Wednesday, January 17, 2018

Will We Heed Adam Smith's Warning?

How so? After all, his warnings regarding arbitrary government limits to trade with other countries, are still taken to heart by many economists. Indeed, Adam Smith's anti-mercantilist arguments from "The Wealth of Nations" are perpetually relevant.

Nevertheless, Smith had other equally important concerns about economic dynamism. In particular, his emphasis on the dangers of spending in excess of ongoing wealth generation, is often either dismissed or approached in an altogether incomplete framing. Since many of these debt and austerity related discussions tend to be ideologically, financially or mathematically oriented, the underlying nature of real economy wealth creation versus wealth capture or redistribution, has yet to be fully taken into account. If only more dialogue could be devoted to a close reexamination of real economy wealth creation, given the recent historical context of service sector dominance!

Perhaps Adam Smith's warning re continuous progressive wealth origination wasn't taken seriously, since it wasn't as crucially relevant during centuries of tradable sector growth and dominance. Plus, Smith's framing of "irresponsible" individuals who were inclined to spend in excess of what they contributed to the marketplace, has long since shifted to institutions in which "irresponsibility" isn't quite the relevant issue.

Rather, time based product as organized by non tradable sector institutions, has displaced much of the individually provided time based product still largely supported by wealthy individuals in Smith's time. This institutionally supported time based product, continues to rely on price making (for administration) within the monetary circulation of general equilibrium, because it never seemed necessary before, to organize via the price taking patterns which immediate reciprocal capacity makes possible. Only recall that a marketplace for time value, would allow for the immediate (time "debt") reciprocity and wealth generation of price taking.

Meanwhile, even though both policy makers and citizens are concerned about the possibility of shifting too much debt responsibility into the future, no one has yet envisioned structural means to avoid this problem. Yet not doing so means the problem gradually worsens. Too many national institutions can eventually become fragile, if all of them extensively compete for an equilibrium dependent set of available resources, during periods of economic stagnation.

Also, in Adam Smith's time, he could hardly have imagined, how financial tools would eventually change the structure of economic activity beyond recognition. Alas, these financial tools also reduced the economic "inconveniences" that came with "just in time" wealth creating reciprocity, by replacing them with the institutional conveniences - if occasionally uncertainties - of future responsibility.

Smith didn't need to think about how time based services generation might be reorganized so as to generate wealth, since centuries would pass before indirect services compensation would place excessive demands on original wealth. Smith's primary concern in this regard was simpler in nature. One might think of it as a request for societies engaging in wealth creation, not to squander too much of their participation in activities which could potentially reverse the forward path of progress.

At some point that rationale was lost, yet there were understandable reasons as to why. One only wonders how Adam Smith might have felt about the proliferation of financial product in our time. Much of today's services dominance was also made possible due to financial product innovation. Valuable though much of this process became for twentieth century growth and dynamism, increasingly it poses new problems, as societies struggle over which groups "should" even be allowed to benefit from institutions participating in high skill and time based services.

Heeding Smith's warning is not about imposing austerity, even though some have confused it as such. We need to step well beyond the economic theoretical circumstance of Smith's lifetime, to envision a reciprocal mechanism which also functions as a wealth creating mechanism for present day knowledge. Yet it's not enough to accomplish this part of the task and consider the job done, because the macroeconomic context for doing so, is every bit as important. Without a sufficient macroeconomic understanding for time centered wealth, chances are too many arguments for mercantilism would still hold sway, for policy makers and citizens alike.

Adam Smith's warning has even more relevance in today's economic circumstance, as nations shift away from wealth creation dialogue, towards the cultural dialogue of who "deserves" redistribution. While some moral arguments are certainly worth having, I do not believe that moral arguments which pit one group against another for government benefits, serve any productive purpose. It's time to concentrate instead on new forms of wealth creation, so that talk of nationalism might ultimately fade into the background. Fortunately, we have the ability to pick up wealth creation dialogue where Adam Smith left off, in this historical moment of service sector dominance.

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