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

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How Would Adam Smith Fix the ... Master of the Mint * Economics without Economic ... To save Smith from neo-classical appropriation. * Adam Smith Those exertions ... – PowerPoint PPT presentation

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


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 crisisis 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 governmentsThe
    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
  1. Examine key themes in Smith
  2. 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
The Division of labor
  • Smith on

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 laborthe
    great body of the people comes to be confined to
    a few very simple operations. Butthe man whose
    life is spent in performing a few simple
    operationsgenerally 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
Class as a category
  • Smith on

24
Smiths 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?
CLASS METHOD MONEY-NAME
Merchant Sell their product Profit
Laborer Sell their labor-time Wage
Landlord Lend their land Rent
Lenders Lend their money Interest
Capitalist Leverage others property Windfalls
29
Bank of Amsterdam
  • Founded in 1609

30
A Typology of Class Or how did you make your
money?
CLASS METHOD MONEY-NAME
Merchant Sell their product Profit
Laborer Sell their labor-time Wage
Landlord Lend their land Rent
Lenders Lend their money Interest
Capitalist Leverage others property Windfalls
31
WEALTH AND WORK
  • Smith on

32
Shares in Northern Rock
Tyneside City of London Rest of Britain
1997 493 5 329
1999 350 214 257
Change -143 209 -72
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 Debt Household Debt as
Proportion of GDP
38
How Would Adam Smith Fix the Financial Crisis?
  • David Munaver Bholat
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