Economic Collapse (Prepping for Tomorrow Book 2)

by Bobby Akart

  This view probably overstates the need for liberty to be perfect. By way of analogy, it seems that the human body can remain perfectly healthy despite a variable and sometimes unwholesome diet.

  Similarly, the economy seems capable of surviving, despite illiberal public policies. It may be slowed, but it is hard to stop. Turgot, the leading advocate of this view, was not only a pioneering economist but also physician to Marie Antoinette. Smith's comparison of the economic system to the human body therefore rebuts Turgot's philosophy in terms he could well understand.

  However, the main error of the agricultural system is to see the artificers, manufacturers and merchants as a barren or unproductive class. First, the theory accepts that this class covers its own cost. This is hardly barren. Second, they do actually attach value to things that endure and which can later be sold: this is clearly productive labour.

  Despite these imperfections, this theoretical system is among the better ones. It recognises that wealth consists not in money, but in a country's production; and it sees perfect liberty as the best way to maximise this. In the absence of trade restraints or preferences, people are left free to pursue their own interests, and to bring their capital and labour into competition with others, subject only to the rules of justice. Capital and labour flow into their most advantageous uses, and the state is spared any need to supervise and direct economic life. Indeed, the system of perfect liberty leaves the state only three duties to attend to: defence, justice and certain public works.

  The sovereign is completely discharged from a duty [for which] no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.

  Book V: The role of government

  Defence expenditure

  The first duty, and necessary expense, of the state is defence: protecting the society from the violence or invasion of others. Among nations of hunters, such as the native tribes of North America, people have to be warriors as well as hunters. They must live off their own labour, even when they are at war. There is no king or commonwealth with the resources to maintain them.

  Nations of nomadic shepherds, such as the Tartars and Arabs, all have chiefs, but warriors must still live off their flocks. These, and the whole nation, go along with them. But then there is the prospect of capturing booty from vanquished enemies.

  In an agricultural age, people are settled. Farms cannot simply be abandoned, so the men of military age go to war, and others stay behind. As long as the seeds are in the ground, they can be spared; nature will do most of the work.

  In the manufacturing age, things are different. When people quit their work as smiths, carpenters, or weavers, their income immediately dries up; when they take to the field to defend their nation, they cannot maintain themselves, and must necessarily be maintained from the public purse – all the more so because modern military campaigns can last for months on end. Also, military equipment has become more complex and more frightening, which requires a specialist and disciplined force. For all these reasons, the defence of advanced countries must be financed by the state.

  Justice

  Just as the state must protect people from foreign enemies, so must it protect them against domestic ones. Among nations of hunters, there is hardly any property. People usually have nothing to gain from injuring others, and there is little need for any formal administration of justice. But where property exists, things are otherwise. There are potential gains from theft.

  The avarice and ambition of the rich, or the desire for ease and enjoyment among the poor, can lead to private property being invaded. The acquisition of valuable property – which may take years to build up – necessarily requires the establishment of a civil government and a magistracy to preserve order and justice.

  The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions. It is only under the shelter of the civil magistrate that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security.

  It is obviously useful if, as a rational matter, everyone accepts the authority of independent judges. But there is also a natural respect for authority among humans that makes this acceptance more likely. People respect personal qualities such as strength, wisdom, prudence and virtue; and they respect maturity and age. Wealth is another factor which promotes deference, particularly so in the age of shepherds, where great proprietors have nothing else to spend their fortunes on other than maintaining thousands of retainers. That is why the authority of an Arabian sharif is very great, and that of a Tartar khan altogether despotic.

  A fourth cause of human deference is the inequality of birth: though this is the result of an inequality of wealth. In the age of hunters, there are no major wealth inequalities; the son of a wise or brave man may be more respected than most, but the differences are unlikely to be great. In nations of shepherds, by contrast, wealth can stay within families for generations, and birth is greatly revered. It is in this age that great inequalities of wealth start to emerge. Alongside this wealth emerges civil government – an institution designed to protect those who have property against those who do not.

  Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.

  Smith's argument that law and government are institutions devised by the rich to prevent them being robbed by the poor does not mean that it is a bad system. He has already remarked earlier that for people to accumulate capital, they must have confidence that their property, which may take years of effort to acquire, will not be stolen from them. And this capital accumulation is essential for economic growth.

  Public works

  The third role for the state is to build and maintain public works that could never yield a profit to individuals: institutions to facilitate commerce, the education of the young and the instruction of people of all ages. As the commerce of a country increases, so does its need for public works such as roads, bridges, canals and harbours. Most such facilities can be financed out of tolls or charges, without any burden being imposed on the public finances. The coinage, which also facilitates commerce, generally defrays its own expense and indeed provides a small seignorage to the state; the post office generates a very large profit.

  The greater part of such public works may easily be so managed, as to afford a particular revenue sufficient for defraying their own expense, without bringing any burden upon the general revenue of the society. Public works which cannot produce such revenues, but which benefit some particular locality, are better maintained by a locally raised and administered tax. London streets, for example, would not be so well lit and paved if the cost of the lighting and paving fell upon the Treasury; and instead of being a tax on the particular street, parish, or district of London, the expense would be a tax on all citizens, most of whom would gain no benefit at all.

  Some supporters of greater public expenditure take comfort from Smith's remarks on public works and education (below), but it is a false comfort.

  First, Smith limits his remarks to projects that are essential for commerce, such as infrastructure and education. He does not support public projects as a substitute for private commerce. There is an unbridgeable distance between this limited support for public works and the numerous and large undertakings of the modern state. Second, even where Smith accepts that public expenditure may be necessary to get infrastructure projects built, he thinks that this cost should be repaid by charges on the users, rather than direct taxation. If charges are impossible, it should be the local beneficiaries who should pay the tax. Third, in Smith's time there were few companies large enough to finance large-scale infrastructure projects (except a few jo
int-stock companies, of which he was very suspicious for other reasons): this has changed. And ways of collecting tolls and charges are much more sophisticated today. Private build and operation of public infrastructure projects is therefore more practical than in Smith's time.

  The object of these public works is to facilitate commerce generally. But some particular branches of commerce, such as that carried on with barbarous and uncivilised nations, require extraordinary protection. An ordinary store or counting-house could give little security to the goods of the merchants who trade with West Africa, or Indostan. The interests of commerce have often made it necessary to post ambassadors to foreign countries: the commerce of the Turkey Company prompted the establishment of an ambassador in Constantinople; the first English embassies to Russia were entirely for commercial interests.

  It seems reasonable that such extraordinary expense should be paid by a moderate tax on those in the particular trades affected. It also seems reasonable that, when merchants undertake to establish a new trade with some remote and barbarous nation, they might be granted a temporary monopoly. Like the patents on new machines, this is the easiest way for the state to recompense them for a risk that should afterwards deliver benefit to the general public.

  National policy has been inconsistent, however, and sometimes this protection of trade has been contracted out to private companies, but these companies have either mismanaged or restricted the trade. They include regulated companies like the Hamburgh, Russia, Eastland, Turkey and African Companies, which any qualified person can join on payment of a fee; in other words, they are rather like the trade guilds, and behave like them too. They include joint stock companies established by government, such as the South Sea, Hudson's Bay, and Royal African Companies, which have been granted exclusive privileges in foreign trade. But such privileges have not prevented such companies from failing, and perpetual monopolies to them are an absurd tax on the public.

  Joint stock companies may succeed, without special privileges, in repetitive trades like banking or insurance, or in building utilities such as canals. Other forms of business, however, move too quickly and require risk-taking and attention to changing details.

  A company governed by a board of directors moves too slowly to succeed in such industries. Smith is commonly construed as being opposed to joint stock companies – the kind of arrangement that dominates big business today. But in fact he is principally against the special privileges that had been granted to particular companies; and he believes that companies governed by a large board of director-shareholders could not move quickly enough to succeed in most lines of business. Today, however, shareholders elect a small board of directors who in turn rely on a small executive group to run things, making it possible for large companies to operate quite nimbly.

  Education of the young

  Despite the clear benefit of economic efficiency that it delivers to society, specialisation can have harmful effects on the individual. The person who spends years performing the same simple operation has no opportunity for innovative thinking. Unless the government takes steps to prevent it, the labouring poor will fall into mental torpor, narrow-mindedness, and a fear of change and the unknown.

  Smith here anticipates Karl Marx's idea of 'alienation' among workers who do repetitive tasks with little interest in their final product. In barbarous countries, of hunters or shepherds, the variety of people's occupations and the everyday problems they have to overcome keeps their minds and their judgement sharp.

  The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur.

  In civilised countries, however, the education of the common people requires particular attention. Wealthier people are more willing and able to pay for their children's education; and they tend to have more varied jobs, so their minds are less likely to grow torpid through want of exercise. The common people, however, have little money for education – and little time, too, since in order to eke out a living for the family, their children have to start work as soon as they are able to do so.

  But the essential elements of education can be acquired very young. And for a very small cost, the public can encourage, or even impose, the requirement to acquire this basic learning on almost everyone. It could do this by establishing local schools where children can be taught for such moderate fees that even a common labourer could afford them. The masters could be paid partly from the public purse (though they should not be paid wholly, nor even mainly, from this source, because they would then soon neglect their students). In Scotland, the establishment of such parish schools has taught almost all the common people to read, and many of them to write and account. In England, charity schools have had something of the same effect.

  The endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers. Their subsistence [is] altogether independent of their success and reputation in their particular professions. Smith himself was educated at one of these local, publicly supported schools in Scotland. But his policy recommendations, while generously motivated, are not wholly consistent. He argues for some state finance for school buildings, but only partial state support for teachers; and at the same time he praises the private schools that teach dancing and other arts.

  Certainly, he was not contemplating comprehensive state education as is common in many countries today. Schoolbooks could of course be more instructive: and instead of Latin, elementary geometry and mechanics would be more useful to the common people. Public awards for educational achievement could help too. And there could be an examination before anyone was allowed to join a trade.

  This is how the Greek and Roman republics maintained the martial spirit of their citizens. They instituted gymnasia for their practice, appointed teachers (who were paid by their students) and awarded badges of distinction to those who excelled in these exercises.

  Today, only a few people are trained in this martial spirit, except perhaps in Switzerland, and the spread of cowardice and the lack of a sense of self-worth, is as big a danger as ignorance and stupidity. Fostering self-worth and promoting knowledge are a benefit to society, promoting decency and good order.

  Religious education

  The institutions for the instruction of all ages are chiefly those for religious instruction. The ministers of established religions, being supported by estates or tithes, grow complacent, and are often eclipsed by the zeal and industry of new ones. They fall back on the law to protect their position: the Roman Catholic clergy, for example, used the law to persecute the heretics, and were in turn persecuted by the Church of England.

  Moral systems can be austere or liberal. People of fashion veer to the liberal system, and indulge luxury, disorderly mirth, and within reason, intemperance. But then they can afford such laxity. The wiser folk among the common people, by contrast, abhor such excesses, which they know are potentially ruinous to them. Their moral problem is particularly acute in the cities, where anonymity allows people to fall more easily into self-neglect and profligacy, unless they are picked up by one of the small, austere, often unsocial religious sects.

  The first remedy for this problem is the study of science and philosophy, which the state could spread, not by giving salaries to teachers (which would make them negligent and idle), but by requiring people to learn them before going into a trade. The second is to amuse and divert people by promoting the arts.

  Funding state expenditures

  Some expense is needed to support the dignity of the monarch, who as the chief magistrate must command general respect. The cost of the criminal justice system is likewise an expense that the whole society should bear. The expense of civil proceedings, however, is better defrayed by those who benefit from it – that is, its users. Indeed, as a general principle,
public servants should be paid by results.

  Public services are never better performed than when their reward comes in consequence of their being performed, and is proportioned to the diligence employed in performing them. Local or provincial expenditures which have a local or provincial benefit should be paid out of local or provincial taxes, rather than a tax on the whole society. The cost of good roads and communications, however, may justly be financed out of general taxation. But much of the cost can be recovered by user fees, such as the turnpike tolls in Engand or the peages in other countries.

  The expense of education may also fall legitimately on general taxation; but again it is equally proper and perhaps advantageous if it is paid for by those who receive the immediate benefit. In other cases, where public works benefit the entire society but cannot be paid for by specific users, the shortfall must usually be found from general taxation.

  Governments may try to raise money from commercial projects, but they are generally unsuccessful traders. Public servants regard the public purse as almost inexhaustible, spend unnecessarily and pay themselves well, while successful businesspeople are careful and parsimonious at managing their limited resources. Some governments, likewise, raise revenue from their land holdings, but these are generally insufficient to pay for all the demands on the public purse, and moreover, state assets are generally less well managed than private holdings.