DR. PETROS KOSMAS LECTURER, CASA COLLEGE ACADEMIC YEAR LECTURE 4 H ISTORY O F E CONOMIC T HOUGHT ECON-220

How Would Adam Smith Fix the Financial Crisis? “Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it.” —Adam Smith, Wealth of Nations ([1776] 1976), vol. 2, 279 ECON-220

Economics without Economic History The drama of the banking crisis…is unprecedented in the lifetime of almost all of us. Governor of the Bank of England, 2008 The Worst Financial Crisis since the 1930s. Governor of the Bank of England, 1973 ECON-220

Economics without Economic History The drama of the banking crisis…is unprecedented in the lifetime of almost all of us. Governor of the Bank of England, 2008 The Worst Financial Crisis since the 1930s. Governor of the Bank of England, 1973 ECON-220

“Northern Wreck” Britons in the queue, between the Rock and a hard place ECON-220

Banking Crises Source: National Bureau of Economic Research (US) ECON-220

Motivations for Talk To emphasize the structural versus contingent causes of the current crisis. To save Smith from neo-classical appropriation. Objectives of Lecture Examine key themes in Smith Apply Smith to the present ECON-220

Adam Smith Those exertions of the natural liberty of a few individuals, which might endanger the security of the whole of society are, and ought to be, restrained by the laws of governments…The obligation of building party walls to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed. - Wealth of Nations Vol. 1, 345 ECON-220

“Dark Age in Macroeconomics” Paul Krugman Source: National Income and Product Accounts Rea£ Profit$ of the Financial Sector (USA)

Solutions derived from Smith 100 percent reserve banking Mutualise Financial Institution Ownership End contracts on intangible un-deliverables ECON-220

What is Wealth? Bullionists Mercantilists Physiocrats Political Economists ECON-220

Neo Bullionism “Money is neither a material to work upon, nor a tool to work with.” -Adam Smith, Vol. 1, 313 Structured Finance Innovation Engineering ADDING VALUE ECON-220

Smith on THE DIVISION OF LABOR Territorial Division of Labor Organizational Division of Labor Technical Division of Labor ECON-220

Technical Division of Labor “In the progress of the division of labor…the great body of the people comes to be confined to a few very simple operations. But…the man whose life is spent in performing a few simple operations…generally becomes as stupid and ignorant as it is possible.” Wealth of Nations Vol. II, ECON-220

Smith on Profit$ “As capitals increase in any country the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital.” Wealth of Nations Vol. 1, 375 ECON-220

Territorial Division of Labor ECON-220

UK Current Account Deficit ECON-220

‘Natural’ Growth “Unnatural” Growth ECON-220

Smith’s Three Classes Landlords Laborers Merchants ECON-220

Redistribution of Wealth ECON-220

Smith on Class Interests [The merchant class’] interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. Wealth of Nations Vol. 1, 277 ECON-220

Smith on Profits Our merchants and master- manufacturers complain much of the bad effects of high wages. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people. Wealth of Nations Vol. 1, 110 ECON-220

A Typology of Class: Or how did you make your money? CLASSMETHODMONEY-NAME MerchantSell their productProfit LaborerSell their labor-timeWage LandlordLend their landRent LendersLend their moneyInterest CapitalistLeverage others’ propertyWindfalls ECON-220

Mortgage Lending by Purpose (UK) ECON-220

Wealth and Work ECON-220

Two Sides of the Same Coin: Democratization of Credit/Tyranny of Debt Household Debt as Proportion of GDP ECON-220