A certain problem with the racial wealth gap
We’re told that there is yet another problem in our green and pleasant land. The racial wealth gap:
According to a recent report by the Runnymede Trust, Black African and Bangladeshi households have only 10p of savings and assets for every £1 of white British wealth.
About which it is necessary to point out just a few things.
Mass immigration is a comparatively recent thing in the UK and we find ourselves entirely unsurprised that recent immigrants are not at the top of the societal, income or wealth distributions. We tend to think that’s not how immigration works, not in the first generation. We would go on to agree that seeing such a pattern in the second and or subsequent generations would be worthy of investigation and possibly rectification.
It is also true that wealth increases with age. Household wealth is largely - actually, outside the top 10% of the population almost entirely - made up of pensions and housing equity. These are things which skew with age. None of us are surprised that a 20 year old has none of either, all understanding that both are built over a lifetime. The Black African and Bangladeshi populations trend very much younger in average age than the white. Whether the gap is purely explained by this we very much doubt but any examination which doesn’t control and correct for it is valueless.
There is a much more thorny problem here as well. Yes, there’s a significant gap in housing equity. We also have a system which subsidises people not to build housing equity. Part of this system is Housing Benefit, part is the system of social housing. These are both - not exclusively, but near entirely - aimed at the poorer sections of the population and at those who rent.
Leave aside entirely whether such should exist or not - we think that some system of subsidy to those who cannot afford housing is entirely fine, even if we argue with aspects of this one - and concentrate just upon the effects.
For what is the complaint here? That people poorer in income are not gaining housing equity. Yet we have a substantial system - Housing Benefit alone was something like £40 billion a year last time we bothered to look - which deliberately subsidises people not to build housing equity. For if you buy you don’t gain the subsidy, if you continue to rent you do.
So, why do the poorer among us not gain housing equity? Because we’re paying them not to do so. Which makes complaining about the absence of housing equity among the poor somewhat obtuse at best.
Of course, there is a solution to this, sell the social housing to the poor at whatever discount makes it financially viable for them to buy it. That produces, over time, the equity and reduces the cost of the subsidy as well. In fact, it solves the wealth gap problem entirely. It’s just that we can’t help feeling that someone has tried this before and the same people doing the current complaining didn’t like that at all.
Gender equality is a luxury
Before we create too, too, much apoplexy out there we should point out that we do not mean that gender equality is a luxury in the colloquial sense, something the rich can have and the poor just have to lump being without it. Rather, gender equality is a luxury good, that description being a technical one with a specific meaning. It means something we devote more of our income to as our income rises, less as it falls.
At which point:
Women's careers are regressing and taking Britain back to a 1950s style of living, a study has found, as experts say the pandemic has shifted traditional childcare duties back onto mothers.
We are currently some 20 to 30% poorer than we were 3 months ago - we’re not quite sure and won’t be until we see next month’s GDP release. The complaint here is that we’re going less of that gender equality stuff as we become poorer - gender equality is a luxury good.
We’re rather in favour of luxury goods ourselves and we’re also firmly in favour of gender equality - even as we might mutter a bit about how some people define that.
What interests us here though is that this is a good argument in favour of economic growth, isn’t it? Gender equality increases as society becomes richer, becoming richer is economic growth, gender equality is generally seen as one of those things we’re all in favour of - we should pursue economic growth as it increases gender equality.
Oh, yes, that also means that capitalist free marketry is pro-gender equality as it’s the only socioeconomic system that has produced consistent economic growth over time.
Good, we’re glad that’s solved then. Gender equality is just another in that long list of reasons to support capitalist free markets.
Why politics is such a lousy way of doing anything
We are looking at the rubble of the global economy caused by a pandemic. Allow us at least some rhetorical hyperbole here. We also know that the effect of the disease itself seems to vary over human genotypes. We’d like to know why.
We do know that Vitamin D is linked to the human immune response. We also know that Vitamin D production is linked to the melanin content of the skin and the amount of sunshine (more strictly, UV light) upon it. Pale skin wouldn’t have developed in northern climes (the equivalent latitudes in the Southern Hemisphere generally not being land) if this were not true according to our current understanding.
Unfortunately politics rather gets in the way here:
Public health officials are urgently reviewing the potential ability of vitamin D to reduce the risk of coronavirus.
It comes amid growing concern over the disproportionate number of black, Asian and minority ethnic people contracting and dying from the disease, including a reported 94% of all doctors killed by the virus.
A delayed Public Health England review into the reasons why BAME people are disproportionately affected, which pointed to historical racism, did not review the role of diet and vitamin D.
Some large portion of the politically engaged insist, for their own reasons, that the cause is that structural racism. Thus that’s the first answer that politics reaches, that it is structural racism.
This is rather what Hayek was talking about in The Road to Serfdom. Not that the existence of the National Health Service would make us all serfs. But that directing health care through politics would give political power over health care. Thus health, and its care, would be directed by the political fascinations of those who rule us rather than being offered on the basis of what actually works in improving our health and its care.
This current example does not exactly disprove his contention.
In terms of what’s really happening we’re entirely open about this. If it’s structural racism causing the problem so be it and let’s go and deal with it. If it’s Vitamin D then so too there. The important thing is that we want to know. For only then can we work out what to do. There would be little point in overturning society if the cure were actually to advise the melanin enhanced to go sit in the park for 30 minutes each afternoon.
All of which is why politics is such a lousy way of getting things done. Answers proffered tend to be politically determined. Even the questions asked are so. Which isn’t how we do get to understand reality and what to do about it.
For look at what politics has managed with health care so far in this pandemic. They’ve not, as yet, even asked the right question and yet they’re already proffering that answer. This just isn’t the way to do things.
The Not So Green Belt
There are few policies in the UK which bring about as much controversy as the Green Belt. These vast areas surround many major UK cities, and are hailed by their supporters as bastions of environmentalism. Yet to many the benefits of the Green Belt are questionable, and the externalities of reduced housing and increased congestion raise doubts on the efficacy of the policy.
In the case of the Green Belt, the opportunity cost of a supposedly environmentally sound policy is vast swathes of land which could be used to solve Britain’s housing crisis. In fact research from the ASI estimates that for London ‘one million homes could be built on just 3.7% of Green Belt land,’ meaning that if the Green Belt has (if any) positive environmental impact, it must outweigh the distortion that it creates on the UK housing market to be even remotely justifiable.
Yet whilst some areas of natural beauty may exist, 37% of land around London is used for high intensity farming, carrying with it detrimental environmental impact, not to mention the vast swathes of land dedicated to private golf courses. This is far from the enchanted forest depicted by many Green Belt supporters.
Further, with employment becoming increasingly centred around London, more and more people are forced to commute further out from London because of the Green Belt. This consumes immense quantities of oil, and creates clouds of emissions, further diminishing the limited environmental benefits of the Belt.
If the environmental benefit is doubtful, why does the Greenbelt continue to persist?
For a politician campaigning on credentials of environmental activism, showing support for a physical green space is far more likely to persuade the average voter than any talk of arcane emission standards or other more effective policies. The narrative of ‘green good, building bad’ put forward by activist groups clouds the debate into one of emotion, rather than of facts. This isn’t even mentioning the upward pressure on constituents’ houses prices creating an incentive for politicians to appeal to local supporters, rather than the national, or even global interest.
Thus we must seek to change the narrative to one which favours logic and tangible improvement to society, rather than one that rubs politicians ego’s and improves electoral chances in order to save both our housing market and environment together.
Tim Edwards is the winner of the 18-21 category in our Young Writer on Liberty 2020 competition.
Therapies to cure Post-Pandemic Depression
The Chancellor is surely looking for antidepressants. Austerity and higher taxation, as German Chancellor Bruning demonstrated in 1930, are fatal prescriptions. Conversely, and this still surprises left-wing politicians, nobody gets rich just by spending money: one must distinguish “good” public investments, like autobahns, which work, from the “bad” like the UK’s £13bn. expenditure on wood fired power stations, which emit more CO2 than coal-fired. Hitler took the credit for autobahns, which undoubtedly helped lift Germany out of depression, even though they began in the decade before he came to power: “By December 1941, when wartime needs brought construction to a halt, Germany had completed 2,400 miles (3,860 km), with another 1,550 miles (2,500 km) under construction.”
The concept of return on investment does not work for public expenditure, such as infrastructure; so how does one distinguish good from bad? Three tests should be applied: is it capital expenditure on long term assets, is it essential, and is it good value for money, a test HS2 conspicuously fails? A depression is a relatively good time to carry out essential capital expenditure. Interest rates are low, labour is plentiful and will cost a lot more when the economy revives.
Large companies can, and should, take care of themselves but there are four other antidepressants in his medicine bag:
Tax reduction and incentives
Reducing regulation
Responsible banking
Private sector financing
Thus the Taxpayers’ Alliance proposed five tax cuts: employer and employee national insurance, abolishing capital gains tax and significantly raising both investment allowances for corporation tax and the bar on property stamp duty. This Institute has made similar proposals, specifically business rates and the ‘Factory Tax’. Everyone will propose their favourite tax cuts but those selected should be few, targeted and show clear antidepressant effects, for example a general rule that no business in its first five years should pay taxes, e.g. business rates, until it generates at least twice as much profit as the levied tax. Furthermore, following Brexit, no business should pay taxes on its first five years of export profits. It seems unlikely that generalised tax cuts or incentives would boost trade and industry or be affordable by the Exchequer.
Relative to some countries, e.g. France and Italy, the UK has a competitive advantage in setting up business, hiring and reducing staff. But improvements can be made, e.g. Philip Ross’s June 16th letter: “reintroduce fees for tribunals so we’re not faced with unfair dismissal claims by ambulance chasers and chancers [..and..] entrepreneurs’ relief at 10 per cent”. Formal de-regulation is a legal mares’ nest which is why it so rarely happens; in any case, we promised Brussels we would not do so. Simpler is to advise the enforcers to do as many already do, namely help rather than harass. Fill in the forms themselves or turn a blind eye to any minor transgressions that do not endanger health or safety.
The Bank of England (BoE), rather like the MoD, tries very hard to fight the last war and does that very well. Inflation, however, is unlikely to be an issue for some years to come and interest rates can be expected to hover around zero. As the first word in the name implies its Prudential Regulation Authority (PRA) is more concerned with minimising the bank’s risk and zipping up banks’ pockets rather than with encouraging trade and industry to go out and prosper. The last war was indeed about keeping banks solvent but this one is about getting the economy back on its feet.
The Chancellor’s spritely 17th March announcement of government backed Covid loans was assisted by the BoE lowering interest rates and capital requirements as well as putting a brake on dividends and cash bonuses for senior bank executives. Yet customers were met with bureaucracy and box-ticking with only 20% initially getting the loans they needed. The Chancellor came to the rescue with 100% guarantees but the point here is that the non-empathetic attitude of the banks was counter-productive. Unless the BoE, in its fatherly way, inspires banks to re-discover their traditional role as long-term supporters of small businesses, they will, as they did last time, demand their umbrellas back when it rains, as it surely will.
The last item in the Chancellor’s medicine bag is the most important: only the private sector itself, not government quangos, can cure depression. Venture capitalists and business angels back their judgment with their own money, their long-term involvement and their experience. Given the importance of start-ups and SMEs, business angels matter more initially; venture capitalists come into their own as businesses grow. Government to date has ignored all that and set up myriad quango schemes which early stage entrepreneurs are supposed to find their way around. After going through all the hoops, they usually find self-important committees dashing their hopes. Even if the entrepreneurs had time to explore the maze, these quangos show no evidence of producing the right answers.
Earlier blogs proposed recycling government funding from the national (UK Research and Innovation, UKRI) and London quangos as well as local quangos (Local Enterprise Partnerships and Growth Hubs) to topping up business angel investments. The simplicity of one nationwide scheme that would not require the entrepreneur to divert attention from building his or her business would be a major bonus in itself. The degree of top up could vary by region, e.g. more for the north, by sector or domestic vs. export, according to government priorities without the need for many different schemes. And evidence for its potential is provided by the long-running BBC Dragons’ Den series.
Another issue arising from the earlier analysis is the confusion in the current quango-led system between encouraging new private enterprise and public investment, e.g. in universities and infrastructure. UKRI funds both new private enterprise and academic research: in its self-evaluation an extra arts PhD rates alongside a commercial technology start-up. LEPs fund transport infrastructure and new businesses out of the same pocket. They should be treated quite separately with new private enterprise funded locally and academic funding left to universities. In short, we do not need UKRI, and its sub-quangos, at all. Similarly LEPs mostly fund public infrastructure projects but also small private sector initiatives. The former should be returned to local government and the latter taken over by whatever scheme replaces quangos playing Santa Claus.
The big difference between quangos delivering private sector support and the private sector itself doing so, is that venture capitalists and business angels are not just pontificating, they are betting with their own money. That is why HM Treasury should trust them more than quangos. Maybe there are private sector-led solutions other than the business angel top-up scheme. Now would be a good time to tell the Chancellor about it. And, of course, anything radically new should be piloted before being rolled out nationwide.
Depression is hard to cure. It will need a combination of therapies: essential value for money public investment in the true sense of the word, targeted tax incentives, relaxed regulation, banks with their customers well-being as their priority and incentivising the private sector. It is no coincidence that stimulating one’s own creativity is an important depression therapy.
The unseen cost of furlough and corporate welfare
Rishi Sunak was right to quickly put in place the furlough scheme we currently have. To not have done so would have been to risk many well functioning companies collapsing as a result of the restrictions the government had put in place. Doing so helped avoid an unemployment crisis that would have swamped the Universal Credit systems, and most importantly, risked the livelihoods and security of millions of families across the UK.
However, as lockdown restrictions are lifted, we cannot allow the furlough scheme and other means of corporate welfare to become the enemy of the ‘new normal’ that we all seem to be always talking about.
The scheme was very successful at freezing the economy, as was its intention. But as the thawing begins we should not expect the economy to be the same as it was before lockdown, nor should we want it to be.
Even without some of the restrictions that will remain for the foreseeable future, such as social distancing, consumer habits will have drastically changed. A poll last month suggested 27% of people are less likely to travel by plane. 20% per cent are less likely to go to the cinema. 26% are less likely to dine out. And despite a notable minority in the last few days, 34% said they are less likely to attend large public events.
While these are only stated preferences in a survey, both the continued threat the virus poses as well as the effect of experiencing a new way of life for some months will undoubtedly change what people decide to spend their money on and how those goods and services will be delivered to them.
It’s economically imperative that economics follows people rather than attempting to tell them what their preferences really are. With scarce resources it’s best for us all in the long run for markets to adapt to changing market conditions. Where it’s not government restrictions harming revenue raising, then it shouldn’t be taxpayers that are propping up bets on ongoing concerns for companies, but private financiers.
Many existing and new firms will benefit and grow as they enjoy new business, while others will shrink and go bust. This is not necessarily a bad thing. It is a process we normally see as some 1,400 firms go under each year as creative destruction replaces old inefficient firms with new innovative ones. Production shifts away from flying people around the world and towards e-commerce, telecommunications and other lockdown growth industries, making it both cheaper and more easily accessible for consumers.
The best way of achieving a recovery from this crisis, as well as dealing with the tab we’ve run up is of course growth. Innovative firms are at the forefront of helping us try and achieve the quick bounce back we are aiming for. Unusual businesses such as Artfinder, an online marketplace for new artwork, have reported a 110 percent increase in new customers as physical galleries have experienced restrictions.
Keeping key talent locked into the furlough scheme for jobs that may not exist in October is not just a huge cost to the taxpayer but also a huge opportunity cost for the value they could be creating in these new roles.
This unseen cost of holding onto the corporate welfare schemes for too long should not be overlooked.
While livelihoods should be secure and the welfare safety net should ensure none slip through, we should nonetheless start helping our economy adapt rather than continue enforced stagnation. Certainly by building on schemes such as The Skills Toolkit, along with greater business cooperation to assess the skills demanded will be a good preliminary in easing the transition. Transitioning towards an Australian “jobkeeper” allowance would, along with the current plans for part time furlough, help ease many furloughed staff back to work while also possibly giving an early indication if the job still exists and avoid a large unemployment shock when the scheme ends in October.
Of course, helping these innovative firms source talent is only part of the picture. Measures such as abolishing the factory tax will make it cheaper for firms to expand their physical capital, while also helping to overcome longtime lagging productivity growth which has held back income growth for years. Such measures will also help ensure that these businesses will be profitable and able to employ many of those who will unfortunately be made redundant in the coming months.
Clearly the challenge is assessing when furlough and other corporate welfare should be removed. It wouldn’t be sensible to remove support when lockdown measures are preventing some businesses from operating, especially when they can quickly revive once restrictions are lifted. But we must also be prepared, especially if some restrictions will still be enforced for the foreseeable future, to accept some failures rather than bear both the fiscal and economic cost of keeping our economy in stagnant stasis, while only kicking the problem down the road.
It will be by helping talent move from idleness, waiting for jobs that may have already died, to new innovative ones that create value that we will help ensure growth and secure livelihoods in reconstruction.
We say no to a future jobs fund, so should all
Yvette Cooper is succumbing to the planning delusion once again. The argument is that automation will put lots of people out of work. This has the merit of being true so far. Therefore there should be some system of support for those put out of work. This is also true so far. But then the leap into the planning delusion:
This time, in the face of a bigger crisis, ministers must go further. We need a new future jobs fund on a much bigger scale as part of wider government support for the economy. The final report of the Commission on Workers and Technology will call for a jobs guarantee scheme to prevent the scarring effects of long-term unemployment for young and older workers – focusing on areas of need such as green technologies.
The entire point about technological change is that we don’t know. The universe of things it is possible to do is c hanging, expanding - that’s what technological change means. We don’t actually know what it is that can be done until we have rung the changes through trying out these new technologies. Further, until those things that can be done have met the consumer we don’t know what it is that we, the people, would like to have done.
We have only one manner of efficiently sorting through these possibilities and desires. Markets. Markets with free entry - anyone can try any combination of whatever - and markets where those who produce something of value get rich - the incentive to do so. That is, our only useful response to technological change is capitalist free marketry.
Sure, there should be a system of making sure those waiting to find out where they will be gainfully employed don’t starve and all that. We have a welfare state and even if we’re less than convinced about the current structure of it the base idea is fine.
But Cooper - and all those supporting this idea - is making that leap to the state being able to identify what of these new possibilities will work. For only then does it make sense that the state determine who is trained for what and how. But no one knows what will succeed.
No, really, no one does. We’ve no idea, even collectively, even among those wise folk in Whitehall. To take just one obvious example, autonomous cars, if they ever properly work, will kill the rail and bus industries. Will they work? Who knows? Or, sticking with the same rail industry, the change in working habits as more have done so from home, will that continue? Are we about to see a 10, 20, 40% fall in daily commutes? No one has any clue - therefore this is something that cannot be planned for.
It is precisely the uncertainty of the future that kills the ability to plan. The greater the uncertainty therefore not the more government must direct labour, as Copper is arguing, but the less it is able to do so.
Exactly the fact that we’ve not the slightest scooby is the reason that planning won’t work.
Trade talks beginning between Australia and the UK are welcome news
Today marks the beginning of something truly exciting: trade talks with Australia.
Our two peoples might be over 11,000 miles apart but in personal terms we couldn’t be closer. We share the Queen as our Head of State, we share a common language, our legal systems are common law based, we share attitudes to life, we have been the victims of each other’s sporting triumphs, our troops have fought and died together in the defence of the world’s freedoms in the face of the most awful tyrannies.
We share a healthy scepticism of pious political promises. A healthy commitment to the maintenance of habeas corpus. And we share a healthy love of accosting our leaders in the street when they’re getting too big for their boots, or telling them off when they step onto our lawns.
Trade is about goods and services, but mostly importantly it’s about people. More than 1.2 million Brits live in Australia, and more than a hundred thousand Aussies call these fair islands home. As our very own Matthew Lesh shows, they integrate and have an impact immediately.
We’ve made it difficult in recent years to live in each other’s countries and it’s had an impact. Surcharges and visa fees, quotas and a lack of recognition of qualifications mean it’s more expensive, more time-consuming and less inviting for Australians thinking of making a move. In the meantime, the USA has made it cheaper and easier for Aussies to study and work in the States with an E3 visa specifically designed for them. It’s worked, more Australians live in New York now than London.
This trade deal is a chance to rectify this. Make it easier for our peoples to start businesses, use bank accounts, and for insurers and marketers and lawyers to work across borders. Make it easier to come and study or do a secondment, or even to start a family. Make it cheaper for doctors and nurses in our health services to come and tend for each other. Make Britain the greatest place for an Aussie to live outside of Oz itself.
Trade is also, or at least should be, about trust. Australia is a modern and developed country that wants for its citizens the same things we want for our people: a safe society built on open and transparent processes, where you trust what you’re buying and have recourse if something goes wrong. We should recognise their regulators are trying to do the same job as ours. If it’s good enough for Australians (whether that’s food, or medicines, or banking, or technology) then it’s good enough for Brits.
When the UK voted to leave the EU, it was Australia that jumped at the chance to offer up a trade deal first and has been most vocal in supporting the free choice of our free people to make their own destiny. That loyalty is being rewarded finally with concurrent negotiations for the UK with the EU, USA and Australia. Our physically closest allies in Europe are no longer put ahead of our personally closest allies further afield.
Today marks the beginning of Britain’s global future. A reminder that a world outside Europe awaits and welcomes us with open arms. They’ve been waiting for a long time. They’ve held the faith. For four long years so have we. It’s finally here. That’s something to cheer.
The unwelcome return to the use of petitio principii in public policy
Given that one of us wrote a standard work on the use and abuse of logical fallacies it’s worth our pointing at the return of one such to the public realm. As that source says about petitio principii:
The fallacy of petitio principii, otherwise known as “begging the question”, occurs whenever use is made in the argument of something which the conclusion seeks to establish…(,,,),,,It might seem to the novice that the petitio is not a fallacy to take for a long walk; it seems to fragile to take for any distance. Yet a short look at the world of political discourse reveals petitios in profusion,…
Indeed so and here’s a glory of an example:
The Institute of Race Relations thinktank said it would be hard to have confidence in the commission’s outcomes.
“Any enquiry into inequality has to acknowledge structural and systemic factors. Munira Mirza’s previous comments describe a ‘grievance culture’ within the anti-racist field and she has previously argued that institutional racism is ‘a perception more than a reality’,” a spokesperson said. “It is difficult to have any confidence in policy recommendations from someone who denies the existence of the very structures that produce the social inequalities experienced by black communities.”
The Labour MP Diane Abbott, a former shadow home secretary, said: “A new race equalities commission led by Munira Mirza is dead on arrival. She has never believed in institutional racism.”
The question we’d like an answer to is how much is racial inequality to do with institutional and or structural racism and how much to do with demographics (the BAME population is rather younger than the non-BAME), status as recent immigrants, the terrors of inner city educational systems, any cultural factors anyone wants to throw in the pot and so on? We’d like to know what is going on and why.
The insistence here is that anyone who does not already leap to the conclusion that it’s entirely structural and institutional racism may not be allowed to even run the investigation. That is, no one not committing the logical error of petitio principii is allowed to ask the question - only those who beg it can be included.
Demanding that an inquiry into what we agree is an important question start with a logical fallacy doesn’t seem like quite the way to run a country to us. Perhaps it’s us that’s out of kilter though, presumably because we have actually read - and one of us written - that book on logical fallacies and are therefore informed upon the matter.
Happy Birthday Adam Smith (maybe)!
Possibly. We know when his birth was registered, and normally that would be a couple of days after the event itself. The registration was in early June 1723, but since the calendar changed in 1750, you have to add a few days, so 16 June seems close enough.
His childhood in Kirkcaldy, a small working port on Scotland’s east coast, was largely uneventful, except for briefly being kidnapped by vagrants. But the local school did give him a good education—a school system which he later praised. It was good enough for him to win a scholarship to Balliol College, Oxford—which he later definitely did not praise. Indeed, he found that the professors there had “given up even the pretence of teaching” because they got paid whether they taught or not.
On his return—the journey took a month each way, on horseback—a family friend arranged for him to do some public lectures in Edinburgh, after which Smith secured a teaching position at the University of Glasgow. There, he wrote a book on ethics, The Theory of Moral Sentiments (1759), which brought him instant fame. Enlightenment thinkers sought a firmer foundation for ethics than the dogma of clerics and commands of kings. Some sought ‘rational’ alternatives. Smith, however, identified morality as a feature of human social psychology. We have a natural sympathy for others. Their pleasure or pain affects us; and we like to please them:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.
That natural sympathy binds and benefits the whole human species.
On the strength of Theory of Moral Sentiments, the Duke of Buccleuch’s stepfather hired Smith, on a £300 pension for life, to tutor Duke, aged only 12. Taking him on the Grand Tour of Europe, Smith picked up endless facts about different systems of commerce and regulation. He started writing The Wealth of Nations, weaving current and original ideas into a new, systematic, modern approach to economics.
The Wealth of Nations was both an economic treatise and a polemic. It debunked mercantilism, the prevailing system by which countries tried to boost their cash resources by selling as much as possible to others, but buying as little as possible from them. So, they subsidised exports and raised resisted imports.
But both sides benefit from trade, said Smith, not just sellers. The sellers get cash, but the buyers get goods that they value more than the price. What makes a country rich is not the gold in its vaults, but its vibrant trade and commerce. Wealth came from liberating commerce, not restricting it.
The division of labour made free commerce even more productive. Specialist producers can be thousands of times more productive than amateurs. They can produce more than they need, selling their surpluses to buy capital equipment that makes them more productive still. They do this for their own ends, but their actions benefit everyone:
Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
This commerce automatically steers resources to where they are needed. Where things are scarce, consumers will pay more, so suppliers produce more. When there is a glut, prices fall and producers switch their effort into more profitable lines. So, without any regulation and planning:
[T]he obvious and simple system of natural liberty establishes itself of its own accord. Every man...is left perfectly free to pursue his own interest in his own way.... 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.
This liberal system benefits the poor most. Smith hated merchants using their political influence to win monopolies, tax preferences, controls and other privileges that distort markets in their favour—today’s crony capitalism. Instead, government must be limited to its core functions of providing the defence, justice and infrastructure that enables commerce to succeed. Leave people free, and the results will amaze you.
Which seems a good message for today. Happy birthday, Adam Smith!