Tag Archives: economics

The Wealth of Nations and 1776

In the late 20th century people who say that Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, (generally referred to by its shortened title The Wealth of Nations) shows why ‘Capitalism’ works are forgetting the world and culture he was writing was. This is a world where rapid transit was by sea.  Most people walked and few ever went more than 7 miles from where they were born.  This is a world where most people were farmers and in some nations the middle class was smaller than the nobility.

Most business were ‘small’ like two or three people small. An big business was never over a 100 people.  Where money was cold hard cash (coin mind you) that you still had to check out to be sure of it’s purity (monarchs still liked to debase coinage to stretch the budget) and true weight (people like to shave or Knick coins).  An people lived in neighborhoods so small everyone knew everyone else and was suspicious of everyone else.

In Great Britain (England, Scotland,and Wales) most towns had just had Church & Chapel if not just Church. If you acted badly in your business everyone would know and best you would have a very hard time of it.  If you were very unlucky or very bad, you could even have your “Name read out” on Sunday.  Your wife, if wife you had, would could be ostracized from all town social life and finding suitable marriages for you children would be next to impossible.  Now I can hear some of you saying, “But what about all those stories I read like “Pride and  Prejudice”.  First the people in the story are not middle class they are ‘Gentry’ AKA lower upper class.  An if you look closely few, if any, of the characters are in “Trade” which is what business was called back then.

So what does this all have to do with Capitalism?  Simply that the Capitalism being discussed is small/local Capitalism.  Capitalism with few and easily identified entries into starting a business.  Just consider this:  Why was the silver smith shop of Paul Revere in Boston, a city, and not in a village like Braintree.  Several reasons but two of the most important was access to raw materials (shipped in over water to Boston Harbor) and customers.  That is the people with both the need to buy silver and the cash gold to buy it.  It would do us well to remember that most artisans did their work on consignment.  This went for cobblers, cartwrights, blacksmiths as well as silver or gold smiths.  Very little would you see a shop filled with goods you could come in and buy.

Also the law was very different back then.  Like modern day full partnerships, someone like Paul Revere, or even John Hancock, was personally responsible for all debts and liabilities of the business.  It is just about this time you see the first limited/shared liability companies showing up in London (to wit “ lloyds of London”) where an investor was liable only for the amount of money he invested and nothing more.  Even then some very interesting cases in commercial law come out of the period that forced Parliament to make new law.  Next comes the steam revolution that suddenly made traveling over hundreds of miles in a day something that could be done by most anyone.  I shan’t go into more detail on the industrial revolution as there are many many good books and online classes on the subject.

What is important here is that the type and form of capitalism we have now would be totally unrecognizable to Adam Smith.  Trying to justify economic activity using his writing makes as much since as starting a business based solely on cold hard cash and selecting your business location on foot traffic of the wealthy.

A problem with Socialism & Capitalism in America

As strange as it may sound both Socialism and Capitalism suffer from the same problem in America. This is not to say both suffer other problem/issues, just that they both suffer from the same one in America. In America we seem to think that both Socialism and Capitalism are well defined and thought out economic systems. Unfortunately they are not. They aren’t even well formulated economic theories. What they are are two, in practice, economic systems with many many different systems in practice.

People also think that Capitalism is a 18th century development an Socialism is a 19th century one. What is true is that those were when economic systems that had been going one for many centuries started to be both studied and, sometimes, formalized. When Adam Smith wrote “The Wealth of Nations” he was describing the economic system system he found around him in 18th Scotland. He both gave it a name and did try to formalize it into a theory. An for an 18th century philosopher he did quite well. But he wasn’t the last word, not by a long shot.

The same can be shown for Socialism. The economic philosophers of the early/middle 19th century were describing an economic system that they could observe practiced by natives in the soon to be colonized Africa and Americas.

So just what is the problem these two Izums share? When discussed they are in an idealized form. This is something done quite often in science. We will create an ‘idealized’ model to simplify the tremendously complex system we are studying. The thing to remember that it is an idealized sample we are looking at and therefore subject to errors. What will work in the idealized system doesn’t work, or works in strange ways, in the real world.

A great example of this is something I learned in a Macro Economics class, the concept of elasticity. All too often people think that you can buy, or refrain from buying something depending on how much it costs. An for a lot of things this is true. But somethings you must have to live, like food an water. If either or both of these become scares people will do what ever is needed to get them. These are what are called inelastic commodities. In an idealized economic model commodities will either be all elastic or all inelastic, not a mix. Nor will you have a commonality that is usually elastic that can become inelastic do to non economic forces.

Another thing that is often done in idealized economic systems is to limit the number of reasons a person will do something to strictly economic reasons, excluding religious , moral, and/or philosophical reasons. We even do a lot just for emotional reasons, because it will make us feel good, or to get back at someone/something that hurt us? These reasons for making economic decisions are difficult or impossible to quantitize much less predict.

So the next time someone brings up Socialism or Capitalism take a moment and ask them just what they mean by that word. You just might be surprised.