Economists remind one another, occasionally, their profession has so-called–physics envy. Over two centuries ago, Adam Smith looked to physics for clues about the orderly way in which he believed the economic world worked—or ought to work.
Smith was a child when Isaac Newton died, almost three centuries ago. As he grew, he emulated the great physical scientist.
Newton, of course, saw orderliness throughout the natural world. He observed how the planets rotate the sun in perfect harmony. The term used in economics to describe such orderliness is equilibrium.
In the late 18th Century, Smith observed equilibrium at the market level, as consumer-buyers jockeyed with producer-sellers to get the best deal. If the quantity demanded happened to equal the quantity supplied, then market price could be expected to remain stable, so long as market fundamentals remained unchanged.
Even beyond a single market, equilibrium has meaning applied to an entire economy. Economists conclude that macro equilibrium—adding together individual markets—occurs when the amount saved by all households is the same as the amount invested by all businesses.
Saving is a passive act. It is what is left over from income, not otherwise used by households for consumption. Investment, on the other hand, is active.
The way Adam Smith viewed it, the farmer/ entrepreneur of his day may rent land and borrow seed from an economically passive landlord. Alone, the landlord does not create new wealth and therefore does not contribute to growing the economy.
Smith’s farmer/entrepreneur does create wealth, however. He is not economically passive, but instead, works with uncharacteristic skill and industry to create an economic reward for himself—called profit. It is the residual claimed by the entrepreneur, following repayment of what the landlord has lent.
Now, we see laissez-faire ideologically. Fundamentally, it is the belief, anything impeding the entrepreneur—such as government-imposed taxes or regulations—is bad because it frustrates orderliness with all sorts of bad consequences.
Of course, laissez-faire doesn’t say how an actual economy can right itself when its ideological prescriptions are followed and crack up occurs, anyway. During the Great Depression, wealth shrank drastically in the face of protracted disequilibrium.
Contemporary laissez-faire advocates—or fundamentalists—don’t say much of value—either—about the rolling economic crack up, on-going at the moment. Neither do they face reality in their diagnosis about what caused the Great Recession. Instead, they continue with same-old, same-old.
Through it, they enable a kind of pseudo-capitalism that Adam Smith, moral philosopher, would find repugnant. Smith would be stunned, for instance, that his philosophy, indirectly, has been used to evict a handicapped Boulder man from his house trailer for failure to satisfy a modest tax lien. Robert McHugh became homeless on February 29, 2016, owing to Julie Carpenter’s purchase of the $175 lien, then sale of the trailer to Boulder-based Five Star Homes. One wonders how this sort of brazen pursuit of self-interest could align with service to the common good, as Smith advocated.
If you find the current economic situation disconcerting, even frightening, check out Capitalism in Crisis.Org on the web.
From Boulder, Colorado, for Capitalism in Crisis, this is Jim Sawyer.