Robert Skidelski Blames Adam Smith, not the Prodigals

Robert Skidelsky in the Moscow Times writes a polemic against deficit reduction policies and in favour of expansionary government spending HERE 

“I Don't Believe in Economic Confidence Fairies”

“The doctrine of imposing present pain for future benefit has a long history, stretching all the way back to 18th-century British economist Adam Smith and his praise of "parsimony."

Comment

When I was an undergraduate in the 1960s, Robert Skidelski was a prominent author, mainly associated with Keynes and Keynesian ideas in the "General Theory".  His biography of Keynes was a well-thumbed tome and his ideas were just coming under attack from Milton Friedman.

I was taught ‘Keynesian Public Finance’ at undergraduate School, at the University of Strathclyde (Glasgow) and went on to teach it too at a Management School in Essex for a couple of years, then as a Lecturer in Economics at Brunel University in West London for another couple of years, and finally, as a Senior Lecturer at the University of Strathclyde for 11 years.

The academic biography is by way of saying that I was happily familiar with Keynesian economics and his "General Theory of Employment, Interest and Money" (1936), as both an honours economics student and later as a senior academic.  However my interest in Keynesian macro-economics waned towards the end of those years, partly from decreasing convictions that it remained the answer and partly because I developed research interests not directly relevant to what I was teaching, and I therefore took academic posts broadly removed from macro-economics (and, later, neoclassical micro-economics too). 

A couple of years ago, I attended a fully subscribed lecture by Robert Skidelski in Edinburgh, mainly out of interest to hear the economist who was most prominent among the remaining Keynesian economists and whom I was influenced by.  He didn’t deflect me from my earlier loss of interest in macro-economics, though his ideas remained well-put with evident conviction, without convincing me – I had also lost touch with recent controversies relating to the post-2008 momentous events in macro-management, or the lack of it, depending on which side of the fence you occupy. 

Hence, when I read the first sentence quoted above, where Skidelski invokes Adam Smith in support of his current campaign against “deficit reduction” programmes and what they call “austerity” (anybody brought up in Council housing schemes in post-war, “rationed” Britain knows about real austerity), I was concerned, because Skidelski indentifies “parsimony” as “imposing pain”, which is more rhetorical than factual, at least as regards Adam Smith.  “Pain” is the consequence of reckless prodigality, not the policy choice those practising parsimony, which if followed generally would avert – for ever – the avoidable and inevitable consequences of prodigality, which Skidelski ignores.

For Smith, he discusses the counterpoint to “frugality”, as an aspect of “parsimony” when compared to “prodigality’ in WN, Book 2, chapter 3; “of the Accumulation of Capital, or of productive and unproductive labour”), which is well worth reading to appreciate what Adam Smith was actually on about.  Those of you who read that chapter in WN will likely come to a different perspective of Smith’s good sense than Skidelski, who glosses over it by describing parsimony as “imposing present pain for future benefit”.   I suggest that Skidelski is being mischievous rather than insightful.  He attacks the messenger for the contents of the message, which the messenger did not write.

Smith’s argument is much more sound than Skidelski credits.  See “Capitals are increased by parsimony, and diminished by prodigality and misconduct” (WN. II.iii.14: 339). 

Today, unlike in Smith’s time, governments can and do borrow prodigious amounts of capital, a) because taxation does not cover the whole amount required to support all government expenditures (now vastly grown to unprecedented proportions, even as experienced in the spendthrift, war-ridden 18^th century); and b) the amounts that governments can borrow, here and abroad, are dependent on the willingness of lenders to do so at levels of interest manageable by countries with a good credit status as borrowers, but crisis-causing for countries and governments losing such status.

The gloomy conclusion from such a knife-edge inevitable reliance on one’s credit-worthiness was summed by Smith: “If the prodigality of some was not compensated by the frugality of others, the conduct of every prodigal, by feeding the idle with the bread of the industrious, tend not only to beggar himself, but to impoverish his country” (WN II.iii.20: 339). 

Moreover, while bankruptcy of an individual is a personal catastrophe, the bankruptcy of a whole country – including the others to which the border-line to disaster soon spreads rapidly, if they too are judged to be unreliable debtors (what ever they were before) – is a contagion that portends a world-wide disaster affecting hundreds of millions, and with all that might accompany that event.  Failed states are dangerous places to live in.

Individual disasters are tolerable, but a contagion of disasters for everybody is not.  So Britain, say, shrugging off its debts by wanting to borrow more, even to invest in nominally worthwhile employment-generating projects, sends signals to those creditworthy countries, institutions, and individuals, whose tolerance for the risks to lending more to potential heavier debtors seeking to borrow yet more, will likely compel them to realise the pressing need for their own more prudent parsimony by no longer lending at all.  Collectively, they will stop lending and can demand that their debtors exhibit realistic action to cut their debts, and quickly, and cease borrowing.  They know that they too are not immune from debtors-cause contagion.

Adam Smith discusses these issues, albeit in different times – the scale of debt then was narrower and individualistic, not country-wide and general – in Wealth Of Nations (Book II, chapter 3).  I recommend that readers – and Robert Skidelski – spend 15 minutes, reading about the real world of debtors’ dependence on creditors.  It is the creditors that decide how much “pain” needs to be suffered, and who is to suffer it; it is the debtors who suffer it for what they did.   It is not those advocating and practicing parsimony.

Oh, yes, blame the governments that got us into this mess, not the messengers who warned of the consequences.   It is the spenders who increased government spending to what the lenders inevitably regard as unsafe levels, and from the greed of individual key players in the banking and finance sectors who force the initial realisation among creditors that debts could not be paid back nor more borrowed to cover them,. The pack of cards shakes and in due course collapses.