrained by the laws of all governments…[T]he obligation of building party walls, in order 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.”

Again, the point is that today’s free marketeers are no more related to the founders of free market capitalism than the Tea Partiers are to the original Bostonians.

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4 comments in reply to "Travel and Debt"

  1. perplexed says:

    In another “essential” book “Winner Take all Politics” by Hacker & Pierson also takes note of how Smith’s views were exactly the opposite of how he has been portrayed by the “government is the enemy” crowd:

    “Lest this critique be seen as deeply radical in spirit, its worth quoting a little-noticed passage in Adam Smith’s 1776 ‘The Wealth of Nations,’ now viewed as the bible of limited government free-market economics. ‘Wherever there is great property,’ Smith wrote, ‘there is great inequality…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 against those who have none at all’ (Smith, a resolute skeptic about the rationality of unfettered financial markets, also authored the phrase ‘other peoples money,’ which titled Brandeis’s famous work.) A clearer statement of the legal-realist view of a century and a half later would be hard to find.

    In short, property and markets rest on government and law. And, in the Progressive critique, they had to be restrained and limited by government and law. Without such restraints and limits, greater economic inequality would laad to greater political inequality, which in turn would lead to government policies that reflected the interest of those at the top. Swamped by the tides of inequality, democracy would give way to oligarchy – the very concern that recent economic events have cast in stark relief.”

    It should come as no surprise that the winners in the “class war” would try to rewrite history, the winners of all wars do that.

    These observations and arguments precede computers and technology by hundreds of years. Arguments about structural and technological changes making “this time be different” are simply a diversion to keep us from correcting a situation that we should have known better than to allow in the first place.

  2. general c. san desist says:

    …seems one class of politicians are aboard the Teatanic & the other, The Good Ship Lollipop…I’m afraid both will be needing life preservers should neither desire in changing course.

    I thought we touched on this base…debt is good only when the conservatives control Congress, otherwise it is muy malo, verboten & a crime against nature, right?

    What happened to the champions in the Democratic party? Where are the voices of reason & outrage? Harry Reid is Casper Milquetoast & on the right side of the argument…but who listens to him. We need a new position at the DNC…head of spine replacements, which I believe, is covered under ObamaCare.

  3. Adam Smith Doesn’t Agree with You, Regulation Edition « Multiplier Effect says:

    […] But uses and misuses of Smith aside, this one happens to hit the conceptual nail on the head.  Jared Bernstein, who is evidently working on a longer piece on debt, pulls this quotation from Adam Smith on the […]

  4. Shane Taylor says:

    Warren Samuels and Steven Medema spoke to this dimension of Smith’s thought, especially in his Lectures on Jurisprudence, here:

    But it seems that Adam Smith’s preferred system for “natural” liberty was neither obvious nor simple. I don’t mean that there is some obvious and simple system to which we should aspire. Instead, I mean that glib appeals to “natural” liberty should be suspect. They strike me, after reading Max Lerner’s introduction to the Wealth of Nations and Carl Becker’s book The Heavenly City of the Eighteenth-Century Philosophers, as deceptive fables. Granted, they had their uses against feudalism and mercantilism, but they were useful as agitprop.

    So what? Well, I believe the center-left’s political challenge is less the Tea Party’s animus for government than the their fantastic belief in “natural liberty.” Their ignorance about inconvenient facts is galling but secondary. The greater fault lies in their ideal itself which is utopian.