Facebook Twitter YouTube E-mail

STL #9: Wealth of Nations Book 5: Impressions

My Thoughts On: April 22nd, 2004

This is my 5th and final installment reviewing the last book of Adam Smith's "The Wealth of Nations". This book finishes up talking about government finance, what government exists for, and Smith's view of various government institutions. I also include a look back at the entire work.

Well, I finally did it. Consuming this huge book has taken a toll on my brain, it's dry, but it's over. I feel like I've crossed the Sahara on foot, sipping water from cactuses and eating desert beetles to survive.

The final book of Smith's 5-part work centers on what he has established are the three principle duties of government - the defense of the country, the administration of justice, and the maintenance of certain public works. He breaks the book up into three sections, one discussing the necessary expenses of the sovereign, the methods of contribution towards the expenses, and the causes and effects of public debt - all in respect to the three necessary duties of government (military, justice, public works).

Chapter 1, "Of the Expenses of the Sovereign or Commonwealth", starts off with Smith noting that military spending differs in different times and states of society. He refers to ancient states of society, hunter tribes, shepherds, and husbandmen (farmer settlements). These old states of society were so undeveloped that, as a matter of necessity (either of feudal law or natural hardship), each person trained themselves in military arts and went to war on their own accord, sustaining themselves through war (taking their own supplies, weapons, and surviving off nearby resources or pillaging), costing the sovereign nothing. As society becomes more advanced, and labor more divided, it becomes less feasible for each person to take the kind of time away from their trade to train for military efforts. The two causes for this increased expense are improvements in manufactures (which increase acceptable living standards and provide more enticing opportunities than war) and improvements in the art of war itself (increasing the real cost of conducting effective campaigns). Long wars involving hard labor for the maintenance, construction and deployment of complex arms is too much for the people of the rude societies to bolster on their own, and thus the practice of paying soldiers as a specific trade began.

Paying soldiers to work for the sovereign state has it's benefits and it's disadvantages. Division of labor lets standing armies create bigger and better tools of war, to make campaigns more civil yet brutally effective. Take a look at today's war compared to the wars hundreds of years ago. We have remote guided sentries, EMP missiles, nuclear warheads, battleships and aircraft carriers, submarines, big B-17 bombers, I could go on and on. These developments come though division of labor being employed in our military, to allow industrialization to take hold on our weapon development. In that way, we make it so one standing army of a few thousand can take on more primitive militias by the tens of thousands and win consistently.

The disadvantages come, however, in two areas - finance and spirit. If, unlike the ancient times, you are paying people to be military personnel as a trade, you can obviously only support in war the amount of standing bodies the general public can finance in addition to themselves. This means the percentage of the population that can go to war at any given time in this system is much smaller than the ancient days, where entire communities would put every man of working age in active combat on any given occasion. As society becomes more prosperous, it becomes more peaceful, and there is also the question of how inclined to go to war the people are. They settle in trades and for the most part live peaceful lives. Simply put, the industrious are generally too busy to train for war.

Smith tells us the history of conflicts between militias (where the people are in general expected to train and sustain themselves for war) and standing armies (where society trains and sustains soldiers they hire) shows the unerring success of standing armies. A more relevant recent example of this might be the War in Iraq. Iraqis are organized into armies because they are required to attend military service, and recent settlement revolts show that the general population has arms training. Since the Hussein regime fell the army degraded into militias, being the current insurgency. The United States, however, has a superior standing army with more advanced weapons of war and a recruitment who have been living for months practicing the duties their regiment requires. Likewise, direct combat between the groups has been swift and decisive in favor of the standing army (the United States). The militias in the area have resorted to domestic terrorism to expel the United States troops, and not any real decisive military action against them, since they simply have no power to conduct those actions (or they would've by now). You may see violence against civilians in the streets, but during this conflict you will not see a marine base raided with any measure of success, or a whole platoon taken out in active combat. The use of the Iraq War as an example is not an endorsement for the war, but it helps put the militia vs. standing army question into perspective better than the Greek/Roman examples Smith gives.

Smith says that a standing army is the proper way to defend a civilized nation, since a militia-bound nation is at all times threatened by invasion and internal revolt, as the militia is ineffective and unprincipled, generally as a result of the circumstances which give rise to the militia (each soldier in the militia gains nothing besides plunder in war, and is there because society demands them to be, not out of any real offering). When the United States was formed by the Constitution, the Constitution left rights for militias to form in states, but it reserved for the federal government the right to create a standing army. Smith likewise adds that a standing army helps barbarous nations become more civilized, since it provides domestic security, which is important to securing a single law and order. He sums up this part of the chapter by adding that the development of firearms is a good example of a great expense of war that extends and preserves civilization.

Next we talk about the expense of justice. He says that like defense, the need for a justice system depends on the advancement of society. A court system is not needed until a system of property rights is created, since without recognized property, no one has a basis for arguing privilege in court. Smith notes that in older forms of judicial systems, sovereigns would use the court as a way to generate revenue, through court fees and dues, and that it cost the state little - and in fact made money. This use of the courts as a system of generating revenue for the sovereign led to many obvious abuses of authority. These abuses and contradictions in authority didn't stop until the salaries and pay of the judicial officials were removed entirely from the factors and decisions in the court cases, thus there was no incentive to find a ruling based on financial benefits. Smith says that a judicial system is never free, and that court fees can help cover the expense of running the system, but stamp duties, presents to the court, and amercements to officials are financial pitfalls that will corrupt courts. Summing up this part of the chapter, Smith notes that the last real excess of the court system comes from mergers in the executive and judicial branches of the court, and that only in a system where the two are separated can court judgements be made impartially. Having a judicial system that is separate from the executive branch - where a judge's salary, his rulings and his chair are all independently guaranteed to him outside political choices and supervision - guarantees a system where an individual's rights will be less up in the air in the courtroom. This, as always, is Smith's emphasis. When the American Founding Fathers formed the United States federal government, the judicial system, possibly in lieu of this good advice, was separated from the executive and legislative branches.

The third part of this chapter deals with many different parts of public works of Smith's time. He discusses how government deals with them and perhaps what it should be doing instead of what it does. He defines public works business which is necessary to facilitate commerce but brings no financial benefit to individuals (thus, being necessary for the state to assume). As we analyze what he says about these various institutions, you will see his stances on valid public works are not as broad as it may seem from that rationale given for them.

He says, of general public works, that their expenses need not be paid by the coffers of the state, instead, by user fees (tolls, duties, etc.). He comments of the equitability of road tolls, but criticizes their implementation (not so relevant today) and then goes on to say that private persons are better fitted to run most conventional pathways. Major roadways, he suggests, might be better run by government but not to make money, since high tolls to generate money for the state provides a great immeasurable hindrance on trade. Post roads (minor roadways) are good, he says, but often kept in poor condition by the government and should be managed by others. A big point of criticism for Smith is government mismanagement, and he hits on it throughout this book. He says to run public systems like the roadways better, most issues regarding them should stay local, as not meddled by big government.

He goes on to talk about those public works which facilitate specific kinds of trades, like foreign embassies that provide security abroad. An embassy is necessary to acquire treaties from nations with unfree political policies, because without the securing of private property abroad, foreign trade would do no one any real good. To encourage investment in these risky trades, he suggests corporations should be formed (as opposed to normal business), but only temporarily. Smith suggests some trades can be run successfully by government-mandated corporations, such as banking, insurance and water works. However, he notes, this is only because these businesses can be broken down to very simple tasks and procedures, that even mismanaging government-chartered limited liability corporations cannot mess up. He says here that it is rational to suggest a charter be issued for a joint stock company (a corporation - a form of government institution, chartered and regulated) to conduct these kinds of trades, but nowhere does he suggest it's preferable to normal business if it can be shown to be unnecessary.

The next major public work Smith addresses is in this chapter is education. He starts off by slamming government endowments to educational institutions as having made teachers lazy, saying he's sick of teachers who "pretend" to teach by reading out of a teacher's guide (he particularly rails on Oxford for giving up "altogether even the pretense of teaching"). When a teacher's salary is not based on the quality of their lessons, the production of the teachers decline. Control of education by the government is ignorant and capricious according to Smith, especially when it comes in the form of compelling students to attend universities, through privileges of graduation, which he likens to corporate privileges of apprenticeship (you get a degree of X years, you get a job - a system that suffers the same flaws Smith addressed in regulated apprenticeship, where you train for X years under a master and you get a job). He even attacks the semi-voluntary institution of scholarships as pledging to colleges people irregardless of any actual earned merit in attendance.

This all sounds very harsh on public education, and Smith makes it clear his many objections to public education, in fact, on page 824 he suggests that private institutions produce the best taught students, on page 831 he prompts the idea that universities are simply set up wrong and don't produce real men of the world, saying these universities themselves have made few to no real improvements in philosophy. The more teachers depend upon fees and not base salaries, the less corrupt and lazy they are, as they are more interested in teaching better when there is financial incentive to do so. Most reform in education, he notes, is for the benefit of teachers, and not the student body. This is true today, although I'll save this tangent for future writing. Even extracurricular activities, like music, are not outside the scope of Smith's attacks (pg. 833). If there were no public institutions for learning, Smith says, only what is really useful and necessary to the people would be taught.

So should the state give no attention to education? Smith says, in some cases yes, in some cases no. Division of labor destroys martial (military) values for the reasons I covered above, and likewise, a person who trains himself over the course of his life to one type of skill or trade, also finds himself faulting in intellectual and social values for it. Smith basically describes a system of dumbing-down society, "devolution" as my friend Xavier might say. As people train hard to fit into industry, their skills elsewhere (intellectual/social/physical) will diminish. Before, in rude and barbarous societies, you needed those variety of skills to survive. Smith uses this as an argument for limited public education in the fields of reading, writing and arithmetic. By this he proposes to keep the mind of the workers fit enough to keep up their production and to grow if they choose to do so. The system he describes for public education is very short, but very efficient in teaching people basics of thinking. He likewise, along the same veins, includes gymnastic and light military skills in this - perhaps today, gym class being the best example of what Smith would see for physical proficiency. Ultimately, he says, cowardice, gross ignorance and stupidity can plague common society as nations become more prosperous as a result of this effect (despite those civilizations ultimately being better than others), and he sees the government as needing to step in to prevent that, without causing more of it by making teachers and education itself unproductive and lazy. This can only be done, according to him, by teaching the basics and allowing private learning institutions to cover the rest.

A whole segment of this part of the chapter is dedicated solely to religious teaching, of which he follows the same vein of "private learning is better". Religious tolerance, he says, comes in separating religion from politics - especially religious instruction - so multiple sects form to compete for the intellectual prize of swaying people with good argument and truth. To make minds less lazy, Smith suggests that the basic public education system should include along with reading/writing/arithmetic the teaching of science and philosophy (primarily logic). This prevents, as he says, the growth of absurdities and superstition. In Smith's time, organized religions often were more powerful than the government itself, and a dominant religion could not be ignored by the sovereign. However, when there were many different competing smaller sects, the sovereign needed to do nothing to step in, since society develops a more tolerant view of religion. Perhaps, because things are more thick-skinned when there is much debate and many different stances, that it's no longer necessary for the state to cater to religion. This is definitely true where there is not a religion that can take over the whole nation, like churches in Smith's time threatened to do (there were still many monarchies then). This view, perhaps, is the segue into a view of separation of church and state, later endorsed by American Founder Thomas Jefferson.

The last part of Smith's discussion of the necessary expenses of the sovereign is a brief look at the expense necessary for the dignity of the state. Palaces, grand treasures and monuments, all seem to be the fashion of all nations throughout history. Perhaps a large capital city, and the maintenance of those things of national historical importance. The more raised above his subjects the leader is, the more disposed to gross spending on these kind of dignities a state requires. Whether a state truly requires any of these expenses, depends I guess on the specific projects. Ultimately, I foresee no government truly eliminating all such expenditures, as important national documents and congressional halls should always have some form of expense to be maintained and contain some level of luxury. Memorials and museums, monuments and treasures, I see no nation ultimately doing away with entirely. Smith makes no real point in his short two-paragraph coverage of this, than that it's an expense the people expect to pay, and that Republics require less of this grandeur than Kings. This probably goes on to insinuate that the better organized a government is, the less gross and exorbitant such expenses are.

So, he sums up this chapter on expenses by saying that general contribution (taxes) should pay for defense/military expenses and the maintenance of the dignity of the sovereign, however small or large that might become. A court system can be defrayed by fees, but ultimately some part of that will need to come from general taxes if we want the court system to remain impartial. The expenses of local benefit should be paid out of local revenues, or perhaps in our modern system, the benefits to individual states (like most roadways) should be paid and managed by their state/local governments and not the federal government. Roads, Smith notes, is best paid by tolls, but tolerably paid by general taxes. Education is better run by voluntary contributions and fees than by general taxes, but like roads, a certain level of public education (the basic education Smith recommended) may be paid for in part by general taxes justifiably. What's justifiable to Smith is not always what's best, and throughout the work he is constantly probing private solutions and praising their increased efficiency over public answers, eternally pragmatic, Smith didn't care so long as the freedom of the state wasn't put in peril by perpetual growth of these services (something I'd claim is currently happening, as Smith's ideas are steadily replaced by Socialism and Keynesian economics). So, as far as government is concerned, all this leaves Smith to discuss are methods of taxation to finance government, and the problems of incurred public debts, in the last two chapters.

Chapter two breaks down sources of government finance, which Smith says is divided into two forms of revenue, money made from state property and money made from tax collecting. If the government is using it's property to make money, then that revenue can come in the form of profits or interest. Smith says that while lending and trading can be done with government property to make money, the state makes both poor businessmen and poor lenders. Land, particularly in the form of rent, can be a source of revenue for the state, but Smith says it simply does not cover the state's expenses. A truly minimal government that Smith wants would probably never hold enough land survive on rent. Lands the government owns simply will not cover a proper budget, Smith even suggests that many lands are better off sold. Most of the sovereign's expenses should simply be through taxes. Smaller preserves, like parks and other places of "pleasure and magnificence" should be held by the crown, but Smith doesn't really give a good reason for that. Those recreation spots make for great places for private businesses to set up shop, and derive a revenue via the attraction of the nice surroundings. I guess there wasn't many hot dog stands and Starbucks in Smith's time.

The next part of the chapter is the other form of state revenue, taxes. Taxes fall on three sources of individual revenue, which are the three we covered throughout the whole book: rent, profits and wages. If they don't fall specifically on one of these three groups, then they do on several of them or all three. All taxes, Smith says, should meet four basic expectations:

1. Equality. Since all people share security to create their own wealth because of government, all people should equally contribute to that. This should be in proportion to the revenue they create, not a fixed dollar amount, since in a system where everyone pays a tax in the exact same dollar amount the poor (who require less government security since they have less property) would pay much more in relation to their income than the rich. So people should pay in proportion to their revenue. Now, all taxes that affect only one or two of the three sources of individual revenue (profit/wages/rent) are necessarily unequal as people who derive most of their sustenance from the other kinds of revenue are unaffected. This should be kept in mind as a core objection to most of the taxes we'll cover as we continue.

2. Certainty. Taxes that come at unpredictable times and places are burdens on the people by causing confusion and interrupting their ability to conduct normal business. Uncertain taxes are usually corrupt ones, arbitrary and cause huge power abuses. Uncertain taxes, Smith says, in a way are far worse than unequal ones.

3. Conveniency. Taxes that are levied should be timely and match natural business cycles so they come out a time that is easiest. Usually this means having the tax gathered at the point of sale, or the point where the transaction occurs. This of course depends on the kind of tax, but regardless of what kind, it should be as convenient as possible to prevent any further imposition on the people for what is already an imposition, the tax itself.

4. Economically efficient. Each tax should be as small as possible, to limit the damage of the tax. Also, the tax should produce a lot, taxes that require heavy expenses (huge bureaucracies) are not as useful to the state nor to the people. Those kind of taxes should be changed or dropped for better forms. Likewise, some taxes heavily discourage industry, which of course is very negative, and those concerns should be kept in mind when forming the tax.

Smith starts by talking about taxes on the rent of land. Fixed taxes on rents for long periods of times become unequal because the real value of improvement in the lands changes over time, some going up and down in value, because of improvements or lack in maintenance affects how much revenue that land can generate. The security that the state provides for those lands is employed in proportion to the wealth generated by them (at least in theory), so all taxes on land, to be fair, should be set on a variable evaluation of the rent's worth, not a fixed canon evaluated once and never revised. The best way to do this, Smith suggests, is to register leases. Registering leases is effective, but landlords of Smith's time often tried to get out of paying extra taxes by using loopholes. Such work-arounds were "fines" landlords issued instead of increasing the rent (thus, while charging roughly the same, the "rent" portion of the payment is lower and taxed less), and collecting rents paid in bartered commodity (trading "in kind" - obviously this is hard to evaluate for taxing and usually very unreasonable on both tenants and landlords). To stop these work-arounds, Smith suggests higher taxes on these unorthodox payment methods. Smith says a valid criticism of these kind of land taxes is that people might be less disposed to produce if they must give some money to the state for producing. Smith says the longer the sovereign takes to tax these improvements, the better, perhaps suggesting a limited reprieve from tax liability on recent land improvements, to encourage private landowners to do things to step up production. These kind of land taxes, Smith sums up, become unequal over time despite any attempts to make them more fair, and the public surveys which usually evaluate them are completely arbitrary.

Rent taxes proportioned not to the rate of rent like those above but to the rate of production, are necessarily unequal by nature. Unlike the regular land-tax in proportion to rent, land-taxes proportioned to produce always discourage improvement and good cultivation by taxing - not the improvements that increase output of the land - but the output itself. Smith's criticisms bode poorly for both of all these kinds of taxes, he might favor a system between them, but he does not seem to favor any taxes on rent. He moves on to discuss taxes placed on renting homes which he says are very unequal, building rents simply being a bad target for taxing rent. The best way to tax rent, he sums up, is to tax the ground rent (the basic rent charged to a tenant based on the land's value for whatever reason). Landowners always drive that up as high as possible, and a tax on it would always come from the land owner - since those kinds of rents are usually their highest, if the landowner forwards some of the tax to the inhabitant, he necessarily sacrifices that much in the maximum amount of rent he can charge from them, which basically means the landowner pays for the tax irregardless of what happens. Ultimately, all taxes on rent in some way lower the amount of rent land will bring, which is negative to land owners of all sorts.

Taxes on profit can be divided into two parts, interest and surplus gain. If there is no surplus gain (all transactions break even), ultimately the undertaker will stop trading, as it gets him nothing while benefits everyone else. Because the surplus is a necessary part of trading, it's not taxable. Interest seems taxable at first, but like taxes on rent cannot raise the rent (thus, always being a tax on the landowner), taxes on interest cannot raise interest rates (thus being a tax on the stockholder). It's even less fair to tax interest on money than it is rent of land, because the amount received in interest rates cannot be ascertained without heavy government intervention, and stock can be moved back and forth - unlike land - creating a lot of tax evasion without the kind of dominant government presence Smith is always against.

Other taxes on profits are aimed on particular employments, and particular business owners. The people to pay these taxes are not the business owners targeted - they will raise the price of their goods to compensate the tax (and usually a little above to compensate themselves more for the trouble). In the end, consumers pay these taxes, not the producers that they target. Taxes on these particular profits don't affect interest rates, because lenders simply won't lend at different rates just because one group is taxed while the other is not.

Continuing on with various taxes, Smith talks about taxes when property trades hands, especially in the case of death taxes. Death taxes, Smith says, bring down the value of the commodities taxed, and can't come out of any real revenue those commodities were supposed to earn because they were merely trading hands. Taxes on land being moved from one hand to another differ when between the living and the dead and the living and the living. Taxes on such transfers between the living come out of the seller. The buyer usually is not required to buy, so any price increase on the part of the seller to compensate for the tax is likely not to be paid. So the seller, who is usually the one who has to make the transaction happen, will typically be the one to shoulder the tax. Taxes between the dead and the living fall always on the person receiving the land, since well, it can't really fall on the dead person. Taxes on the sale of new buildings fall on the buyer, because the builder has to have his profit or else he wouldn't be in the business of building new homes. Taxes on the sale of old houses typically fall on the seller, because the buyer is not usually in the place to need to buy, much like regular sales of land. Taxes on loans fall on the borrower (the lender won't lend less simply because of the tax). All taxes on transfers are unthrifty, Smith says, and unequal. Benefits of these kind of taxes are that they are certain and inexpensive (usually). Taxes on immovable property and mortgage lending should be public and recorded, whether taxed or not, because it helps guarantee the security in the transaction, so taxing those institutions might be easier than the rest, although it does not free itself from the criticisms of the other systems.

Thus far, in talking about taxes on rent and on profit, Smith has been decisively negative. This is important though for his system, eternal skepticism is necessary for those who want to create good government. And good government to Smith is limited government. The last major section of this chapter deals with taxes on wages. Taxes on wages must raise wages, because workers are already being paid what is necessary to sustain them, anything cutting into that would require they look for new jobs. So the raise in wage caused by the tax would be paid by the employer, who passes that expense to the consumer. Ultimately the consumer, not the employer or the employee, is who pays the taxes on wages. Sometime this effect of raising wages is disguised by a fall in demand for labor caused by the tax. Smith says "the declension of industry, the decrease of employment for the poor, the diminution of the annual produce of the land and labor of the country, have generally been the effect of such taxes" (pg. 933). Smith adds that taxes on government official salaries will not raise wages like they would in private trades, however redundant that might be.

The last group of taxes are ones that in some way include two or more of the three forms of revenue (wages/profit/rent). Smith divides these kinds of taxes into two categories - poll taxes (which do not exist in America today, they have been outlawed by a 1966 Supreme Court ruling) and taxes on consumable goods (which fall on consumers, who all subsist by various incomes from wages/profit/rent). Poll taxes, Smith says, are entirely arbitrary and never truly equal. Smith says poll taxes are certain and convenient, but they do not produce much for the sovereign. Poll taxes were used in Southern U.S. states to discourage poor people and blacks from voting, and were eliminated in our modern government as a result of civil rights movements.

So, in Smith's really detailed breakdown of various taxes, this leaves us with one last kind of tax, excise taxes on consumable commodities (sales taxes, luxury taxes, other taxes on goods that happen during their sale). These come in two kinds - taxes on necessary goods (the things standard society cannot do without, food, clothes, respectable housing - today a necessity might be transportation) and taxes on luxuries (things they can do without, today common luxuries might be liquor, tobacco, expensive appliances, etc.). Wages, as we established earlier, always must cover basic needs. Taxes on goods that affect basic needs will always raise wages, which either raises prices or decreases the demand for workers. Taxes on necessaries also make it harder for poor people to sustain themselves and bring up families. This diminishes the general extent of society to consume and produce, and while it hurts the poor most obviously, it's also contradictory to the middle and upper class since they suffer a huge loss of industry. A bread tax, for instance, might have these negative effects on society.

Taxes on luxuries cannot have these effects. Where they raise wages, the wages are usually so high that the rate difference is easy to compensate. The valuable distinction between luxury taxes and taxes on necessities comes in that while both target specific industries - and are thus, arbitrary - one targets an industry that drives virtually all our price structures (necessities) while the other targets industry that merely supplements that (luxury). In this sense, and only in this sense, luxury taxes are better. Luxury taxes may drive up wages, but only in one industry. Taxes on necessities drive up all wages, since all people must pay the price increase caused by the tax in some way, thus bringing up the basic level their wages must meet.

Taxes on imports and exports (tariffs) are typically referred to as customs, and they fall in this category as well. Smith notes that originally imports and exports were taxed, but taxes on exports have become unpopular as we saw in his various attacks on the mercantile system of Book 4. Smith says this is unfavorable to the revenue of the government, and prohibiting certain imports to "benefit" domestic producers likewise has the same effect. Smith is by no means an advocate of the high tariff, as high duties on imports are likewise as good as prohibition, and suffer the same complaint. The reason Smith suggests that the tariffs do not produce enough to finance the majority of government functions is because they are limited and not uniform or low amongst all trade. Likewise, they are used to finance government incentives, like subsidies (the bounties of Book 4), and that expense with the lowered input of drawbacks also reduce the revenue tariffs can earn.

Now, taxes on necessities and luxuries both target specific trades and consumable goods. None of these taxes are universal across all goods, except sales taxes, and Smith suggests that they don't have to be to still generally affect people in equal ways. Taxing a few articles makes it easier not only on businesses but on the population in general, and so long as those taxes are considerably low, convenient, and aimed at trades which will distribute the expense near to being equal, it works effectively as well as a universal sales tax on all goods might without the trouble of instituting a universal sales tax.

Just as universal sales taxes might be better replaced by taxes on specific articles, Smith suggests that universal tariffs (which he seems to advocate, notwithstanding his criticisms to the mercantile system that runs such tax lobbies) might be better if targeted on a few specific materials. This would improve the security of the trades a lot while hurting the real revenue of the tax (thus it's pragmatics) very little. Assuming of course, all the taxes stay low and economical, and are not abused for mercantile gains.

Smith notes that while the revenue from a tax that affects mostly what the poor consume would generate more than taxes on the rich (the poor, collectively, consume more than the rich due to their superior numbers), yet he says that taxes should never be on the necessary goods that the poor consume. Smith then goes into a rant about malting beer, which while relevant, is very boring and I will skip that. Taxes on luxuries are paid more voluntarily due to the unnecessary way luxuries act in the market, but on the other hand, they take more from the people than they yield to the state. Taxes on luxuries, which do not have the pleasure of always being needed, will require more customs and excise officials and discourage the industries. This brings about smuggling and confusion. These inconveniences are institutional, and uniform systems suffer from them less than arbitrary ones. Smith views the tax on agriculture as being the worst of all taxes on necessary commodities as it breeds all sorts of inequalities in who pays it, and bashes the French for their policies. To sum up, Smith things poorly of all these systems of taxation, and he has yet to put a light on what is preferable, as all of them have negative features. The two taxes Smith praises the most are uniform tariffs and modest luxury taxes, followed by: general taxes on rent/profit/wages, the redundant and negative taxes on necessaries and agriculture, and lastly the taxes he says cannot happen due to technical flaws in the tax (such as taxes on surplus profits or taxes).

A valuable insight learned from these taxes are that many of them compound. A tax on necessaries, for instance, not only tax the consumers, but they also add to wages, which adds to prices, which hurt other consumers, and likewise raises their wages. All taxes in some way have this compound effect that is hard to estimate, but the taxes with the fewest tend to be more economical (one of the 4 characteristics we are aiming for in the quest for the "perfect tax" - or, as I'd prefer to say, the "not-so-bad-as-the-others tax"). Smith will sum up with more insight on these things later.

The last chapter of this book, and I apologize already for having drawn it out this far, is public debt. In ruder states of society, people hoard. When luxuries are more fixed and the rich have things to spend their money on, they will usually spend all that money, and this is the same for the rich as it is of the government. In peace, a state will usually spend what it earns. During war, when the state must exert more, the government will usually contract debt, since during peacetime states usually don't spend time saving up for war, instead, they indulge themselves (this is true today). Whether this is good or not is still questionable. Should the state sit on a well of money just for war? If it is not saved, the money must come from somewhere, and it's usually very uneconomical to raise taxes. Merchants, especially the ones that run banks, are ready to lend and willing. So borrowing tends to be government's response to financing major expenses like war.

Government won't save if it knows it can borrow. When it gets into the habit of borrowing, it often will borrow to continue borrowing instead of paying up debts. By keeping the borrowing perpetual, the effects of the debt are suspended from being felt, but debt overall can only grow. In this way interest arises as a major expense, having to pay that interest creates a series of taxes which are permanent on the people and not based on the real value of the debt, instead, on preventing that debt from growing even further than it would otherwise, and the permanent tax of interest on a state is really the only thing between it and bankruptcy. Usually this is said to be helped during periods of peace, but if a state doesn't deal with this burden during peace time, the mismanagement will ensure that new taxes do nothing more than pay up the interest payments the government owes the people it borrowed money from. In this way the British government in Smith's time (1776) still was suffering problems from debts created by a war in 1697. It never paid the debt down over the course of peace and new wars, giving Britain a problem with national debt that most people didn't feel but existed in it's loans and interest obligations to creditors.

The United States, like Britain, has carried debt and managed it well up until the Great Depression/WW2 era. Unlike other modern nations, we started with huge debts from the Revolution and the Louisiana Purchase, but eliminated that debt due to fiscal frugality by the early 1800's. A small debt was maintained till the Civil War, but it was well managed. Borrowing during times of war can be something of an investment, the added security the war gives the people being the extra finance to pay off the debt, so it's not entirely unnatural. During the Great Depression, government growth went to unprecedented scales, all while the gross national produce (which we explained earlier was a real measure of national wealth) went through the floor. This was not only because of WW2, but because of government growth policies that hurt, not helped, the Great Depression. Debt since then has been steadily growing because the resulting big government has been irresponsible in managing that debt. This was not felt fully, because the great success of WW2 brought about huge gains for the U.S., perhaps being the core reasons the Great Depression ended. The debt went virtually unattended during these years since few really thought about it (the nation recovering from troublesome time relieved worries about debt) and bloated recently due to heavier emphasis on borrowing as a replacement for taxation in policy making decisions of recent administrations. Now we have an unprecedented 6.7 Trillion dollar national debt, a problem that puts Britain's to shame.

Smith says that the opinion that borrowing creates new capital is totally wrong. While you may borrow and have more money than previously, the capital is all old capital merely moved by the borrowing and the promise of new capital in the future and interest payments. The government may pay back it's creditors, but that merely happens by moving productive labor of the people into unproductive debt payments. Debt does not create wealth, the one advantage of debt might be that people have an easier time saving up during times of government borrowing (especially during troublesome times like war and depressions), but that advantage disappears when peace comes. The stability cannot be maintained for long unless the indebtedness can be dealt with in a frugal and prudent way. Debt might be one of the core contributions (the only other being the great success of WW2) to the end of the Great Depression. However, it's the irresponsible administration of debt that gives us a $300+ billion annual expense in interest to pay it back. That's a huge perpetual tax nearly larger than all our other expenses of government. Multiplication of taxes these periods bring burdens the revenue even more. Smith says that this practice of irresponsible debt management has always enfeebled states. I might agree that this has happened in the United States if it wasn't for the superior productivity the U.S. GNP shows we have in spite of this huge debt.

But, like the problem Smith is observing with the British war debts, the United States cannot manage an unlimited burden. Bankruptcy is the end of all major accumulations of debt. Inflating dollar amounts might disguise a bankrupting nation, but this is worse as it exaggerates the effects of open bankruptcy by making all people suffer the burden of the huge debt. I do not know where the theoretical line is when our debt becomes a threat to bankruptcy, but Smith suggests this is the ultimate effect of perpetually growing debts.

So, Smith sums up everything. The nation's management should be streamlined with his suggestions and criticisms kept in mind, and the debt paid down before it becomes a problem. Trade should be freed up between all of Britain's colonies and managed territories - Ireland, the Americas and the West Indies. There should be uniform tariffs (customs and duties) expanded to all these areas because many of Britain's wartime efforts that caused it's public debts of the time were to protect these areas. Smith says the uniform tariffs would be the greatest advantage of all, but only if accompanied by total free trade. Minor excises, he notes, can supplement this, although he makes it more of a secondary point to the advantage of uniform tariffs and free trade. Smith says that he thinks Ireland and America should contribute to the British debt, because the British debt was in part caused by defending these territories and contributed to it.

This brings two options. The colonies of Ireland, America and the West Indies should become a union with the state of Great Britain to help settle it's debts and create a more perfect government... or Great Britain should shed itself of the colonies and declare them free. We know that before Smith suggested the American colonies and Britain separate, so Smith's stance here should be decidedly in favor of getting rid of the other colonies, perhaps the first option being more flight of fancy since he knows pragmatically it won't happen. Smith sums up at the end of the book...

"The rules of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been, not an empire, but the project of an empire; not a gold mine, but the project of a gold mine; a project which has cost, which continues to cost, and which, if pursued in the same way it has been hitherto, is likely to cost, immense expence, without being likely to bring any profit; for the effects of monopoly on the colony trade, it has been shewn, are, to the great body of the people, mere loss instead of profit. It is surely now time that our rulers should either realize this golden dream, in which they have been indulging themselves, perhaps, as well as the people; or, that they should awake from it themselves, and endeavor to awake the people. If the project cannot be completed, it ought to be given up. If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expence of defending those provinces in time of war, and of supporting any part of their civil or military establishments in time of peace, and to endeavour to accommodate her views and designs to the real mediocrity of her circumstances." - pg. 1028, closing paragraph

The American Revolution, which was declared in 1776 - the same year this book was published - in many ways vindicated Smith's logic in regard to the perfection of unions. It was better for Britain and the U.S. as Smith stated in this book. Many of Smith's principles were adopted by Founders, and his insights saved by the United States in spite of Britain's major failures in being a empire. This is perhaps one of the reasons the United States is where it is today, being the global leader it is.

Many of the criticisms that Smith had for Britain then can still be passed on to the America of today, which suffers many of the same problems, as these ideas have largely been forgotten by modern policy makers, and if not forgotten, then trivialized. It's in this empowering wisdom that Smith has shown us the real true measure of the wealth of nations. It's not in money or balance, not in war or peace, but in the freedom of the perfect liberties and the ability to provide the best security for these liberties for the people without encroaching on those same liberties with oppression. Even in taxes, when Smith spoke of what taxes were better than others, he ultimately concluded that all taxes had their negative effects - the same of debts, and of regulations. Keynesian economics derided much of this, as did the growth of Socialism in global politics. The basic truth remains that division of labor and free markets provide the best for people - anything else is just another part of the New American Myth we live in everyday.

- Good ol' PA


© 2012 PAOracle.com
Real Time Analytics