I’ve now made available a three-part piece on Adam Smith. It starts by considering his credentials as an egalitarian thinker whose embrace of the ‘invisible hand’ of the free-market was less complete than his deregulating champions at the Adam Smith Institute would claim. This reappraisal is based on a recent book by Professor Iain McLean (Adam Smith – Radical and Egalitarian, Edinburgh University Press, 2006). I then go on to assess Adam Smith’s writing on money and banking in relation to crises in the 18th century and 21st century banking systems.
(This is a summary of an essay I wrote in 2000!) It still seems relevant. The full document is here (pdf 36.8kb).
By 2050 money in its current form as non-specific value will have been replaced by credits for specific future goods and services. These credits will be traded in a sophisticated barter network. This is the only complete solution to the problems created by money which have plagued the global economy in the 20th century. The partial solutions offered by Marx, Keynes and Friedman have done as much harm as good. Because money represents a claim on future production of goods and services, but these goods and services are not specified in transactions, physical limits to their future availability and use are often not reflected in money prices. This is responsible for the phenomenon of national money supplies growing faster than national production and the asset price inflation seen in many parts of the global economy. The apparently limitless nature of the pool of money in the global economy also means that major distortions in distribution often go unrecognised. The solution of using credits for specific future production is a feasible one using anticipated advances in information and communication technology. Pointers to the future can be seen in the proposed Kyoto emissions trading scheme, and in the expansion of barter networks. Banks, or their equivalents, will continue to offer credit for development but will assess the risks and benefits on a much broader basis than pure profit and loss. The proposed credit system will produce significant improvements in the ability of market mechanisms to value environmental and social aspects of production and supply. Macroeconomic stability will be enhanced by the removal of uncertainty over money effects in future transactions and political responses to economic shocks will be improved by greater public understanding of their real causes and effects.
Banks are returning to profit. The new chief executive of the taxpayer-owned Royal Bank of Scotland complains that
We sometimes feel as if commentators variously want us to go back to over-lending, to operate on a ‘not-for-profit’ basis, to never entertain a client and to offer employment conditions that deter the best and brightest.
All the evidence is that the government is listening to him, and that the banks will soon re-acquire their independent status and carry on pretty much as before. And yet the complaints of Stephen Hester are somewhat undermined by the balance sheet changes that by his own admission are necessary to restore the bank (from its own point of view) to health and safety over the next 3 years. This involves doubling its ratio of the safest-rated assets from 4% to at least 8%, increasing its liquidity reserves from £90bn to £150bn, and reducing its wholesale funding reliance from £343bn to £150bn with a consequent reduction of its loan/deposit ratio from 156% to 100%. According to Hester, ‘those with accountability for past mistakes have gone.’ So the previous appalling state of the balance sheet should be regarded as a natural disaster of which the ‘the new RBS’ need hold no memory. This is clearly nonsense. No other bankers, Hester among them, were queuing up to denounce the Royal Bank’s balance sheet position before the crunch came. Nor would we expect them to do so. The problem with the banks was and is little to do with the errors of individuals. It isn’t much to do with their talent and inspiration either. The problem lies with a complete failure on the part of bankers and the government to understand banking and its social function.