Tag Archives: adam smith

Private property is a most sacred right of mankind

Adam Smith writes in The Wealth of Nations:

To prohibit a great people, however, from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.

This quote reminds me of what John Adams wrote in 1787 in his A Defence of the Constitutions of Government of the United States of America:

The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If “Thou shalt not covet” and “Thou shalt not steal” were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free.

Adam Smith: Supply Side Economist

From The Wealth of Nations:

High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes. [page 954]

Dollar holding steady, so why are commodity prices way up? And where’s the inflation?

The US Dollar Index is up three percent this year. On the surface, it appears as if we have not experienced a Dollar devaluation this year. But that is not so. Looking at the US Dollar Index or the Dollar against other currencies gives you a false sense of what is happening. The Dollar is being devalued, but so it the Euro, Yen, and most other currencies. All currencies are falling together, but that means they aren’t changing against each other.

How is the Dollar doing against other things, like commodities. Most people look at gold and silver as a currency substitute. Adam Smith looked at wheat prices to measure the value of one’s labor. In today’s global economy, oil may be even more important. So how are the metals, oil, and agriculture doing compared to the Dollar?

Gold is up 28 percent so far this year. Silver is up 79 percent. Platinum is up 19 percent. Palladium is up 92 percent. Copper is up 29 percent.
Crude oil is up 12 percent. Wheat is up 91 percent. Corn is up 56 percent. Soybeans are up 32 percent. Cotton is up 97 percent. Sugar is up 40 percent.

No matter how you measure it, commodity prices are up. Another way of looking at it: the Dollar buys less of each of the above items. Inflation or Dollar devaluation. Whatever you call it, it is happening right now.

So why aren’t we feeling the effects of this falling wage rate or, from the other perspective, this inflation? In fact, we are to a small degree. Just ask anybody around you about their financial situation. Times are tough. But why aren’t we feeling it to the extent the statistics imply? Simply because raw materials make up just a small percentage of the total cost of the things we buy. Personal income, whether it be wages, benefits, capital gains, or corporate profits flowing to individuals, makes up 86 percent of GDP. Raw materials is somewhere around 10 percent of GDP. So it should come as no surprise that rising commodity prices have not, for the most part, not found their way into the CPI statistics. In fact, I’d guess that rising health-care costs have been a bigger contributor to inflation than commodities. On the other hand, falling housing prices are keeping inflation in check.

But what if commodity prices not risen so much? What if the Dollar had not been devalued? In that case, we would either see rising wages or deflation. One is seen as good and the other evil, but they are really the same thing. Either we’d earn more and be able to buy more good with our earnings or we’d have the same wages but lower prices would allow us to buy more with our earnings. Just look at how much we’ve benefited from deflation in the technology area. Don’t we all wish other goods would fall in price as well?

While we have inflation in some areas, such as commodities and health care, we have deflation in other areas, such as housing. Even though the Dollar is being devalued in comparison to non-currency money like gold and silver, it is holding steady against other currencies that are devaluing at similar rates. But we’d be much better off if the United States didn’t devalue: we’d benefit from rising wages or falling prices, either of which would enable us to buy more goods. But the government fears deflation, not for our sakes, but for its own. Deflation makes the real value of the government debt rise. Inflation though makes the real value of that debt smaller, enabling the government to hide its incompetence, that is until interest rates rise. If the government doesn’t right its ship soon, inflation or deflation will become a secondary issues. Interest rates will rise and the government won’t be able to hide its debt and deficit with inflation.

Adam Smith and Alexander Hamilton on income and sales taxes.

Back in the 1700s, income taxes were rare, yet more countries were adopting such revenue generating schemes. Adam Smith minced no words in attacking such “absurd and destructive” taxes. In a section of The Wealth of Nations titled “Taxes upon the Wages of Labour,” Adam Smith wonders why countries institute such income taxes:

Absurd and destructive as such taxes are, however, they take place in many countries.

Just a decade later, the Founding Fathers recognized that limits needed to be placed on government. One such limit would be to make it more difficult for government to raise our taxes. In Federalist #21, Alexander Hamilton argued that a consumption tax would effectively limit the size of government:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, “in political arithmetic, two and two do not always make four.” If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

We have seen how the income tax has accomplished the growth of government that duties were unable to do previously. I return to this chart of the size of government excluding defense dating back to 1910. Remember, the income tax amendment to the Constitution was ratified in 1913.

Click on image to zoom in:

Seeing the growth of government since the income tax appeared a century ago, Smith and Hamilton were correct in their assessments. Based on the above quotes and their other writings, Adam Smith and Alexander Hamilton would support a switch to a consumption tax, more commonly called a sales tax today or the proposed Fair Tax.

Classic quotes against the income tax

Plato: “When there is an income tax, the just man will pay more and the unjust less on the same amount of income.”

Adam Smith in the section “Taxes upon the Wages of Labour” of The Wealth of Nations“Absurd and destructive as such taxes are, however, they take place in many countries.”

Albert Einstein: “The hardest thing in the world to understand is the income tax.”

Will Rogers: “Income tax has made more liars out of the American people than golf.”

Please post more quotes in the comments.

If Corporations Are Evil, Government is Evil Times Five (or more)

Collectivists (communists, socialists, and many liberals) hate corporations for a number of reasons, yet they love government. But in fact, government is the largest corporation. The US government has revenue five times the size of Wal-Mart, the largest US corporation in terms of sales, nine times the spending (due to the huge budget deficit), debt five greater than Bank of America, the largest bank (not including off-budget liabilities such as social security and medicare), and is the country’s largest employer. And this is just the federal government, with state and local figures only adding to the imbalance.  But this government, which the collectivists love so much, perpetrates the same “evils” for which they blame corporations.

The major criticism of corporations is the Divisions between labor, management, and owners. Adam Smith explains:

The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

This same criticism applies to government. Government officials spend other people’s money and, as a result, “it cannot well be expected, that they should watch over it with the same anxious vigilance” as which they would spend their own. But there remains a major difference between government and corporations. Corporations only have money to spend if people voluntarily give them money. Either investors must give the corporation funds to expand their business or customers must purchase products from the company. If neither of the two occur, corporations have no money to spend. On the other hand, nobody voluntarily gives money to the government. Government forcibly takes money from a country’s citizens with the threat of imprisonment if taxes are evaded. In theory, the people control the government through the election process, but that would be just as true when it comes to corporation in which shareholders elect the Board of Directors. In both cases, there is a division between the people who are supposed to be represented and the managers of the corporation/government. Yet, the distinction between the two remains: corporations must earn their revenue whereas government simply takes it by threatening to use force.

Another argument is that corporations are anti-democratic:

Chomsky contends that corporations transfer policy decisions out of the hands of the people and into corporate boardrooms, where public oversight is limited. The extensive financial resources of corporations and the extent to which they’re employed to influence political campaigns in the United States has also been implicated as a way in which corporations undermine the democratic institutions in a society[6].

By extension, the large government bureaucracy transfers “policy decisions out of the hands of the people and into” unelected government agencies “where public oversight is limited.” Again, a major difference remains. Corporate heads can be fired by the Board of Directors and the Board of Directors can be fired by the shareholders. Additionally, corporations must “do good” in order to stay in existence. If they don’t sell product, the corporation will go bankrupt. On the other hand, government bureaucrats largely work in secret in which the shareholders (the country’s citizens) do not even know of the bureaucrat’s existence. Furthermore, government agencies that underperform do not go out of business. Instead, they request even more money from the government, which they claim they need in order to properly carry out their duties.

As a result, the government acts even more like a corporation than actual corporations do and without the requirement of actually providing something. Worse yet, government is much larger than any corporation can ever be. Throughout history, liberals complained about a number of corporate monopolies. Yet, government is much larger than any corporation and a real anti-monopolist would attack government for its monopolistic control of our health care system, defense, retirement funds, and education system.