Sunday, April 27, 2014

Adam Smith is a deeper thinker than he is often given credit for

A very nice extraction of some of Adam Smith's views is here at the Monkey Cage.  A couple of key passages:
For instance, he described Holland as the most advanced and prosperous economy in his time. His explanation was simple but critical: Every “man of business” was forced to work because rates of profit were low (about 3 percent). With such low returns and little capital accumulation, it was “impossible” for anyone “to live upon the interest of their money.” This was the key to economic success for Smith: fundamentals forcing everyone to work. But you can’t get concentration of wealth in such a system.

And not only is the taxation of inheritance advisable (except for minors), but taxation is a tool to micromanage incentives, especially for the spendthrift rich. His priorities are clear: The “inequality of the worst kind” is when taxes “fall much heavier upon the poor than upon the rich.” Which is why the rich should be taxed “something more than in proportion.” Smith in fact praises the British tax system, which taxed twice as much per capita as France, because “no particular order is oppressed:” The rich were taxed, unlike in France. Smith had only one criterion: Taxes should encourage the productive use of capital. 
In other words, the goal of Adam Smith's view of economics is to make it hard to acquire wealth so that everyone is forced to work (to be productive).  It is a sensible view coming on the heels of centuries of upper-classes defined by their inheriting of great wealth, and the consequent stagnation of European innovation. 

Worth reflecting on . . .

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