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Adam Smith

2010-11-16T17:49:24Z

128.135.235.248: /* Critique of Adam Smith */

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'''Adam Smith''' (1723-90), a Scottish economist, is popularly considered the founder of modern economic science.<ref name="Rothbard_Smith">Murray N. Rothbard. [http://mises.org/resources/2691 "The Celebrated Adam Smith"], originally published as chapter 16 in An Austrian Perspective on the History of Economic Thought, Vol. I, Edward Elgar Press, 1995; Mises Institute, 2006. Referenced 209-06-07.</ref>

==Critique of Adam Smith==
Some economists have called into question Smith's contributions. According to [[Murray Rothbard|Rothbard]], "Smith not only contributed nothing of value to economic thought; his economics was a grave deterioration from his predecessors" and much knowledge of previous economists was "blotted out".<ref name="Rothbard_Smith" /> A particularly glaring mistake of Smith's was the use of [[the labor theory of value]], which later influenced [[Marx]]. <ref> History of Economic thought page 393</ref> Against the standards of his day, Smith acknowledge very few of the authors he quoted from.<ref name="Rashid_citations">Salim Rashid. [http://mises.org/journals/jls/11_1/11_1_5.pdf "The Intellectual Standards of Adam Smith's Day"] (pdf), Journal of Libertarian Studies, Fall 1994. Referenced 2010-06-10.</ref>

===Division of labor===
For Smith had division of labor crucial and decisive importance.

The older and truer perception of the motive power for specialization and exchange was simply that each party to an exchange (which is necessarily two-party and two-commodity) benefits (or at least expects to benefit) from the exchange; otherwise the trade would not take place. But Smith unfortunately shifted the main focus from mutual benefit to an alleged irrational and innate 'propensity to truck, barter and exchange'. As Edwin Cannan pointed out, Smith did this because he rejected the idea of innate differences in natural talents and abilities, which would naturally seek out different specialized occupations. Smith instead took the egalitarian position, still dominant today in neoclassical economics, that all labourers are equal, and therefore that differences between them can only be the ''result'' rather than a cause of the system of the division of labour.

But if Smith had an undue appreciation of the importance of the division of labour, he paradoxically sowed great problems for the future by introducing the chronic modern sociological complaint about 'alienation', picked up quickly by [[Karl Marx]] and has been advanced to a high art by socialist gripers. In Book I of the ''Wealth of Nations'', the division of labour ''alone'' accounts for the affluence of civilized society, and is repeatedly equated with 'civilization' throughout the book, expanding the alertness and intelligence of the population. In Book V it is condemned as leading to their intellectual as well as moral degeneration, to the loss of their 'intellectual, social and martial virtues'.<ref name="Rothbard_Smith" />

===Productive vs. unproductive labor===
One of the [[Wikipedia:Physiocracy|physiocrats']] more dubious contributions to economic thought was their view that only agriculture was productive, that only agriculture contributed a surplus, a ''produit net'', to the economy. Smith, heavily influenced by the physiocrats, retained the unfortunate concept of 'productive' labour, but expanded it from agriculture to material goods in general. For Smith, then, labour on material objects was 'productive'; but labour on, say, consumer services, on immaterial production, was 'unproductive'. In Book II of the Wealth of Nations, Smith opines that labour on material objects is productive, while other labour is not because it does not 'fix or realize itself in any particular subject which endures after that labour is past and for which an equal quantity of labour could afterward be purchased'.

The bias in favour of material objects amounted to a bias in favour of investment in [[capital]] goods, since a stock of capital goods by definition has to be embodied in material objects. Consumer goods, on the other hand, either consist of immaterial services, or they get used up, consumed in the process of consumption. Smith's imprimatur on material production, therefore, was an indirect way of advocating investment in an accumulation of capital goods as against the very goal of producing capital goods: increased consumption. When discussing exports and imports, Smith realized full well that there was no point to amassing intermediate objects except that they eventually be consumed, that the only goal of production is consumption. However, Adam Smith's Presbyterian conscience led him to value the expenditure of labour ''per se'', for its own sake, and led him to balk at free market time-preferences between [[consumption]] and [[saving]]. Clearly, Smith wanted far more investment towards future production and less present consumption than the market was willing to choose. One of the contradictions of this position is that accumulating more capital goods at the expense of present consumption will eventually result in a higher standard of living unless Smith prepared to counsel a perpetual and accelerated shift toward more and more never-to-be-consumed means of production.

The lingering physiocratic bias was also shown in the assertion that agriculture is a far more productive industry than manufacturing, because in agriculture nature works alongside man and provides extra rent for landlords as well as profit for capitalists. Smith here failed to realize that [[Land|nature]] in the form of ground land collaborates in all activities of man, not just agriculture, and that all activities, including manufacturing, will therefore yield ground rent to landowners.

But if Adam Smith was excessively in favour of capital [[investment]] as against consumption, he at least was sound in realizing that capital investment was important in economic development and that the only way to increase capital is by private [[saving]]s or thrift. Thus, Smith wrote, 'Whoever saves money, as the phrase is, adds proportionately to the general mass of capital…. The world can augment its capital only in one way, by parsimony'. Savings, and not labour, is the cause of accumulation of capital, and such savings promptly 'puts into motion an additional quantity of industry [labour]'. The saver, then, spends as readily as the spendthrift, except that he does so to increase capital and eventually benefit the consumption of all; hence 'every frugal man is a public benefactor'. This was probably inspired by the creative work of [[Turgot]], with his emphasis on [[time]], the structure of production, and time-preference. But at least it was sound, and it stamped its imprint indelibly on classical economics.<ref name="Rothbard_Smith" />

===The theory of value===
Before the ''Wealth of Nations'', economists had always concentrated on the market [[price]], and had seen readily that it was determined by the forces of supply and demand, and hence of subjective utility and scarcity. The more abundant any given good, the lower its '''[[value]]'''; the scarcer the good, the higher its value.

In his lectures, Smith had solved the value paradox neatly, in much the same way as had [[Wikipedia:Francis Hutcheson (philosopher)|Hutcheson]] and other economists for centuries. Why is water so useful and yet so cheap, while a frippery like diamonds is so expensive? The difference, said Smith in his lectures, was their relative scarcity: 'It is only on account of the ''plenty'' of water that it is so cheap as to be got for the lifting, and on account of the scarcity of diamonds… that they are so dear'. With different supply conditions, the value and price of a product would differ drastically. Thus Smith points out in his lectures that a rich merchant lost in the Arabian desert would value water very highly, and so its price would be very high. Similarly, if the quantity of diamonds could be multiplied, the price of diamonds on the market would fall rapidly.

But in the ''Wealth of Nations'', Smith finds himself unable to solve the value paradox and separates utility from value and price, the crucial concept of [[scarcity]] is gone:

<blockquote>''The word value... has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use': the other, 'value in exchange'. The things which have the greatest value in use have frequently little or no value in exchange; and on contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.''<ref name="Smith_value">Adam Smith. [http://www.econlib.org/library/Smith/smWN1.html#B.I,%20Ch.4,%20Of%20the%20Origin%20and%20Use%20of%20Money "Of the Origin and Use of Money"], ''An Inquiry into the Nature and Causes of the Wealth of Nations'', Book I, Chapter IV. Library of Economics and Liberty, referenced 2010-06-10.</ref></blockquote>

Smith turned to another concept which for him took on overriding importance: the "'''natural price'''", or what might be called the "long-run normal" price. This concept, similar to [[Richard Cantillon|Cantillon]]'s "intrinsic value" or Hutcheson's "fundamental value", had appeared in Smith's lectures, but occupied a minor role as it did in the work of these other economists. But suddenly, it became more important, more truly "real" than the market price of the real world that had always been the prime focus of economists. Value and price theory shifts from prices in the real world to a mystical non-existent price in the never-never land of longrun '''[[equilibrium]]'''.

Not that the natural price, or as we now call it the [[Wikipedia:Economic equilibrium|equilibrium price]], is nonsense. The equilibrium price is the long-run tendency of the market price. As Adam Smith indeed saw, if the market price is higher than the long-run equilibrium, then extra gains will be made and resources will flow into this particular industry, until the market price falls to reach equilibrium. Conversely, if the market price is lower than equilibrium, the resulting losses will drive resources out of the industry until the price rises to reach equilibrium. The equilibrium concept is highly useful in pointing to the direction in which the market will move. But equilibrium will only be ''reached'' in reality if the 'data' of the market are magically frozen: that is, if the values, resources, and technological knowledge on the market continue to remain precisely the same. In that case, equilibrium would be reached after a certain span of time. But since these data are always changing in the real world, equilibrium is never attained.<ref name="Rothbard_Smith" />

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Adam Smith|Adam Smith]] on Wikipedia
* [http://mises.org/journals/jls/20_2/20_2_1.pdf Is the Wealth of Nations' third duty of the Sovereign compatible with Laissez Faier?] (pdf) by Valentin Petkantchin, 2006
* [http://mises.org/journals/jls/1_4/1_4_3.pdf Adam Smith: A Reappraisal] (pdf) by Ellen Frankel Paul, 1977
* [http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php&person=44 Adam Smith], works at the Online Library of Liberty
* [http://mises.org/journals/qjae/pdf/Q11_5.pdf Murray Rothbard's Adam Smith] (pdf) by Spencer J. Pack, 1998
* [http://mises.org/journals/jls/7_2/7_2_7.pdf West's "Cantillon and Adam Smith": A Comment] (pdf) by Roger W. Garrison, 1985
* [http://mises.org/journals/scholar/thornton12.pdf The Mystery of Adam Smith’s Invisible Hand Resolved] (pdf) by Mark Thornton
* [http://mises.org/journals/jls/13_1/13_1_1.pdf Adam Smith, Justice, and the System of Natural Liberty] (pdf) by Gary M. Anderson
* [http://www.adamsmith.org/ Adam Smith Institute]
[[Category:Biographies]]
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Time preference

2010-11-16T17:23:32Z

128.135.235.248:

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'''Time preference''' is the assumption that all people prefer a given end to be achieved sooner rather than later. In the misesian school it is derived from the assumption about human action. If people did not prefer to attain their ends sooner rather than later they would never act. The further in the future the attainment of the end appears to be, the less preferable it is. The less waiting [[time]], the more preferable is the end.

It may be called the preference for present satisfaction over future satisfaction or present good over future good, provided the same satisfaction (or [[good]]) is compared over periods of time.<ref name="Rothbard_Time">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap1b.asp "4. Further Implications: Time"], Chapter 1-Fundamentals of Human Action, ''[[Man, Economy and State]]'', online edition, referenced 2010-01-10</ref>

==Preference for future goods==
It is sometimes objected, that future goods may be more preferred. For example, in winter will a man care little for ice, but will crave to have it in summer. But a [[good]] is not an item with certain material properties. The good "ice-in-the-summer" provides different (and greater) satisfactions than "ice-in-the-winter", they are different goods. In this case, different satisfactions are being compared, while the physical property of the thing may be the same.<ref name="Rothbard_Time" />

==Savings and Time preference==
To enjoy greater [[consumption]], man must extend his [[Production|productivity]] first. Since acquiring the increased productivity comes with a cost — namely, time spent away from using the old method of production and consumption — there must be some means of paying that cost. This is the role of [[saving]]s. Some people have refrained from consumption in the past so that others can be sustained and create the new structure.

Savings remain key to this process of capital construction, and it is the time preference, that manifests itself in savings. Time preference is the extent to which people value current consumption over future consumption. If people enjoy current consumption so much, that the promise of an increased future consumption cannot bring them to save (and sacrifice the current level of consumption), the production will not be improved.

The thrust of the [[Austrian Business Cycle Theory]] is that credit inflation distorts this process, by making it appear that more means exist for current production than are actually sustainable. Since this is in fact an illusion, the endeavors of entrepreneurs to create a structure of production not reflecting actual consumer time preferences (as manifested in available savings for the purchase of producer goods) must end in failure.<ref name="Mahoney_preference">Dan Mahoney. [http://mises.org/story/672 "Austrian Business Cycle Theory: A Brief Explanation"], Mises Daily, May 07 2001, referenced 2010-01-10.</ref>

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Time preference|Time preference]] on Wikipedia
* [http://mises.org/daily/4011 Of Time and Marshmallows] by J. Grayson Lilburne
* [http://www.newyorker.com/reporting/2009/05/18/090518fa_fact_lehrer?currentPage=all Don’t! The secret of self-control.] by Jonah Lehrer. A study on time-preference.
* [http://mises.org/daily/4212 Some Applications of the Time-Preference Theory] by Ludwig von Mises
[[Category:Economic concepts]]

Pollution

2010-11-16T17:20:41Z

128.135.235.248:

There needs to be a page that discusses this. For many, the reality of unpaid for costs imposed externally is the reason to embrace government involvement. Despite much asserting under Austrian system about ability to sue etc., I have yet to see a clear exposition of how this works practically. I am convinced about libertarian thinking, but do not have the firepower to make the argument with folks. A good page here would go a long way I reckon.

===external links===
*[http://mises.org/daily/2120 Law, Property Rights, and Air Pollution]

Pollution

2010-11-16T17:20:02Z

128.135.235.248:

There needs to be a page that discusses this. For many, the reality of unpaid for costs imposed externally is the reason to embrace government involvement. Despite much asserting under Austrian system about ability to sue etc., I have yet to see a clear exposition of how this works practically. I am convinced about libertarian thinking, but do not have the firepower to make the argument with folks. A good page here would go a long way I reckon.

---external links---
*[http://mises.org/daily/2120 Law, Property Rights, and Air Pollution]

European Central Bank

2010-11-16T17:17:52Z

128.135.235.248:

The '''European Central Bank''' ('''ECB''') is the [[central bank]] of the [[Wikipedia:European Union|European Union]]. <ref name="ECB_facts">European Central Bank. [http://www.ecb.int/ecb/educational/facts/html/index.en.html "FACTS"], educational presentation of the ECB, referenced 2010-05-16.</ref>

==Structure==
The '''Governing Council''' of the ECB is the main decision-making body of the Eurosystem. It comprises
* all the members of the Executive Board of the ECB, and
* the governors/presidents of all the national central banks (NCBs) of the '''[[Euro area]]''', that is those EU Member States that have adopted the euro.

The Governing Council has the power to take the most important and strategically significant decisions for the Eurosystem, on monetary policy and on other tasks. Each member of the Governing Council has one vote and, unless otherwise provided for in the ESCB Statute, it acts by simple majority. The proceedings of the meetings are confidential, but the outcome is made public, primarily those about setting the key interest rates. Since December 2004 decisions taken by the Governing Council other than those setting interest rates have also been published every month on the websites of the Eurosystem central banks.

The '''Executive Board''' is the operational decision-making body of the ECB and of the Eurosystem, it is comprised of
* the President of the ECB,
* the Vice-President of the ECB, and
* four other members.

All Executive Board members are appointed by common accord of the governments of the participating Member States at the level of the Heads of State or Government, on a recommendation from the EU Council after it has consulted the European Parliament and the Governing Council of the ECB.

The '''General Council''' is a body dealing with transitional issues of euro adoption, it comprises of
* the President and Vice-President of the ECB, and
* the governors/presidents of the national central banks of all 27 EU Member States.

The General Council is primarily responsible for reporting and advisory functions.<ref name="ECB_facts" />

==History==
In the aftermath of the fall of the [[Wikipedia:Bretton Woods|Bretton Woods]] system and the oil crisis, the [[Wikipedia:European Monetary System|European Monetary System]] (EMS) was created in 1979, with adjustable exchange rates between the currencies of the partner countries. The [[Wikipedia:Maastricht Treaty|Maastricht Treaty]] in 1992 established the '''European Union''' (EU) and laid the foundations of EMU. The European Monetary Institute was established in the 1994 as a predecessor of the '''European Central Bank''' (ECB), which was established in June 1998. On 1 January 1999 were the conversion rates of the currencies of the 11 Member States irrevocably fixed and the euro was introduced as the single currency. From then on has the Governing Council of the ECB been responsible for a single monetary policy for the [[euro area]]. In 2001 Greece joined the euro area. On 1 January 2002 were introduced euro banknotes and coins. Slovenia became the 13th member of the euro area in January 2007. Cyprus and Malta joined on 1 January 2008, and Slovakia on 1 January 2009.

Denmark and the United Kingdom were granted the exceptional right to choose whether or not to participate in the monetary union.<ref name="ECB_facts" />

==Convergence criteria==
The Treaty establishing the [[Wikipedia:European Community|European Community]] sets criteria which must be met by each EU Member State before taking part in the [[Euro Zone]] and using the [[Wikipedia:Euro|Euro]] as official currency.

* The Member State must have an excessive budget deficit, as decided by the EU Council;
* There must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination; which does not exceed by more than one and a half percentage points that of the three best performing Member States in terms of price stability;
* There must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing Member States in terms of price stability;
* The normal fluctuation margins provided for by the exchange rate mechanism must be respected without severe tensions for at least the last two years before the examination.
* Each Member State should ensure that its national legislation, including the statute of its national central bank (NCB), is compatible with Articles 108 and 109 of the Treaty and with the Statute of the European System of Central Banks (ESCB Statute).

The convergence criteria for government deficit and government debt must continue to be met.<ref name="ECB_facts" />

==The European System of Central Banks==
The central banking system ('''ESCB''') comprises the ECB and the national central banks (NCBs) of all 27 EU Member States.

The '''Eurosystem''' comprises the ECB and the national central banks (NCBs) of 16 EU Member States whose common currency is the Euro. The NCBs may perform non-Eurosystem functions on their own responsibility, unless the Governing Council finds that such functions interfere with the objectives and tasks of the Eurosystem.

The shares of the national central banks (NCBs) in the ECB's capital key reflect the shares of the Member States in the total population and gross domestic product of the EU, in equal weightings. Eurosystem NCBs are required to pay up their subscribed capital in full. The non-euro area NCBs only have to pay up a minimal percentage of their subscribed capital as a contribution to the operational costs of the ECB, currently 7%.<ref name="ECB_facts" />

Largest share owners are central banks of Germany (18.9%), France (14.2%), Italy (12.5%) and Spain (8,3%).

Profits (of which up to 20% can go into the reserve fund) will be divided to shareholders in the euro area in proportion to their paid-up shares.<ref name="ECB_capital">European Central Bank. [http://www.ecb.int/ecb/orga/capital/html/index.en.html "Capital subscription"], as of 1 January 2009, referenced 2010-05-16.</ref>

===Independence===
Article 108 of the EC Treaty and Article 7 of the ESCB Statute prohibit the ECB, the NCBs and members of their decision-making bodies from seeking or taking instructions from Community institutions or bodies, from any government of a Member State or from any other body. In addition, they also prohibit such institutions, governments and bodies from seeking to influence the members of the decision-making bodies of the ECB or the NCBs. NCB governors have a minimum term of office of five years for (renewable), and a non-renewable term of office of eight years for the members of the ECB's Executive Board. Furthermore, members of the decision-making bodies may not be dismissed for reasons other than those stipulated in the ESCB Statute.

The ECB has its own capital, subscribed and paid up by the NCBs. It also has its own budget independent from that of the other European institutions. As regards the NCBs, Member States may not put their NCBs in the position of not having sufficient financing resources to carry out their ESCB-related and own national tasks.

At the same time, the ECB is held accountable to the citizens and their democratically elected representatives, in order to balance the substantial degree of independence that it has been granted. The ECB has to create an annual report, a quarterly report and a weekly consolidated financial statement to appearances before the European Parliament, on the decisions taken in the field of monetary policy and on its other tasks. The ECB and the national central banks are subject to the audit review by independent external auditors approved by the EU Council, who have the full power to examine all their books and accounts and obtain full information on their transactions.<ref name="ECB_facts" />

==Monetary policy==
The primary objective of the Eurosystem is to maintain '''price stability''', as defined by "a year-on-year increase in the [[Wikipedia:Harmonised Index of Consumer Prices|Harmonised Index of Consumer Prices]] (HICP) for the euro area of below 2%", to be maintained "over the medium term". The indices are published by the [[Wikipedia:Eurostat|Eurostat]].

The Eurosystem is required to act "in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources".

The Eurosystem requires credit institutions to hold minimum reserves on accounts with the national central banks.<ref name="ECB_facts" />

==References==
{{Reflist}}

==External links==
* [[Wikipedia:European Central Bank|European Central Bank]] on Wikipedia
* [[Wikipedia:Washington Agreement on Gold|Washington Agreement on Gold]] on Wikipedia
* [http://www.ecb.int/ Official website]
* [http://www.ecb.int/stats/money/aggregates/aggr/html/index.en.html Monetary aggregates] of the euro area
* [http://mises.org/daily/124 Euro Inflation] by Jeffrey M. Herbener, January 1999
* [http://www.ecb.int/stats/monetary/rates/html/index.en.html Key ECB interest rates], European Central Bank
[[Category:Historical]]

William Graham Sumner

2010-11-16T17:13:13Z

128.135.235.248:

[[File:William_Graham_Sumner.jpg|150px|thumb|right|William Graham Sumner]]

'''William Graham Sumner''' (October 30, 1840 – April 12, 1910) was a classical liberal scholar. Among his works are ''[[What Social Classes Owe to Each Other]]'' and numerous essays. One of the most well-known of those is "[[The Forgotten Man]]."

==External links==
*[http://en.wikipedia.org/wiki/William_Graham_Sumner William Graham Sumner] on Wikipedia.
*[http://en.wikisource.org/wiki/Author:William_Graham_Sumner William Graham Sumner] on Wikisource.
*[http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Fperson=236&Itemid=28 William Graham Sumner] in the Online Library of Liberty

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[[Category:Biographies]]