SubText: Wealth of Nations, the last chapter

For really challenging books I’ll take notes to review and summarize each chapter. Some of those notes get posted, like this for the final chapter of Wealth of Nations.

I shouldn't be shocked that Smith somehow used the concept of a national debt to tie together his whole argument. Alright, let's go.

In less complex economies, people of great wealth had few things to spend on. While they would often furnish themselves of great hospitality and men and armies, that's not really enough to bankrupt yourself unless you're really stupid, and stupid lords in Smith's estimation just became dead ones, a sort of self solving problem.

So, many of those lords would end up amassing great treasures over time, as wealth accumulates with nothing to spend it on over generations. Indeed, in time those treasure troves would end up becoming a sort of escape route, being hidden away somewhere the lord could get at it if they had to make a run for it.

This was especially useful in times of sudden unexpected expense as well, as the sovereign could then draw from that trove to pay for a costly sudden war or drought or other disaster. The state had savings in other words.

Now, not so much. The state is in debt perpetually.

This is due not so much to the profligate nature of the state (but yes that too) but also to the nature of wealth in a complex economy. A complex economy has too many opportunities of stock investment for it to be sensible for people, or states to simply save money. It needs to be out making more money, or in the case of a state, killing people and conquering other nations.

So, given that the state is already taxing enough for it's basic income, and not really putting anything away, indeed that would be foolhardy as you'd be removing wealth from the pool of invest-able stock in the nation just for the government to hold it and do nothing with it. When a war or famine or emergency or an opportunity comes up, the government needs to take out a loan.

The thing is, those loans, essentially secured against he existence of the state itself (a bond would be a type of this) are quite safe, and therefore quite attractive to the merchant class, who often buy them simply to sell them again.

The holder of the bond receives interest on some repayment plan or another, which necessitates the raising of taxes. So a war of a year is paid for and then paid back over several years.

Ooooooor. it's not paid back at all.

See, the holders of the bonds are generally quite happy to just receive interest income forever, its free money after all, and the most stable investment possible. The government is happy to spend more, start more wars, undertake more adventures or just steal the money in some cases.

By Smith's time the debt of the crown had moved from the concept of temporary funds to the idea that this was just how they were going to pay for things now. Bonds would be issued, to never be repaid, paying annual interest to various private citizens both foreign and domestic. Thusly do we push money into the system and grow the economy.

The thing is, those interest payments to bond holders are gathered in the form of taxes. Revenue gathered from citizens which then go to other private citizens as maintenance on an endless and growing debt.

Essentially, it is privatizing the government. And the further issue is that the funds paid in taxes, already not being put to use in a productive manner as private stock and having all the problems of taxation outlined in the preceding chapter are now not even going to the maintenance of government services, they're going to the private hands of some pricks who bought a bond 150 years ago. While it is possible for those creditors to then put that capital to work (finally) they are often themselves merely creditors in profession aswell, and putting the money to use on further loans to produce more interest. And only some of those ventures will work.

Instead of wealth being put into work as capital, it becomes public revenue and is then spent as something more akin to rent than to stock profit. (Remember that stock profit is commensurate to ownership stake and profitability of the business, whereas rent is fixed).

So an ale merchant pays taxes which then go to pay interest on public debts which are paid only to bondholders who may or may not do anything with it other than acquire more debt (like landlords buying up more properties to collect more rent, producing nothing). The merchant could have expanded his business in a small, reasonable way that he is certain as a profession would net a profit overall, and therefore increased the total productive capacity of the whole community.

Smith is really about a grassroots sense of capitalism.

So, how do we shrink the debt?

Expansion of government services, barring a new avenue of taxation, requires another bond be issued, and later increase of taxes. Shrinking of government services, is broadly not a super attractive option as the major expenditures of the government that could make a difference in the revenue are military and infrastructure, which for a sovereign nation you may find having an immediate effect on your existence as a state.

Many states shrink the debt by revaluing their currency literally making it more or less worth the 'silver' its meant to represent. This generally has the effect of making everyone poorer and fucking over the economy of people with savings. This was a little tricky to understand since I've spent my whole life in a world of fiat currency, but essentially, by devaluing their currency they would make the debt payable (the government can just mint more money after all if they decide how much silver makes a shilling) but it also means every shilling saved by their people is worth less too, which acts to effectively shrink the possible stock capital of the whole population. which is bad for the wealth of nations.

If done secretly its a great way to get your ass murdered, once discovered.

In general seniorage is a way you can scrape some funds together but in the end you're devaluing the very currency you'll be paid taxes in to pay down the debt, so like everything in this book, it comes down to the economic reality that anything that hurts long term gains hurts you too.

The other option for England, which Adam explores as a utopian thought experiment:

To absorb all the territories and colonies of the empire into a single super state, with a single parliament, free trade between them and taxes paid by all citizens, modified from province to province.

As in the preceding chapter, the tax policy must be sensitive to the differing contexts, in Ireland the cultural norms being quite similar to England the excise tax can stay the same, but land tax might not work as much since they already tithe so much.

In America, excise might not work, but land tax will. etc. etc.

He admits that to do so will break the monopolies of the powerful, but free trade within the super state will create great wealth for all. Also he hates monopolies, and I'm starting to get the sense he also hates the wealthy.

It will also, hopefully, bring more civilization, free Ireland from sectarian violence (nope) and end slavery in the colonies (ha ha, no). Further taking the East India Companies territories, so famously brutally run, from their control would really only help the subjects of the company.

Some would complain that the colonies are poor, but Smith points out that's only if you define poverty by silver and gold reserves and not by economic potential. in which case they are wealthier by far than England.

In any event, in Smith's eyes, if GB isn't going to absorb the colonies into provinces it shouldn't spend so much to defend them just to maintain the trade monopoly of a few aristos. Cut them loose, give them independence and mind your own affairs in mediocrity.

Or become one great nation, and embrace the equality of all before the invisible hand.

Smith, you were right about basically everything. The only mistake you made was you thought too well of the powerful. You believe that people will act rationally, maximizing the good of all because it’s the best way to ensure the good of themselves. But some people aren’t concerned that they have more, only that they have more than anyone else.

Adam, you were a man who had very little interest in having power over another, and that inherent decency blinded you from the fact that all are not equal before the invisible hand, some have made it their business to ensure that equality, even if it kills us all, them included.

The Real Wealth of Nations, Adam, is you.