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Wealth, Liberals, and Adam Smith
Motivation:
Many of our discussions involve the economy, big government, and prosperity. So I decided to provide a brief synopsis of how wealth is created according to Adam Smith. His 5 volumes The Wealth of Nations is extremely difficult to read. I've managed to read at it a bit and read other books that explain it. From that reading I believe I've captured his core principles and can explain it and illustrate it with an example.
Principles of Wealth Creation:
First his 3 principles of wealth creation are
1. People work to meet their needs -- opponents and antagonists call this greed. It is not; people work to meet their needs, or simply put survive. Some people, say a Bill Gates, do this very well and achieve results beyond those essential to meeting their needs. What to do about it is the subject of another discussion.
2. Specialization -- people tend to find something and do it well. A butcher, for example, cuts meat to meet his needs. He doesn't do it out of charity or noble purposes. He simply tries to meet his needs. By doing something well other people are willing to pay him for his services (more precisely his time).
3. Trade -- People specializing in different things trade. It is this trade that creates wealth.
The 3 principles above ARE the building blocks of the free market. Let's look at an example of how it works.
Illustration:
Two people Socks and Gloves specialize in knitting garments. Not surprisingly Socks makes socks and Gloves makes gloves. In their specialty each can make two of their garments in an hour. Socks can make a pair of gloves in 1 hour and Gloves can make a pair of socks in 1 hour.
For their wardrobes each needs a pair of socks AND a pair of gloves.
1. It will take them each 1-1/2 hours to make both garments. Socks can knit a pair of socks in 30 minutes (1/2 hour) and a pair of gloves in an hour. So it is 1-1/2 hours to knit his own garments. It is the same for Gloves.
2. If they decide to trade with each other then Gloves knits 2 pair of gloves in an hour and Socks knits two pair of socks in an hour. In one hour they make a trade and each has a pair of gloves and a pair of socks. By specialization and trade they managed to save 30 minutes each. That 30 minutes can be used to make or do other things. Wealth was created by specialization and Trade. Notice the connection between time and wealth -- that is the essence of wealth creation.
Taxation and Wealth Creation:
How does the government change things? Well government is coercive and so its transactions create no wealth. There is no trade involved in a government transaction. It merely takes wealth that others create for its operations. As government's taking of wealth is approaching 50% of GDP (topic for another discussion) let's assume that 50% of every transaction is taken by the government.
If Socks and Gloves do not trade then there is no wealth created and the government gets no revenue.
If they trade then the wealth created is 1 hour (30 minutes for each of them). The government takes 15 minutes from each of them. Now the marginal benefit to Smith and Socks was reduced by 1/2. So they aren't as motivated to trade, but there is still some benefit and they will trade. Obviously, however, economic growth (more precisely wealth creation) was cut in half by the government's tax burden.
That is why taxation ALWAYS limits growth. There is NO free lunch. If government is smaller then people benefit more from their trades and are therefore motivated to work harder and trade more. If the government is larger there is less motivation for people to work hard and get ahead. This explains why socialist countries are always poor and capitalist countries are always wealthy. It can be no other way.
Needs:
Back to the needs statement. When government transfers wealth then citizens receiving benefits have no need to specialize, work and trade. They become a drag on the economy just like the government. In fact from an economic perspective someone receiving government assistance and someone working for the government look exactly the same. The both slow the rate at which wealth is created.
Conclusion:
Liberal policies MUST make a nation poorer on the principle of reducing wealth creation. That's why socialism fails every time it is tried. There are subtle points in wealth creation, but the key to remember here is that liberals like to transfer wealth -- take it from those who are trading and give it to those who are not. Thus the liberal policies of taxing some to give to others is ALWAYS harmful to economic activity and wealth creation.
Many of our discussions involve the economy, big government, and prosperity. So I decided to provide a brief synopsis of how wealth is created according to Adam Smith. His 5 volumes The Wealth of Nations is extremely difficult to read. I've managed to read at it a bit and read other books that explain it. From that reading I believe I've captured his core principles and can explain it and illustrate it with an example.
Principles of Wealth Creation:
First his 3 principles of wealth creation are
1. People work to meet their needs -- opponents and antagonists call this greed. It is not; people work to meet their needs, or simply put survive. Some people, say a Bill Gates, do this very well and achieve results beyond those essential to meeting their needs. What to do about it is the subject of another discussion.
2. Specialization -- people tend to find something and do it well. A butcher, for example, cuts meat to meet his needs. He doesn't do it out of charity or noble purposes. He simply tries to meet his needs. By doing something well other people are willing to pay him for his services (more precisely his time).
3. Trade -- People specializing in different things trade. It is this trade that creates wealth.
The 3 principles above ARE the building blocks of the free market. Let's look at an example of how it works.
Illustration:
Two people Socks and Gloves specialize in knitting garments. Not surprisingly Socks makes socks and Gloves makes gloves. In their specialty each can make two of their garments in an hour. Socks can make a pair of gloves in 1 hour and Gloves can make a pair of socks in 1 hour.
For their wardrobes each needs a pair of socks AND a pair of gloves.
1. It will take them each 1-1/2 hours to make both garments. Socks can knit a pair of socks in 30 minutes (1/2 hour) and a pair of gloves in an hour. So it is 1-1/2 hours to knit his own garments. It is the same for Gloves.
2. If they decide to trade with each other then Gloves knits 2 pair of gloves in an hour and Socks knits two pair of socks in an hour. In one hour they make a trade and each has a pair of gloves and a pair of socks. By specialization and trade they managed to save 30 minutes each. That 30 minutes can be used to make or do other things. Wealth was created by specialization and Trade. Notice the connection between time and wealth -- that is the essence of wealth creation.
Taxation and Wealth Creation:
How does the government change things? Well government is coercive and so its transactions create no wealth. There is no trade involved in a government transaction. It merely takes wealth that others create for its operations. As government's taking of wealth is approaching 50% of GDP (topic for another discussion) let's assume that 50% of every transaction is taken by the government.
If Socks and Gloves do not trade then there is no wealth created and the government gets no revenue.
If they trade then the wealth created is 1 hour (30 minutes for each of them). The government takes 15 minutes from each of them. Now the marginal benefit to Smith and Socks was reduced by 1/2. So they aren't as motivated to trade, but there is still some benefit and they will trade. Obviously, however, economic growth (more precisely wealth creation) was cut in half by the government's tax burden.
That is why taxation ALWAYS limits growth. There is NO free lunch. If government is smaller then people benefit more from their trades and are therefore motivated to work harder and trade more. If the government is larger there is less motivation for people to work hard and get ahead. This explains why socialist countries are always poor and capitalist countries are always wealthy. It can be no other way.
Needs:
Back to the needs statement. When government transfers wealth then citizens receiving benefits have no need to specialize, work and trade. They become a drag on the economy just like the government. In fact from an economic perspective someone receiving government assistance and someone working for the government look exactly the same. The both slow the rate at which wealth is created.
Conclusion:
Liberal policies MUST make a nation poorer on the principle of reducing wealth creation. That's why socialism fails every time it is tried. There are subtle points in wealth creation, but the key to remember here is that liberals like to transfer wealth -- take it from those who are trading and give it to those who are not. Thus the liberal policies of taxing some to give to others is ALWAYS harmful to economic activity and wealth creation.
Tags: adam, creation, free, markets, prosperity, smith, trade, wealth
Replies to This Discussion
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Permalink Reply by lisa mincey on -
very well said and very easy to understand, unless of course you are a liberal...then they just can't or won't get it...it then becomes willful ignorance
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Permalink Reply by Clint Manuel on -
Thank you Mike! And this is why, of the many excellent quotes by Churchill, the one I have on my office wall is:
"Socialism is the philosophy of failure, the creed of ignorance and the gospel of envy, its inherent virtue is the equal sharing of misery." - Winston Churchill
I also believe the basic philosophical difference between the Socialist ideology and a free market Capitalist is the interpretation of 'sacrifice'. Where the Liberty loving Capitalist seeks SELF-sacrifice in order to support himself and his own from being a burden on society, the Socialist seeks to place that burden of sacrifice on OTHERS to do what they themselves are not willing to do. And while the Capitalists' natural byproducts of nurturing our individual and unique God-given talents to create is self-esteem, confidence and character, the Socialist is constantly seeking to artificially instill these same attributes today through government programs which, ironically, are the root cause of our moral, societal failure. A child cannot be proud of something for which they have not earned.
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Permalink Reply by Mike Mott on -
Clint,
Exactly right. I sometimes say (feel free to quote me) that "if no one is left behind then no one gets ahead." That statement sums it up I think.
You've touched upon another very key point about liberty-loving capitalists. Jefferson worried that in a capitalist society that there would be haves and have nots. He further worried (recall that he lived in an agrarian time) that a few people would get all of the land and therefore families would have a persistent advantage. However he saw no need for a government remedy. I believe Jefferson would be pleased to see that time mitigates these advantages and that capitalism doesn't produce a class of winners over the long haul.
But I digress. Jefferson also understood that it is our duty, if we are blessed with success, to help others. It isn't known for sure what he meant by "pursuit of happiness" in the Declaration of Independence, but I like an interpretation that says it was advanced citizenship. http://hnn.us/articles/46460.html is a link to the perspective that I like.
The idea of the founders was that government establishes liberty so that society could prosper. When some of the citizens prospered well beyond their fellow citizens they should -- of their own volition -- share with theirfellow citizens. This is the essence of compassion and it is the reason the founders believed America had to be a moral society for this all to work.
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Permalink Reply by Mike Mott on
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Willful ignorance? Perhaps. It does seem to me that liberals choose (perhaps they are not capable) to look at only 1/2 of the exchange. If you listen to them talk it is all about the benefit -- health care comes to mind -- with not a word about the cost of providing that benefit. Their argument for foisting health care reform on us was it would save money. How? Well a trip to the emergency room is expensive ... blah, blah, blah. Yet every study that looked at systemic cost concluded that preventive care did not save the money as was promised. Finally they were reduced to a "rights" argument -- everyone has the right to health care. Liberals seem incapable (willfully ignorant?) of looking at the systemic cost and benefit of these transactions. I plan to add another installment on health care that uses the above model to "prove" that government provided health care will be more expensive. Stay tuned.
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Permalink Reply by Clint Manuel on
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Too, there is the basic hypocracy of intervention. On the one side, you have the 'save-the-world' types - you know, greenpeace, API, WWF, PETA, etc, etc. These peoples' goal is to make humans (that's you and me) out to be villains for...well, being human! They don't really take into consideration that the Omniscient Being that created EVERYTHING also created us. These...enviromental extremists? would have us leave the natural state of plant and animal as they exist and not 'corrupted' by our greedy hands.
Now, on the OTHER side of the argument is that recently re-invigorated watchword of the weary "Redistribution". In spite of all pretentious rhetoric of the defenders of 'Mother Earth' and the sin of interference with the natural order of things, this loosely knit band of brothers (and sisters, lest I be charged with hypocrisy myself) would have us (you and me) ... equalized? leveled? HOMOGENIZED!?
ho·mog·e·nize: 1.to form by blending unlike elements; make homogeneous.
Yet, couldn't that be likened to forced coercion? Like making a tiger to be a dog? Or a hampster to be to be horse? Where does that leave the otter? Landlocked!?
I don't know about you, but we are all made different with different attributes and capabilities for a reason. Paul Bunyan might've been the best damn woodsman on earth, but don't believe I'd want him running a fortune 500 company, ya know what I mean? And I might not be bad at knowing a bit about maritime shipping operations, but PLEASE don't ask me to rebuild your transmission. I've also forgotten most of the calculus and chemistry I took in school, so I'm not gonna be workin' in a lab at Dupont, but I'm ok with that. I didn't really want to anyway. I wouldn't mind more time for my woodworking hobby. Who knows? I could probably make a bit more on the side with that than I do.
Point is, some teach, some labor and some create, but they are good at whatever it is THEY do. So, I say, let teh whales be whales and the chipmunks be chipmunks.
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