Adam Smith —Celebrity First Economics Paradigm later

Adam Smith himself had little interest in the free market and less understanding of economics. He sat in on some salon discussions of the French Physiocrat economists and picked up what he could with his poor French and his Scotsman’s expectations of what was important in the field. What made Adam Smith the first science paradigm celebrity of economics was his keen sense of how to present material in a way to maximize his enthusiastic audience. His aim was not to teach new ideas, but to promote himself.

Adam Smith was part of a group of English authors who hated biographers as paparazzi and believed what they actually thought or did was private and to be kept from the public. In the very limited material about his actual ways, there is a note that he tailored his university lectures to the response of some student he selected for having an expressive face though not very bright. As long as this one’s face showed interest and attention he lectured on his chosen subject. When that one face showed boredom, then he knew it was time to change his topic.

Adam Smith earned by his lecture technique the reputation as a most interesting lecturer which quickly brought him a well-paid position as a private tutor to a wealthy family who took him with them to Paris for awhile where Adam Smith had the opportunity to sit in salon discussions of Dr. Quesnay’s novel and radical new economics.

Dr. Quesnay and his sophisticated new ideas about the economy of the entire French nation impressed Adam Smith, though by the time he published his own book Dr. Quesnay had died, so instead of dedicating his book to Dr. Quesnay, he just stole what he could carry out of his ideas. Adam Smith thus became the founder of modern economics on the grounds his was the first work in English based on the ideas of Dr. Quesnay.

In terms of Adam Smith’s masterwork on economics An Inquiry into the Nature and Causes of the Wealth of Nations his fundamental premise was that all value was the result of the labor contained in market good, and wealth arose from the increase in productivity through division of labor. This first premise makes no logical sense since the total quantity of labor in a market good is diminished by productivity increases through division of labor or industrialization.

The same labor now produces far more goods, therefore the quantity of labor in each item of production is far less. Adam Smith notes that the customer is buying what is the expected labor required for production. That the producer can bring that to market for far less labor input is seen as the source of wealth. This thinking was the direct source for Karl Marx’s view that capitalist profits were based upon cheating labor of their true value.

If all value came from labor content, but only a fraction of that value was paid as wages, then the workers were being cheated out of their fair share. However, it is actually the customer who is being cheated. The retail price in the shop is inflated to some notion of what it would cost that customer to make the item. Then the detail that the producer can make it for far less, sell profitably to the shopkeeper who is selling for a significant mark up to that as well is being covered by how much trouble is saved the customer buying now at this price.

It is the price someone else is willing to offer the customer for the same or similar goods that customers notice. This is touted as the wonder of the free market where a high demand encourages competition and low supply allows for higher profits. Of course, this explains Adam Smith’s observation that whenever merchants and manufacturers sit down to dinner together they discuss how they can thwart free market principles for their own greater profit.

More generally, market prices are never truly free (or necessarily reasonable) they are controlled by the general system of distribution (including information) within which the customer and the merchant operates. That system makes the most important fact about Adam Smith’s Wealth of Nations is that it is published in 1776, the same year as Jefferson’s Declaration of Independence.

Adam Smith and Thomas Jefferson represent two sides of the discussion of the British global trading system established by them for the benefit of the London markets which continues fundamentally the same to this day. Adam Smith promoted himself by writing how beneficial this system without noting the overall system, just the conclusion that its inner workings were private and like the goose that laid the golden eggs, should stay that way.

Thomas Jefferson, writing as a slave-owning Virginia farmer being brought to heel by the British Crown for the benefit of the London branch of this system found it oppressive and unbearable. His remarks about how Africans were kidnapped to be sold as slaves for the benefit of the overall shipping trade were edited out of the public version of the Declaration, but they were part of the founding document of the U.S.

Adam Smith wrote as a Scotsman already well integrated into Great Britain, though his remarks apparently supporting American Independence weren’t at all. He wrote to support his own Scots’ interests, advocating power in Parliament should be apportioned based upon population and tax revenue which would greatly favor the bustling and productive cities of Scotland.

Adam Smith didn’t baldly write that Scotland should have more representatives in Parliament, he wrote about a general principle which would result in that (and did by the reforms of 1820’s). In 1776, he noted that in terms of interest then, that the American colonies represented too much trade to allow them to break free of the Empire. Adam Smith phrased it in terms that if the trade with America were so vital to the Crown, then the King and Parliament should move to America. This has been taken as proof Adam Smith supported America, though obviously his remarks were only rhetoric (he did not edit them out after the U.S. won its Independence by the Treaty of Paris)but those who read them as gospel authority show there their lack of rational analysis.

Adam Smith tried his best to write in a way that would encourage broad readership and offer a quote or two to anyone on any side of the issues of his day. He promoted merchants and manufacturers saying they were the source of all wealth and their markets were ordained to bring about the best possible outcome for all. He also noted, under the heading of public education that the dehumanizing effects of industrialization, the reduction of work to simple operations repeated endlessly, required free public education to prevent ill effects to the working class. Everyone had reason to support Adam Smith as celebrity expert in economics.

The Real Paradigm of Economics
the Physiocrat Dr. Quesnay

Adam Smith never understood the true economic discussion of the Physiocrats, although he did manage to pick up enough details, such as looking at the entire annual production or Gross National Product, and the three factors of land, labor and capital involved in that production, and the importance of laissez-faire free markets to overall prosperity.

What he missed was that Dr. Quesnay was speaking of the national economy of France and noted that the Wealth of the Nation was the result of the fertility of its agricultural harvest each year. Further, the annual harvest was what the entire economy was all about. Agriculture needed fertile land, farm labor, and capital in the form of seed, tools and wages for its farm workers to produce the harvest. This harvest funded the food to support the entire nation. Everyone else worked to produce goods and services to exchange for food to survive.

In all the economy, only agriculture was net fertile, that is for each pound of seed it produced 3-6 or more pounds of food harvest. If the harvest was poor, then there would not be enough to repay the costs of the year’s crop unless prices soared. This was the source of the major criticism of Physiocrat economics, that it did not consider the need to feed the population no matter what. Rather, they noted in a poor harvest, the high prices were justified to cover the cost already paid out to produce that crop.

Agriculture has the same routine and same costs regardless of the crop yield, only the harvesting cost varies; however, those costs must be paid in order to fund the next year’s crop. Further, Dr. Quesnay noted that each year the cost of living, that is the cost of the food and other necessities to keep the working population alive and willing to work for their wages had to be paid first, and the rest of the economy only could circulate what was left over after that cost of living was subtracted.

This was the source of the laissez-faire and free market remarks Adam Smith only slightly understood. Any tax or impediment upon the maximum production of food and its efficient delivery to the cities would increase the cost of living and therefore decrease the total volume of available economic circulation. Dr. Quesnay was a distinguished court physician who applied the latest insights upon the circulation of the blood to the understanding of the economy. The circulation of the blood keeps the organs healthy as the circulation of goods and services forms the economy. The other circulation of air keeps the body alive. This he saw as the circulation of food from agricultural harvest to city markets which required maximum support and minimal obstruction. For farmers it was laissez-faire—let them produce as much as they can to sell in the free market so that the population can get its food and cost of living at the price dictated by their need.

Adam Smith could not understand these sophisticated concepts of a body politic with its circulation being the economy. He rather noted that agricultural produce was rude, even dirty in its appearance fresh from the fields to the market place. On the other hand, processed foods and manufactured goods were pretty and clean and shiny and clearly worth far more bushel to bushel than raw field produce. What Adam Smith didn’t notice was that only food will keep humans alive. Only agriculture can produce a harvest several times the weight of the seed sown. These two facts are the basis of Physiocrat economics.

The recent peak in oil prices and corn prices due to government ethanol subsidies came together to disrupt agricultural markets and spike a huge increase in the cost of living which brought the entire economy into dire straits. When the cost of basic living necessities soars, the economy lacks the circulation for anything else. This is basic Physiocrat doctrine and it was what brought the various financial bubbles to burst. Not quite noticed with our current emphasis on Adam Smith laissez faire economics, however, when the economy comes to the brink that is what explains it.

In France in the late 18th century, Dr. Quesnay took his insights and worked out a national econometric input-output spreadsheet using data available to the Crown, processing in his mind as his computer and outputting through his quill pen. The impact of his spreadsheets was most impressive and he was able to improve transport and reduce local tolls and taxes on agricultural product being transported to market. He was deceased by 1776 and the fundamental problem of the French National economy was that revenue was not raised by direct taxation. Instead, the Crown borrowed its money needs from an investor class who then made their profit by collecting sales taxes on necessary goods from the people. It is noted that the city of Paris was surrounded by literal walls to prevent smuggling goods without paying the high private-taxes required by the borrowing of the Crown. The weather was terrible causing crop failure in 1777 and 1778 then the winter was so cold that the ports and rivers froze preventing ships with food relief from getting inland to the population. By 1789 the food crisis erupted into the French Revolution.

Adam Smith published in 1776 and economics took a long detour from understanding the economy as the circulation of the body politic. The expansion of fossil fuel based engines changed agriculture and society so that the trade circulation supplying markets and the credit fluctuations funding demand were moved to an entirely new level. It is only now with global warming, oil crises and government subsidies distorting the grain markets that basic Physiocrat principles are able to express themselves.

As with any complex global system, once the economic circulation of the body politic is seriously upset it doesn’t just settle down as soon as the crisis is passed. Disruptions set up have their ramifications and consequences throughout the body politic that start their own problems and set off their own crises for quite awhile. Entire new understanding and a new system of accounting and national economic functioning will be required as these problems churn out their own local dislocations and difficulties.

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