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

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 any occasion from those rules, in consequence of some flattering speculation of

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

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  1. 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 any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it.” —Adam Smith, Wealth of Nations ([1776] 1976), vol. 2, 279

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

  3. 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

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

  5. Banking Crises Source: National Bureau of Economic Research (US)

  6. Motivations for Talk • To emphasize the structural versus contingent causes of the current crisis. • To save Smith from neo-classical appropriation.

  7. 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

  8. “Dark Age in Macroeconomics” Paul Krugman

  9. Rea£ Profit$ of the Financial Sector (USA) Source: National Income and Product Accounts

  10. Objectives of Lecture Examine key themes in Smith Apply Smith to the present

  11. Solutions derived from Smith • 100 percent reserve banking • Mutualise Financial Institution Ownership • End contracts on intangible un-deliverables

  12. KEY FOCI DIVISION OF LABOR CLASS WEALTH AND WORK

  13. What is Wealth? • Bullionists • Mercantilists • Physiocrats • Political Economists

  14. 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

  15. Categories of Stock in Smith

  16. Smith on The Division of labor

  17. Division of Labor • Territorial Division of Labor • Organizational Division of Labor • Technical Division of Labor

  18. 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

  19. 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

  20. Territorial Division of Labor

  21. UK Current Account Deficit

  22. ‘Natural’ Growth“Unnatural” Growth

  23. Smith on Class as a category

  24. Smith’s Three Classes • Landlords • Laborers • Merchants

  25. Redistribution of Wealth

  26. 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

  27. 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

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

  29. Bank of Amsterdam Founded in 1609

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

  31. Smith on WEALTH AND WORK

  32. Shares in Northern Rock Shares in Millions

  33. Mortgage Lending by Purpose (UK)

  34. Fascist Reactions

  35. Crisis Financial Economic Cultural

  36. Wealth and Work

  37. Two Sides of the Same Coin:Democratization of Credit/Tyranny of DebtHousehold Debt as Proportion of GDP

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

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