How Would Adam Smith Fix the Financial Crisis? David Munaver Bholat “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 1

Sir Isaac Newton: (not such a) Master of the Mint 2

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,

“Northern Wreck” Britons in the queue, between the Rock and a hard place 4

Banking Crises Source: National Bureau of Economic Research (US) 5

Motivations for Talk To emphasize the structural versus contingent causes of the current crisis. To save Smith from neo-classical appropriation. 6

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 7

“Dark Age in Macroeconomics” Paul Krugman 8

Rea£ Profit$ of the Financial Sector (USA) Source: National Income and Product Accounts 9

Objectives of Lecture 1.Examine key themes in Smith 2.Apply Smith to the present 10

Solutions derived from Smith 100 percent reserve banking Mutualise Financial Institution Ownership End contracts on intangible un- deliverables 11

KEY FOCI DIVISION OF LABOR CLASS WEALTH AND WORK 12

What is Wealth? Bullionists Mercantilists Physiocrats Political Economists 13

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 14

Categories of Stock in Smith 15

THE DIVISION OF LABOR Smith on 16

Division of Labor Territorial Division of Labor Organizational Division of Labor Technical Division of Labor 17

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,

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,

Territorial Division of Labor 20

UK Current Account Deficit 21

‘Natural’ Growth“Unnatural” Growth Trade & Finance IndustryAgriculture Industry Trade & Finance 22

CLASS AS A CATEGORY Smith on 23

Smith’s Three Classes Landlords Laborers Merchants 24

Redistribution of Wealth 25

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,

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,

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’ property Windfalls 28

Bank of Amsterdam Founded in

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’ property Windfalls 30

WEALTH AND WORK Smith on 31

Shares in Northern Rock Tynesid e City of London Rest of Britain Change Shares in Millions 32

Mortgage Lending by Purpose (UK) 33

Fascist Reactions 34

Crisis Financial Economic Cultural 35

Wealth and Work 36

Two Sides of the Same Coin: Democratization of Credit/Tyranny of Debt Household Debt as Proportion of GDP 37

How Would Adam Smith Fix the Financial Crisis? David Munaver Bholat 38