Revising Adam Smith

By J.D. Alt

The Ebook DIAGRAMS & DOLLARS (in top 10 best-sellers on Amazon/ category money & monetary policy!) paints an optimistic picture of what “Sovereign Spending” could achieve for our collective benefit. The video made from it (approaching 3,000 views on YouTube—thank you Haiku Charlatan!) ends with cheering calisthenics around the final diagram of our national prosperity. Unfortunately, the “real world” of our Congressional leaders and media spin-machine is painting a very different picture—a dire vision of out-of-control government spending and national insolvency. Understanding why that is, and what we can do about it, is the real challenge we have before us.

There have been some notable moments in American history when effective Sovereign Spending seems to have been accomplished: Rural electrification, the Interstate Highway system, the Man-to-the-Moon and Space Shuttle programs come to mind. And then, of course, there was the unprecedented command economy collectively created to win World War II—a coordinated effort which saw U.S. Sovereign Spending invent, usher in, or lay the groundwork for virtually every technological breakthrough of our contemporary world.

For the most part, however, the ability of our political system to allocate and manage Sovereign Spending has been, and continues to be, pathetically short on results. Our most recent efforts—the “Stimulus”, Hurricane Sandy reconstruction, and Obamacare—could reasonably be considered exercises in futility. Why is it such a struggle to do good things for ourselves?

Part of the reason has got to be the resilient stranglehold Adam Smith and his seminal book “The Wealth of Nations” continues to wield upon our collective imaginations. His words, more than any I’m aware of, lie at the heart of our collective confusion and dysfunction when it comes to allocating—and then spending—our national budgets. Listen to what he says:

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

In other words, our collective good is most effectively produced and maximized when each individual strives exclusively to maximize his own benefit or profit. Furthermore, conscious efforts directed toward producing collective benefits are often counterproductive. These premises have been joined to become the mantra of Free Market Theology: Any and every effort to “control” the selfish pursuit of private profit (a) diminishes our collective good, (b) intrudes on our individual liberty, and (c) interferes with the “invisible hand” that allocates resources in the most efficient and effective manner.

It is easy to see how this Free Market mantra is an “invisible hand” in its own right, framing and guiding our political democracy on many fronts and levels—from gun-control to pipe-line construction to charter schools—but its most challenging difficulty lies in the cognitive dissonance it creates about Sovereign Spending itself. Specifically, how can we imagine “paying ourselves to create collective goods and services”—as is so effortlessly visualized in DIAGRAMS & DOLLARS—when each individual is supposed to be employing his own capital to maximize his own benefit and profit? From this perspective, Sovereign Spending is somehow unnatural—especially when we imagine what is being “spent” are Dollars the government has simply “printed”! If we can’t frame the whole operation so money flows through the hands of private contractors who will then use it to pursue their own self-interest and profit (thereby maximizing the collective good) then we simply can’t bring ourselves to spend it at all, because to do so would be (a) wasteful (b) counterproductive and (c) an intrusion of “big government” on individual liberty.

The problem, of course, is that Adam Smith’s insight, as far as it goes, is basically correct: we can’t argue for Sovereign Spending on the basis that individual initiative and entrepreneurship are NOT or SHOULD not be the driving force of our economy. The harder people work to better and benefit themselves, the better off, in aggregate, we’ll all be. But it ought to be easy enough to show that Adam Smith’s invisible hand actually operates most powerfully and effectively within a collective structure consciously designed and built with Sovereign Spending. In other words, properly conceived, Sovereign Spending doesn’t displace private initiative, it enables and leverages it to higher levels of achievement.

This is so easy to demonstrate, it’s almost a cliché. Take for example a private individual who wants to generate profits for himself by creating and providing a service that helps people find restaurants. Twenty years ago he might have started a yellow-pages type publication that was distributed for free—enabling him to then sell advertising space to restaurants. The efficiency and income potential of this business model was, in hindsight, quite limited. Jump forward twenty years and this same individual is able to operate within a newly built collective structure that dramatically leverages his opportunities: Now he can create a smartphone App that uses GPS to locate restaurants on a digital map in the palm of a hungry person’s hand. The GPS system, as everyone knows, was created—and is maintained—almost exclusively with Sovereign Spending. The smartphone—as revealed in Marianna Mazzucato’s insightful book, “The Entrepreneurial State”—was also the end result of a long string of technological innovation and development that was paid for not by Steve Jobs’ investors, but by Sovereign U.S. spending.

In light of this new point of view, I would like to take the liberty of rewriting Adam Smith’s critical passage, adding in the sentences necessary to make it a more complete prescription for building the wealth of nations. I hope he won’t mind; I believe, in fact, he might even thank me:

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Yet it is also apparent his endeavours are greatly eased and facilitated when his labours take place within a collective structure that renders his efforts more effective and productive, and which further enhances his own skills and abilities to undertake them. It is also apparent that it is not in the selfish interest of any one individual to devise and build such a collective structure, and so without a collective effort, it would never be built; and as a consequence each man’s labours would produce only those revenues as can be scratched out in his own isolation. It is evident, therefore, that the annual revenue of a society is rendered greatest when the individuals within that society first employ their sovereign capital to create a collective structure, and then direct their private capital to its greatest value within that enabling and supportive edifice. Without thus proceeding, and by constantly giving short-shrift to the collective goods of society, the invisible hand of self-interest can succeed only in constructing, ultimately, a sociopathic world of conflict and misery.”

Having revised Adam Smith’s critical quotation, we should also update the Free Market mantra that derives from it:  Every effort should now be made to devise and build collective structures which enable and enhance the efforts of every individual to exercise his personal liberty to maximize his own benefit and profit without harming the public good; furthermore, any effort to stifle the creation of these collective goods with claims they interfere with private liberty and personal gain shall be understood for what it actually is: a misanthropic myopia that can only result in the aggrandizement of a few at the expense of the many.

If this is now resolved, it leaves us finally with two basic issues to confront: (1) How can we most effectively determine the goals of our Sovereign Spending? And (2) how can we most effectively guard against the corruption that will inevitably attempt to divert and corral the flow of Dollars?

6 responses to “Revising Adam Smith

  1. We have in our traditions some other ideas that support what you’re saying:

    “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed”

    The purpose of having a government at all is to benefit ourselves.

    ” in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity”

    We designed our government with the intention that it should promote our collective self-interest.

    The notion that government should do good things is not controversial.

    The notion that it has the financial ability to do more things than it currently does – or at least to stop impeding the good things that private citizens do – is based on a lack of understanding.

    We have in place institutions for deciding what to do, to determine the goals, as you say. I don’t think the economic goals are inappropriate. The proper economic goals are enshrined in Congress’ mandate to the Fed: high employment and stable prices.

    We do seem to lack control of the corruption. The ones who make the rules are the same ones who benefit from the corruption. A big part of the problem is the sheer size of the Federal government, and the amount of money involved. It may just be too big to manage, even by those with honorable intentions. Many of the things government does could be done by States, with better controls and supervision, and only the money supplied by the sovereign (like the financial design of the JG). The scale of the opportunities for corruption would be vastly reduced, and the practice more easily detected.

  2. Actually, JD, the two issues you present are entirely logical without having to delve into the whys and wherefores of Adam Smith. That said, the answer to the first issue would seem to depend on what society deems as “essential services” that are, in fact, essential to maintaining the society. The next question to be decided, is whether this ‘essential’ demand should be met on a profit basis, and therefore, increase the cost? The next thing to be decided is, who should be the beneficiaries of these ‘essential’ services? Obviously, there are certain things in the society that can, or will, be used by everyone. For example, an efficient, well planned and coordinated transport network, a comprehensive energy grid, a good clean water supply, health and education systems, a nation’s defence, and several other services, could be deemed “essential”. A lot of these things need coordinated planning that is beyond the interest, and ability, of private individual concerns, or any “invisible hand” for that matter.
    Who, and how, this overall issue is decided. is really the crux of the matter.
    The paradox about Smith is his recognition of “Nations” as identifiable entities. Obviously, he accepts the notion of societies being governed, or ruled, or controlled, and simply deals with the issue of how much governing, ruling and controlling, is the most appropriate. Smith really isn’t arguing for a totally free anarchist type of society where every individual is free to survive, or not, on their own ability and enterprise. He accepts there has to be an overriding structure to weld a group of people into a collective “nation”. This, of course, is where the “free marketeers” have completely, and deliberately, misinterpreted Smith.
    As for the second issue, quite obviously, the current political entrepreneurs, who are the beneficiaries of the system, will do nothing to change it, or allow it to be changed.
    When the issue ensnares the people responsible for regulating and policing the corruption, then all hope from official sources is lost. In the words of Sun Yatsen,
    “Reforms are not the answer to tyranny, because, tyranny cannot be cured with words.
    Revolution is the only answer – to sweep the house clean and start again. But revolution will only succeed when the concepts can be easily understood by everyone, and that pre-revolutionary mental state becomes a reality”.
    Unfortunately, the US is a long way from that “pre-revolutionary mental state” that will be necessary if a solution to this second issue is to be achieved.

    • “The next question to be decided, is whether this ‘essential’ demand should be met on a profit basis, and therefore, increase the cost?”

      If it is essential and can be done for profit, why is it not already being done? I can only think of one reason, that the government prohibits it. More likely, it is not possible to do it profitably, in which case it is an obvious public enterprise, and you have to ask why, if it is essential, it is not already being done by government — or how we have survived so far without it.

  3. In my view, there are certain essential things that a Government has a responsibility for, if it is to meet its obligation to serve a public purpose. Those things are not conditioned by whether they can be done at a profit. It is the very fact that there isn’t a profit component in them that justifies the reason for the Government to take the responsibility.
    There are other things that can be considered essential for a society that do provide an avenue for profit, but as has been fairly obvious from the rash of privatisation, none of the privatised services ever result in lower costs.
    Hence it is an issue a Government of a monetary sovereign nation needs to consider. Do they put the people first and provide the service at the lower cost, or do they off load their responsibility to private enterprise to make a profit at the expense of the people?

  4. “By preferring the support of domestic to that of foreign industry, he intends only his own security”

    I think the invisible hand has been supporting outsourcing at the expense of domestic industry for a few decades.

  5. JD you are right Adam Smith failed to fully develop his thinking. When he tells us us that the baker, brewer and butcher seeks his self-interest in providing us with our dinner he fails to recognize this can only be pursued for the whole of society if the demand is there. The mechanism for creating this demand (after a fashion) now takes the form of a normative 60% of overall money creation from government (much of which is transfer payments) and 40% from private bank loans. Recessions would appear to ensue if the private 40% increases substantially because after the initial stimulus has worn off the loan repayment drain kicks in reducing demand.

    http://economicsrantsnmusings.blogspot.com/2013/06/does-credit-drive-economy.html

    http://mikenormaneconomics.blogspot.com/2013/06/paul-meli-does-credit-drive-economy.html