Friday, February 01, 2008

Senator McCain Chooses to Read Wealth Of Nations

Floyd Norris, Chief Financial correspondent New York Times and International Herald Tribune (New York Times, 31 January 31:

What Should a Candidate Read?’:

CBS asked the presidential candidates to choose the one book they think would be essential to take to the White House, other than the Bible. Only one chose a book related to economics, and that was Senator John McCain, a Republican candidate who has been criticized for lacking economic expertise.“If I could only choose one book, I might choose “Wealth of Nations” by Adam Smith, because we may be entering some pretty shaky economic times, and I think that`s probably one of the most seminal works concerning how the economy of the nation and the world functions.”

Was that serious, or an effort to reassure the old Reagan Republicans who used to wear Adam Smith neckties in the White House?

Whatever it was, that 232-year-old book, published in the same year that the 13 colonies declared their independence from England, may not be completely up to date on how “the economy of the nation and the world functions.” The financial system of Smith’s time does not bear much resemblance to the one we are stuck with. If Mr. McCain wants to understand how we got into this mess, there must be more current books that he could consult.

So here’s the request. Please submit a list of no more than three, and preferably fewer, books that a would-be president should read in order to decide how to deal with the current economic and financial problems. Briefly explain each choice
.”

Comment
The invitation attracted a large number (by Lost Legacy standards) of suggestions – 77 at my last count – and they covered a range of book titles for the Senator (scroll through the comments below the article here:
http://norris.blogs.nytimes.com/2008/01/31/what-should-a-candidate-read/?hp

Wonder how accurate it is to assert that: ‘the financial system of Smith’s time does not bear much resemblance to the one we are stuck with. If Mr. McCain wants to understand how we got into this mess, there must be more current books that he could consult’?

Across the subjects that Adam Smith discussed he took a ‘backwards’ looking, historical approach and was not given to predictions. But would he recognize some of the same problems common in the 18th century that are still prevalent in the 21st?

One major area that has not changed much would be in international trade policy. Nowhere do we have free trade, and some of the countries admiring free trade are heavily protectionist (USA, EU in agriculture) and some demanding access to richer markets are themselves protectionist towards their neighbours. The same mercantile arguments today would echo those that Adam Smith castigated in the 18th century.

The misbehaviour of many ‘merchants and manufacturers’ in narrowing the market and raising monopoly prices are as general as they were 232 years ago. Despite quite draconian competition laws, markets are well short of competitive, even with monopoly defined at 30 per cent of a market.

Modern combinations, otherwise known as trade unions and guilds, exert considerable monopoly power in certain business sectors and in public organisations. Adam Smith would not be surprised at the consequences. He wrote extensively on the failings of teachers in many institutions who were protected by regular pay divorced from performance, and a look at public sector teaching in North America and Britain would soon inform him of the lasting problems he highlighted.

When producers gain control of their institutions they behave exactly as their 18th-century counterparts and disregard the interests of their consumers. State bureaucracies everywhere, sheltered from competition, exploit their tax-paying funders/consumers and the interests of the bureaucrats predominate.

Jealousy of trade – the bane of mercantile policies – continues unabated, especially over ‘trade balances’; yesterday it was Japan, today it is China (and on occasion recently it has been the EU). Trade sanctions are now commonplace; in his day governments sent their fleets to chastise yesterday’s friends as new ‘enemies’. The result was often the same: a war for supposed gains, which turned into massive losses in blood and treasure, and economically highly wasteful (of which the war against the British colonies in America is a prime example).

Expenditures on public works and institutions in 18th century Britain was desperately needed to facilitate commerce, but governments addressed other issues, including wars, and growth necessarily was lower that it could have been.

Governments now spend well beyond even the fairly large budget that Adam Smith favoured (he was not an advocated of a minimalist state) and much of this is wasted because it is too easily collected from taxation and borrowing. In large economies it should be possible to experiment with new forms of funding and management. Forcing reforms to be debated as total changes means partial changes are not tried and tested. It was ever thus.

In short, I am not sure if Floyd Norris realises that though there ‘must be more current books that he could consult’ on ‘how we got into this mess’, it is not clear which of them Senator McCainshould read in order to decide how to deal with the current economic and financial problems’, which would do as good a job as his starting with checking out Wealth Of Nations.

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