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Author: Sanjeev Sabhlok

Was Adam Smith a socialist? #3 – Are high profits a sign that a country is going to ruin?

The proponent of the view that Adam Smith’s system did not permit inequality in the first place cited the following comment from Smith to “prove” his point: that profits are “always highest in the countries which are going fastest to ruin.”

Apparently, this indicates he was against high profits. And hence a socialist. This idea is also related to Keynes’s view about the declining marginal efficiency of capital.

There is some merit in this view.

We know that poor societies will tend to have a lower rate of financial savings (instead, animals, and particularly children, are used as a means of saving) and will tend to consume all output.

In such a society, only those investments become profitable that allow higher rates of profit to be generated and hence enable the payment of higher rates of interest which are necessary to borrow money for investment.

Further, in such developing societies, with highly underdeveloped and incomplete markets, there are many more opportunities for profit than the opportunities available in well developed countries. However, these profitable opportunities are associated with greater risk, so not many people are willing to invest in developing societies.

This is where Schumpeter comes in. Innovation and competition are the main long term drivers of profit. With every commercial innovative breakthrough, there are immediate profit opportunities but unless the government institutionalises monopolistic power, the market will always wear down the profit margin.

Two forces are at work in relation to innovation:

(a) the technical frontier gets harder to breach and the “bang” for each new innovation potentially gets relatively smaller than the bang from the previous big innovation. For instance, the internet is a much smaller innovation (relatively speaking) than the discovery of electricity; and

(b) more research takes place and knowledge is generated at an exponential pace, as a society becomes more developed.

The empirical question is – which of these two forces “wins” at a particular point in time.

Thus, it is simply untrue to assert that profits are “always highest in the countries which are going fastest to ruin”. The question is – what’s the level of associated risk, the level of innovation, the depth of markets.

It is unclear whether Adam Smith fully understood the concept of profit. 

Once again, I would like to reminder readers that Smith was a founder of economics. He has been superceded on numerous things by other analysis.

Everyone who reads Smith should use his BROADER understandings as a starting point, and thereafter read more – much more (i.e. many other authors); in order to understand the market.

I think I’ll now move on to other issues. The idea that Smith was somehow against inequality – even if true – is related (at best) to some of his erroneous understandings. We must look at the TRUTH that lies in his work and not focus on things on which he has been superceded.

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Was Adam Smith a socialist? #2 – the issue of inheritance tax

Following on from my post here, let’s examine the claim that according to Adam Smith, “inheritance laws SHOULD partition fortunes”.

Before saying anything else, let me note that it is good that at least some people think that Adam Smith’s writings are useful. The fact that socialists cite Adam Smith in THEIR favour is a sign that they are at least somewhat willing to learn something new.

For these same people should know by now that the liberals do NOT have a Bible (unlike the socialists with their Communist Manifesto). Adam Smith is NOT considered the final word in economics (else why would there be a need for thousands of books on economics after Smith?). Smith is considered one of the early thinkers.

And as with all early thinkers in any aspect of human knowledge, the early thinkers made a LOT of mistakes. Adam Smith’s work is replete with mistakes. The bigger mistakes of Adam Smith (labour theory of value, for instance) were used by “economists” like Marx to create a mammoth edifice of mistakes.

But Adam Smith is important to the liberal because he was right on MOST things. That’s saying a lot for someone who lived 250 years ago. Now, if only these socialists would actually read and understand Smith, they would be well on their way to understanding FURTHER advances in economics and finally they might actually become educated. Which would be a wonderful thing.

Now back to this claim about Smith and the inheritance tax.


This is what he actually wrote:

The death of a father, to such of his children as live in the same house with him, is seldom attended with any increase, and frequently with a considerable diminution of revenue, by the loss of his industry, of his office, or of some life-rent estate of which he may have been in possession.

That tax would be cruel and oppressive which aggravated their loss by taking from them any part of his succession. It may, however, sometimes be otherwise with those children who, in the language of the Roman law, are said to be emancipated; in that of the Scotch law, to be forisfamiliated; that is, who have received their portion, have got families of their own, and are supported by funds separate and independent of those of their father. Whatever part of his succession might come to such children would be a real addition to their fortune, and might therefore, perhaps, without more inconveniency than what attends all duties of this kind, be liable to some tax.

Now, Smith was a very primitive thinker on matters of public finance. Liberalism is, in any event, not so much about public finance as it is about productivity.

Smith has been challenged on a number of issues with regard to his views on taxation. I broadly support his insights even into public finance, but clearly he missed out a critical consideration while discussing the inheritance tax, above.

He missed out the fundamental issue of double taxation – that this inheritance has ALREADY been taxed for provision of public goods. He also missed out the even more fundamental principle of the continuity of human families and the power of DNA.

Regardless, even if we assume that his analysis was ill-informed, we can see that nowhere is he REQUIRING the imposition of inheritance tax. All he is saying is that in the case where children are grown up adults in their own right, the state might, PERHAPS, impose SOME inheritance tax.

A very tentative exploration of the matter.

I deduce that it would be inappropriate to take this error of Smith’s analysis to lump him along with socialist fanatics like Marx and Piketty.

But once again – to the socialists reading this post – do ACTUALLY try to read Smith. Once you’ve done that you’ll be ready for much more, and finally, one day, you might even be ready to understand the economy.

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God save America

The Great Lump has spoken: “Protection will lead to great prosperity and strength.” [Source]

The Reason has torn to shreds this lunatic idea (see this).

The Fat Lump is following Indira Gandhi’s footsteps.

Now watch America implode.

Many months ago I had said Trump should read Bastiat. Obviously he is too full of himself. He knows all. God save America.

USA is in for deep, deep trouble. Any attempt at protectionism will decimate American productivity and destroy its wealth.


But that’s not all!

The Lump has also announced that: “radical Islamic terrorism” will be “eradicated completely from the face of the Earth”

This is beyond laughable. Pitiable.

Till the Quran exists, Islamic terrorism won’t be going anywhere. It has outlasted thousands of “leaders” for 1500 years. Only education will eradicate the Quran’s influence. Trump can do nothing about it.

And Robert Higgs has this to say:

Listening to Trump’s inaugural bombast earlier today, I kept thinking: What this guy is saying in so many words is simply, “ein volk, ein reich, ein führer.” And who knows? It has worked before. Maybe it will work for him this time. [Source]

One can only hope that the First Amendment will prevent A Lumpy Dictator in America.

Signs are not looking good. The Democrats were taking America downhill, one notch at a time. The Republicans are rushing towards mass collapse.

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Was Adam Smith a socialist? #1

Comment received on Whatsapp. I’ll analyse and comment later. (There’s a somewhat similar comment here; also this; and this.


Smith’s capitalism demystified……

“People in a free market economy are to trade with, not rob, one another.”
– Smith didn’t preach / prescribe inequality as a precondition of wealth creation.

Smith is assumed to have accepted inequality as the necessary trade-off for a more prosperous economy. This is, in fact, the default assumption, which is wrong. The building blocks of Smith’s economic system do not allow concentration of wealth; the important point about Smith’s system is that it precluded steep inequalities not out of a normative concern with equality but by virtue of the design that aimed to maximize wealth. Once we put the building blocks of his system together, concentration of wealth simply cannot emerge.

In Smith, profits should be low and labour wages high, legislation in favor of the worker is “always just and equitable,” land should be distributed widely and evenly, inheritance laws should partition fortunes, taxation can be high if it is equitable, and the science of the legislator is necessary to thwart rentiers and manipulators. Political theorists and economists have highlighted some of these points, but the counterfactual “what would the distribution of wealth be if all the building blocks were ever in place?” has not been posed. Doing so encourages us to question why steep inequality is accepted as a fact, instead of a pathology that the market economy was not supposed to generate in the first place.

The key principles of Smith’s system work against the concentration of wealth-they also speak about the top issues in economic policy today: profits, taxes, and the minimum wage.

First, Smith thought high profits denoted economic pathology. The rate of profit, he said, was “always highest in the countries which are going fastest to ruin.” This pathology was not simply a symptom of mercantilism, but resulted from the incentives on the economic groups living by profit alone.

Unlike Ricardo, Smith believed that the interests of profit-seekers were structurally and thus “directly opposite to that of the great body of the people,” because “the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries” (with a few exceptions, especially new economies). Accordingly, when the economy is sound, wealth concentration should not occur. Only when profit-seekers have rigged the system through legislation do concentrations occur. Smith states that fortunes would, indeed, not be high and that in any case they were prone to dissipation. Such a system cannot generate steep inequality.

Wages, at the same time, should rise with increased wealth. On this basis, Smith defends adequate labor wages, which had to be at least sufficient to provide the “necessaries,” covering lodging, food and clothes, the latter tailored to middle-class comforts. This baseline appears minimal, yet it provides for more than is covered by the contemporary minimum wage. Moreover, high wage levels should occur naturally. Wages are only lowered artificially, through state intervention, because of the sophistry of merchants and manufacturers who are much more adroit in manipulating legislatures to pass laws in their favor. Moreover, employers enjoy a bargaining advantage over workers and can coerce them to accept worse terms, because they need individual workers less than individual workers need employment. Wages are not the simple product of supply and demand in Smith; bargaining asymmetries are key.

Taxation is perhaps the most contentious topic today, with prescriptions of punitive levels as the main instrument applied to reverse inequality. As such, it is seen as a distorting intervention in the market and a departure from “free market” principles. Smith did not prescribe punitive taxation, but what is missed is that he praised the British tax system though it imposed double per capita taxes than the French. Yet, “The people of France…are much more oppressed by taxes than the people of Great Britain.” Why? Because taxes were less equitably distributed, falling disproportionately on the poor.

A fair distribution of taxation was key to the soundness of the English economy in Smith. The rich, he claimed, should be taxed “something more than in proportion” to their wealth. “The inequality of the worst kind” was when taxes must “fall much heavier upon the poor than upon the rich.” The reasons were not moral. Bad taxes were simply bad economics.

Smith’s overarching point was this: taxes were bad only when they undermined the productive use of capital. But taxation should be used to discourage unproductive economic activities. Landlords, for instance, charged tenants large fines for lease renewals, rather than raise the monthly rent. This is usually “the expedient of a spend-thrift, who for a sum of ready money sells a future revenue of much greater value.” It is “hurtful to the landlord,” frequently to the tenant, but always to the community. So it should be taxed at a higher rate. A tax upon house–rents would also “in general fall heaviest upon the rich,” a welcome outcome, since rent was an unproductive expense; when high, it was simply a luxury. And when Smith advocated against a tax, it was for pragmatic reasons, as with taxing capital: capital holdings could never be verified and could always flee the country, so taxing them was counter-productive. But ground-rents should be taxable, as “Nothing can be more reasonable than that a fund which owes its existence to the good government of the state” should be taxed more than in proportion to its benefit.

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