Adam Smith and Economic Development from Zero

The main advantage of Socioeconomics over Economics is that it is based on the dynamics of the human mind as explained by David Hume which was later applied by Adam Smith. Because the mind is a non-physical thing, it can remain the same throughout space and time. A human mind living 2,000 years ago has the same dynamics as a human mind living today, and the same with a human mind 2,000 years from now living in a spaceship in a different galaxy. The human mind’s dynamics will only change after humans evolve into a different species (such as one with psychic abilities), and this would cause all of our maxims to be re-examined and re-tested.

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Thus, the same maxims given by Smith on economic development will apply to humans throughout space and time. Currently, the only maxim of Smith on development accepted by economists is comparative advantage. His other maxims (mostly in Book 3) have been conveniently disregarded because it goes against current mercantile or commercial ideas:

  • The natural and sustainable progress of economies is from agriculture or extraction first, then processing, and lastly, trade. In Smith’s system, the countries where natural resources come from should eventually process them as well. For example, the Ivory coast, which exports cocoa, should implement policies so that it will eventually make chocolates itself. This would solve child labour for good.  However, this goes against the vested interests of chocolate corporations in richer countries which profit from the low cost of raw cocoa. Campaigns against such kinds of child labour that do not address the root cause of vested interests might succeed in small cases, but can never produce any sweeping change, since those campaigns in effect urge African governments to bite the hand of business that feeds them with the taxes that they need to exist.
  • There are differences in the dynamics of a society in a ‘rude’ or backward state and those of a society in an advanced state. Liberal policies work best in advanced, rich countries while austere policies work best in more backward, poor countries. China, a poor country, adopted liberal policies immediately when it opened up in the ’90s. This created wealth imbalances, migration, ghost cities, wasted capital, increased pollution, territorial disputes and stock market crashes. Changing austere policies to liberal ones must be done gradually, just as a person cannot simply flip his entire mentality in an instant and expect no bad effect. Also, desolate countries such as those in the Middle East and Western China are naturally not suited for republican governments and liberal policies. Had the Bush administration known this, then they would have thought twice about establishing a democratic system in Iraq and Afghanistan so that the stability of those countries would be preserved:

Generally, the situation of a country, and its improvement in agriculture and trade are favourable to the introduction of a republican government.There is little probability that republican governments will ever be introduced into Tartary or Arabia, because their country cannot be improved. Most part of its lands are hills and deserts.These cannot be cultivated and is only fit for pasture.They are generally dry and do not have any big rivers.The opposite of this are those countries where republican governments have been established, particularly in Greece. (Simple Lectures, Part 1, Chap 3)

  • The use of mercantile capital to build infrastructure and human capital for sustainable economic development. Since the interests of merchants are usually opposite that of society, the government should use temporary mercantile capital or ‘hot money’ to build its national capital so that when the merchants flee with foreign capital, the nation would have enough local capital to sustain its own economy. When China opened up, American companies left the US, leaving a lot of Americans unemployed. In today’s world where the merchant class dominates and is free to remove its capital anytime, the only logical workaround is for the government itself to spend for and maintain the economy in a system called Keynesian economics. This system will also eventually create problems (currently seen in Abenomics) since it is not the government’s job to do business or invest capital, and because it does not address the root cause.

 

 

A merchant is not the citizen of any particular country. He is indifferent on from where he carries on his trade. He will remove his capital and all the industry it supports, from one country to another with very little disgust. No part of it can belong to any particular country, till it has been spread in that country, in buildings or in the improvement of lands. No vestige remains of the great wealth of the Hans towns except in the obscure histories of the 13th and 14th centuries. It is even uncertain where some of them were situated or to what European towns their Latin names belong. (Simple Wealth of Nations, Book 3)

 

 

How Would Smith Develop A Society From The Rude State?

As mentioned in a previous post, Smith’s economic system works in all states of society, from nothing or ‘state zero’ up to the advanced, prosperous state. State zero can occur after a natural disaster when society breaks down. A slightly more advanced state or state level 1 is when people live very far apart in undeveloped rural areas where they live off the land (when people have some lodging and clothing). (Described in Book 3 of the Wealth of Nations)

Though the people in a rural village will likely not have any technical skills nor even speak the national language, they will likely have some agricultural skills or skills in extracting natural resources. In the ‘rude state’, this will be their most important capital, source of revenue, and the center of their economy:

“Cultivation of land was the original destination of man. All through one’s life, we retain a predilection for this primitive employment. Without the assistance of some artificers, land cultivation cannot be done without great inconvenience and continual interruption. The farmer frequently needs the service of smiths, carpenters, wheel-wrights, and plough-wrights, masons, and bricklayers, tanners, shoemakers, and tailors. Such artificers stand in need of one another. Their residence is not tied down to a precise spot. They settle near each other and form a small town. The butcher, the brewer, and the baker soon join them. Many other useful artificers and retailers join them for supplying their wants. They contribute still further to increase the town.” (Simple WN, Book 3, Chap. 1)

Thus, the economic plan for the rude society will be to export natural resources to other societies (explained in Book 1). The next question is what to export, and this depends on what the society can supply and what other societies demand. Usually, profitable exports require high quality produce which the rude state is incapable of. However, there may be societies within the country that are more advanced (level 2 or 3), that can accept lower quality produce to be processed into higher quality exports. The rude society can sell to such societies while steadily improving the quality of its production, pooling its revenue to attract more, higher quality capital. For example, if the rude state can only produce low quality grains, it can look for societies of animal breeders who needs such grains, until they gain experience to grow better grains. In return, the breeders can pay in meat or animals, to ensure the subsistence of the rude state and its continued labour.

rudeadvancedcorn

The development of the rude state will then depend on the nature of the people, with some cultures being able to develop faster. Regardless of culture, Smith guarantees that by allowing profit-sharing or giving the people the proceeds of their own work, industry and development can be sped up. While profit sharing is the main expedient to speed up development, grain based valuation or supply chain barter is the main expedient to prevent the society from sliding backwards during economic crises.


For comments: please email jddalisay@gmail.com

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