Banking, Profits, Value and Mr. Smith

You’d think that all of these business-people and/or economists who (supposedly) have read Adam Smith’s The Wealth of Nations, would have picked up on his not so subtle hints about the modern findings of Behavioral and Complexity Economics and the present patterns of behavior and function in our own economies.

For example: bankers giving out credit willy-nilly in order to produce as much debt as possible and make as much money as possible off of short term, high interest loans was considered a bad idea by Mr. Smith back in 1776 when he clearly explains the failure of the Scottish and, consequently, English banks when they over-extended their credit lines to people who either couldn’t afford the loans.  What good does debt do anyone if the debtors are unable to pay them?

One could also see the massive bailout by the Federal Reserve as just another instance of the central bank lending out money to cover the losses created by the banks’ foolishness, and creating only more useless debt for the society as a whole as another instance where history is being repeated and Adam Smith’s substantiated observations being ignored.

We can also look at the instance where he argues that the economy’s health is lowest when business profits are highest, because the labor is undervalued and/or the supplies are in short supply (thus leading to higher prices, lower sales and greater profits).  He explicitly states, and I quote: “But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin.” (see this for an explanatory article from The Business Insider).  He’s essentially abiding by a key feature of creating a healthy economy, in terms of the economy being a complex adaptive system, that wealth is something that needs to act as an incentive for everybody’s work and efforts in the economy, not just for the top entrepreneurs, business executives and financiers.  Imagine the circulatory system as acting like the economy, where individual cells in the body selectively consume and produce various “goods” and “services” to other cells through the medium of the blood stream (which is analogous to the flow of money).  Imagine a body where all of the blood (and all the goods and services) have entered into one portion of the body, thus depriving the rest of the body of the goods and services needed to function as individuals.  Contrary to Ayn Rand’s erroneous and delusional view of how societies (and people) operate, the engorged sections of the social body will be equally, if not somewhat more, likely to die off or be rejected by and from the rest of the body of society.  Society as a whole is larger and more resilient than the parasitic minority that would leech the wealth and the goods and services from the rest of the cells in the body.  In addition, those parasitic cells are also dependent upon the production of those goods and services that they sap from the rest of the body of society.  Should the rest of the cells in the body die off, or be “disconnected” somehow from those “elite” cells, the elite cells would have to revert to a state of barbarism in order to produce the goods and services that they’ve become accustomed to.  Money, as Adam Smith observes, again, in The Wealth of Nations is not the definition of wealth, but in fact is the actual goods and services that are produced in the economy, starting with the basics of food and water as the first priority and ending with the luxury items as the last priority.  If there is no one to produce the food, let alone, the luxury goods and services, then no amount of money will make it possible to produce.  As Adam Smith observes, gold and silver (and, for that matter, cash and credit) are least valuable in poor societies, because people are prioritizing the production and consumption of basics over the additional non-necessary stuff that characterizes (and has more value in) the wealthier countries.  What good is a computer or a luxury yacht if you’re unable to feed yourself or your work force?

One would think that all of these miscalculations by business people, bankers and politicians of his time, would have cued him into the fact that human beings are, in essence, non-rational actors with incomplete knowledge about how things are, let alone, how things function in the grander scheme of things.  The “invisible hand” concept whitewashes the irrationality and non-rationality of the human species (who couldn’t even interpret Adam Smiths’ work correctly for all these years) and places an excessive amount of faith in the mental workings of humanity to do make the right moves without guidance or nudging (the basic tenants of Behavioral Economics).

Adam Smith doesn’t even seem to have a problem with government regulation itself, in the spirit and sense of it acting as a tool to guide human behavior and create pro-social and pro-economic incentives (ie, paying out profits and opening up opportunities for workers) while penalizing anti-social and anti-economical behavior (preventing anti-competitive corporate regulation, dangerous and extractive behavior of the merchant and financial classes and allowing non-rational behavior by the economic agents’ to be naturally penalized in the market system).  His main complaints about regulation deal with the inefficiencies created by the ignorance of business owners and politicians’ alike.  He does not, however, seem to oppose regulations in principle or when they promote the well being of the general public.

I wonder how Mr. Smith would react and respond to the environmental considerations that are beginning to crop up in our modern era.  What would he say about an economic system that’s destroying the very world in which it and its agents have to live?

Would he care about the financial costs?

Would he be concerned about the profits of the companies (which he already denounced quite explicitly in his most famous tome, The Wealth of Nations), especially when they would come at the economic cost of human life and society?

We can only speculate, unfortunately.

But what is the point of profit if you’re not alive to spend it, or if many other people aren’t alive to produce the actual wealth that defines and shapes our economy as well as provide for our well being and health as living organisms?

These are questions and perspectives that are not currently being offered in our economics courses, and they’re certainly being deliberately ignored in our business courses.

We need a new logic and attitude, as businesspeople and policy makers, with regards to money, financial gain and the definition of value itself.

How is a return of $1,000 more valuable than a return of $200, if that $1,000 leads to the death of yourself, your society and the value of all your investments and assets in the long term (which, btw, becomes the short term all too soon)?

It’s time for a new age in humanity, economics, policy, business and finance.

And it begins with a conversation, followed by action against that which is harmful and for that which is beneficial.

Think about it.


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