Sunday, November 23, 2008

Real Wealth

From Airllelon’s Investing and Trading Blog, complete with video links to U-tube-style pieces by the author (HERE) I find this piece:

"Week in Review: The Death of Keynes Mercantilism?"

"It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country" - Adam Smith

For decades now, Keynes has been held as the pinnacle of "capitalist" thought, and the latest in the evolution of what started with Adam Smith.

There's only one tiny problem with that little concept.

Keynes was no capitalist. Keynes ideas are a direct descendant of everything that Adam Smith opposed. Keynes ideas are a descendant of Mercantilism. Capitalism isn't dying, because Capitalism hasn't been practised. Keynes Mercantilistic thoughts and theories are what are dying.

Keynes firmly supported concepts found in Mercantlism. Which is that government should work in partnership with private companies.

In a Capitalistic society, there can be no lobbyists.

In a Capitalistic society, governments do not work as partners with private industry.

In a Capitalistic society, private industries do not seek capital from the government when they are doing poorly

To quote a phrase, “there’s only one tiny problem with that little concept”. The author of the piece goes on to recommending to readers that they buy silver, not gold, because silver is doing better at present, which is partly exactly what Smith considered was a central fallacy of ‘mercantile political economy’!

Gold, silver, and cash money are not wealth in Smith’s eyes. They are illusionary wealth by being stored claims on the real wealth. They do not create wealth in themselves. Hording gold or silver will not add to the wealth of nations.

Wealth according to Adam Smith was the ‘annual output of the necessities, conveniences, and amusements of life’, or the real goods and services of consumption, and working capital.

Revenues from engaging in productive work can be spent on final consumption or re-invested in future productive employment; the balance between these ends determines whether growth in the next period’s annual output of real wealth occurs.

Too much prodigality in consumption and too little in re-investment is not good for an economy, or the people in it. Hoarding metallic ‘symbols’, such as gold and silver is a psychological comfort to individuals but does nothing for the economy. Printing more money is not a substitute for generating the means to produce real wealth when it is disconnected from the real economy; too much printing leads to inflation, not more real wealth (see Zimbabwe).

Strong boxes, protected vaults, brim full of gold and silver, are sterile unless part of the great wheel of circulation that puts to work real resources, primarily labour, capital, and work in progress.

Adam Smith did not write about ‘capitalistic’ society – that came later in the mid-19th century. Long before the commercial entities in the 19th-20th-21st centuries sought governmental help for whatever mess they were in, powerful entities in ancient times sought relief of various kinds from their states, usually in the form of retribution against former clients and competitors, punitive expeditions, revenge missions, armed interventions and lucrative supply contracts. Emperors, kings and ‘strong’ leaders, also sought help from traders – sometimes as excuses to intervene with neighbours in pursuit of plunder and tribute, and colonies and empires.

What is needed by those who write about the ‘perils’ of modern capitalism and modern states is a little more historical knowledge beyond what they apparently misunderstand to be the unique behaviour of the current age. Unless they are only interested in selling their 'solutions'...

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