WEBVTT NOTE 16. The Celebrated Adam Smith (continued) 1 00:00:00.000 --> 00:00:07.000 6. The Theory of Distribution 2 00:00:07.000 --> 00:00:13.280 Adam Smith's theory of distribution was fully as disastrous as his theory of value. Though 3 00:00:13.280 --> 00:00:19.240 he was aware of the functions performed by the capitalist, his only venture in explaining 4 00:00:19.240 --> 00:00:25.560 the rate of long-run profit was to opine that the greater the amount of stock, the lower 5 00:00:25.560 --> 00:00:27.960 Over the Rate of Profit 6 00:00:27.960 --> 00:00:33.700 He arrived at this highly dubious conclusion from his perfectly valid observation that 7 00:00:33.700 --> 00:00:41.880 capitalists tend to move out of low-profit and into high-profit industries, their competition 8 00:00:41.880 --> 00:00:47.140 tending to equalize the rates of profit throughout the economy. 9 00:00:47.140 --> 00:00:53.840 But more production, lowering selling price and raising costs in a particular industry, 10 00:00:53.840 --> 00:01:01.520 Is scarcely the same causal claim as more capital throughout the economy lowering profit rates. 11 00:01:01.520 --> 00:01:08.360 Indeed, the rate of interest, or long-run rate of profit, is related not to the quantity 12 00:01:08.360 --> 00:01:15.480 of accumulated capital, but to the amount of annual saving, and moreover, falling profit 13 00:01:15.480 --> 00:01:19.920 rates are not caused by increasing saving. 14 00:01:19.920 --> 00:01:26.120 On the contrary, as the Austrians would point out, both are the results of lower rates of 15 00:01:26.120 --> 00:01:29.320 time preference in the society. 16 00:01:29.320 --> 00:01:35.840 It is perfectly possible for a highly capitalized economy to experience rising rates of time 17 00:01:35.840 --> 00:01:41.960 preference, which in turn would bring about higher rates of interest. 18 00:01:41.960 --> 00:01:48.560 Smith saw correctly that increasing capital means an increase in the demand for labor, 19 00:01:48.560 --> 00:01:55.840 and therefore higher wages, so that an advancing society necessarily means a secular increase 20 00:01:55.840 --> 00:01:57.880 in wage rates. 21 00:01:57.880 --> 00:02:04.240 Unfortunately, Smith's mechanistic view of the profit rate as being inversely proportional 22 00:02:04.240 --> 00:02:10.500 to the total amount of capital led him to believe that wages and profits are always 23 00:02:10.500 --> 00:02:17.860 moving inversely to the other, an adumbration of an allegedly inherent class struggle which 24 00:02:17.860 --> 00:02:20.860 which Ricardo would do much to aggravate. 25 00:02:20.860 --> 00:02:29.860 Moreover, if the supply of labor increases to absorb the increase in demand, wage rates will then fall. 26 00:02:29.860 --> 00:02:40.860 At this point, Adam Smith provided the Malthusian hook, for, as we shall see further, the Reverend Malthus was a devoted follower of Adam Smith. 27 00:02:40.860 --> 00:02:45.860 Smith, indeed, was picking up a theme common in the 18th century, 28 00:02:45.860 --> 00:02:51.860 that the population of a species tends to press on the means of its subsistence. 29 00:02:51.860 --> 00:03:00.860 As Smith put it, every species of animals naturally multiplies in proportion to the means of its subsistence. 30 00:03:00.860 --> 00:03:07.860 So that Smith saw the secular trend of the economy as capital increasing, wages rising, 31 00:03:07.860 --> 00:03:13.860 and the rise in wages calling forth an increase in population. 32 00:03:13.860 --> 00:03:20.880 The liberal reward of labor, by enabling them to provide better for their children and consequently 33 00:03:20.880 --> 00:03:27.320 to bring up their number, naturally tends to widen and extend those limits, the means 34 00:03:27.320 --> 00:03:29.360 of subsistence. 35 00:03:29.360 --> 00:03:36.720 If this demand for labor is continually increasing, the reward of labor must necessarily encourage 36 00:03:36.720 --> 00:03:43.100 in such a manner the marriage and multiplication of laborers, as may enable them to supply 37 00:03:43.100 --> 00:03:50.940 Why that Continually Increasing Demand by a Continually Increasing Population 38 00:03:50.940 --> 00:03:58.420 In this way, wages tend to settle at the minimum subsistence level for the existing population. 39 00:03:58.420 --> 00:04:05.140 A fall in wages below subsistence will forcibly reduce the population, and hence the supply 40 00:04:05.140 --> 00:04:09.860 of labor, raising wages to the subsistence rate. 41 00:04:09.860 --> 00:04:15.920 And if wages should rise above subsistence, the excessive multiplication of workers would 42 00:04:15.920 --> 00:04:20.500 soon lower it to this necessary rate. 43 00:04:20.500 --> 00:04:26.260 One of the many problems of this Malthusian approach is that it assumes that human beings 44 00:04:26.260 --> 00:04:33.180 will not be able to act on their own to limit population growth in order to preserve a newly 45 00:04:33.180 --> 00:04:36.560 achieved standard of living. 46 00:04:36.560 --> 00:04:42.520 In addition to Smith's erroneous Malthusian view that long-run wage rates are at the means 47 00:04:42.520 --> 00:04:50.100 of subsistence, he also introduced into economics the unfortunate fallacy that wages, at least 48 00:04:50.100 --> 00:04:56.000 in the shorter run, are determined by the relative bargaining power of employers and 49 00:04:56.000 --> 00:04:57.340 workers. 50 00:04:57.340 --> 00:05:02.800 It was a simple leap from that position to the view that employers have greater bargaining 51 00:05:02.800 --> 00:05:24.960 In his view of rent, Smith characteristically held several unintegrated views running side-by-side. 52 00:05:24.960 --> 00:05:30.560 On the one hand, as we have seen, rent is demanded by landlords who reap where they 53 00:05:30.560 --> 00:05:35.560 Why are they able to collect such a rent? 54 00:05:35.560 --> 00:05:39.560 Because, now that land has become private property, 55 00:05:39.560 --> 00:05:43.560 the laborer must pay for the license to cultivate the land, 56 00:05:43.560 --> 00:05:50.560 and must give to the landlord a portion of what his labor either collects or produces. 57 00:05:50.560 --> 00:05:56.560 Smith concludes that the rent of land, therefore, is naturally a monopoly price, 58 00:05:56.560 --> 00:06:03.800 and Rice, since he regards private property in land in the same category as monopolization. 59 00:06:03.800 --> 00:06:12.800 Surely, socialist and Henry Georgite calls for land nationalization found here their fundamental inspiration. 60 00:06:12.800 --> 00:06:21.800 Smith also sensibly points out that rent will vary according to superior fertility and location of the land. 61 00:06:21.800 --> 00:06:34.800 Furthermore, as we have indicated, he attributes rent to the powers of nature, which supposedly earns an extra return in agriculture as compared to other occupations. 62 00:06:34.800 --> 00:06:49.800 Smith is also inconsistent on whether land rent is included in cost. At various points he includes land rent in cost and therefore as an alleged determinant of long run price. 63 00:06:49.800 --> 00:06:57.700 On the other hand, he also asserts that high or low rents are the effect of high or low product prices, 64 00:06:57.700 --> 00:07:08.600 and that since the supply of land is fixed, the full incidence of taxes upon rent will fall on land, rather than being shifted. 65 00:07:08.600 --> 00:07:17.900 All these inconsistencies can be cleared up if we regard all costs as determined by expected future selling prices, 66 00:07:17.900 --> 00:07:26.400 and individual costs to be the opportunity for GON to contribute to expected productive revenue elsewhere. 67 00:07:26.400 --> 00:07:34.400 More specifically, while costs do not determine price directly, they do limit supply, 68 00:07:34.400 --> 00:07:42.400 and in this sense, every expenditure, whether on rent or elsewhere, is definitely a part of cost. 69 00:07:42.400 --> 00:07:49.040 But, as we have seen, the greatest of the many defects in Smith's theory was his totally 70 00:07:49.040 --> 00:07:56.000 discarding Cartillon's and Turgot's brilliant analysis of the entrepreneur. 71 00:07:56.000 --> 00:08:01.400 It was as if these great eighteenth-century Frenchmen had never written. 72 00:08:01.400 --> 00:08:08.760 Smith's analysis rested solely on the capitalist investing stock, and on his labor of management 73 00:08:08.760 --> 00:08:10.600 and inspection. 74 00:08:10.600 --> 00:08:18.200 The very idea of the entrepreneur as a risk-bearer and forecaster was thrown away, and again 75 00:08:18.200 --> 00:08:23.880 classical economics was launched into another lengthy blind alley. 76 00:08:23.880 --> 00:08:29.920 If of course one persists in fixing one's vision on the never-never land of long-run 77 00:08:29.920 --> 00:08:36.680 equilibrium, where all profits are low and equal and there are no losses, there is no 78 00:08:36.680 --> 00:08:41.560 No point in talking about entrepreneurship at all. 79 00:08:41.560 --> 00:08:48.440 The political implications of this omission were also not lost on 19th century socialists. 80 00:08:48.440 --> 00:08:55.000 For if there is no role for entrepreneurial profits in a market economy, then any existing 81 00:08:55.000 --> 00:09:02.720 profits must be exploitative, far more so than the low uniform rate existing in long-run 82 00:09:02.720 --> 00:09:04.920 equilibrium. 83 00:09:04.920 --> 00:09:10.960 The perceptive Scottish historian of economics, Alexander Gray, wrote of Smith's Theory of 84 00:09:10.960 --> 00:09:17.200 Wages that he presented several theories not wholly consistent with each other, which lie 85 00:09:17.200 --> 00:09:21.920 together in somewhat uneasy juxtaposition. 86 00:09:21.920 --> 00:09:28.160 Gray then slyly added that it is a tribute to the greatness of Smith that all schools 87 00:09:28.160 --> 00:09:33.840 of thought may trace to him their origin and inspiration. 88 00:09:33.840 --> 00:09:45.400 Other words for such inchoate confusion, for what Gray referred to aptly as a vast chaos, come more readily to mind. 89 00:09:45.400 --> 00:09:50.240 7. The Theory of Money 90 00:09:50.240 --> 00:09:57.240 We have seen that David Hume's famous elucidation of the price-specie-flow mechanism in international 91 00:09:57.240 --> 00:10:03.400 All monetary relations, though attractively written, was itself a deterioration from 92 00:10:03.400 --> 00:10:09.320 the pioneering and highly sophisticated analysis of Richard Cantillon. 93 00:10:09.320 --> 00:10:12.040 It was, however, better than nothing. 94 00:10:12.040 --> 00:10:18.380 Yet, as Jacob Weiner put it, one of the mysteries of the history of economic thought is that 95 00:10:18.380 --> 00:10:24.820 Adam Smith, though a close friend of Hume for many years, included none of the Humean 96 00:10:24.820 --> 00:10:31.700 analysis in his Wealth of Nations. Instead, Smith propounded the primitive and erroneous 97 00:10:31.700 --> 00:10:37.900 view that every country will have as much specie as it allegedly needs to circulate 98 00:10:37.900 --> 00:10:45.340 trade, the surplus overflowing channels of circulation to seek that profitable employment 99 00:10:45.340 --> 00:10:52.420 which it cannot find at home. Gone is any reference whatever to the causal nexus between 100 00:10:52.420 --> 00:10:58.100 and the Quantity of Money, Price Levels and Balances of Trade. 101 00:10:58.100 --> 00:11:03.660 The mystery deepens when we realize that the wealth of nations is a grave deterioration 102 00:11:03.660 --> 00:11:09.120 even from Smith's own lectures of over a dozen years earlier. 103 00:11:09.120 --> 00:11:15.380 For in those lectures, unpublished in Smith's own day, we find a clear presentation and 104 00:11:15.380 --> 00:11:18.260 summary of the Humean analysis. 105 00:11:18.260 --> 00:11:48.260 Thus in his lectures, Smith had written that Hume proves that whenever money is accumulated beyond the proportion of commodities in any country, the price of goods will necessarily rise, that this country will be undersold in the foreign market, and consequently the money must depart into other nations, but on the contrary, whenever the quantity of money falls below the proportion of goods, 106 00:11:48.260 --> 00:12:17.260 Even Smith's modern admirers despair of his confused and scattered, as well as hopelessly inadequate, theory of money and theory of international monetary relations. 107 00:12:18.260 --> 00:12:39.760 Professor Petrella tries to explain Smith's later rejection of Hume's species flow price mechanism as a reaction to Hume's giving hostage to the alleged employment benefits of mercantilistic increases in the quantity of money, benefits which Smith was anxious to deny. 108 00:12:39.760 --> 00:12:47.760 Petrella cites in support a sentence critical of Hume following the passage from the lectures just quoted. 109 00:12:47.760 --> 00:12:58.760 Mr. Hume's reasoning is exceedingly ingenious. He seems, however, to have gone a little into the notion that public opulence consists in money. 110 00:12:58.760 --> 00:13:16.760 But here, Petrella attempts to prove too much. For why couldn't Smith simply continue to adopt the specie-flow price mechanism and then repeat or elaborate on his criticisms of Hume's position, demonstrating the latter's inconsistency? 111 00:13:17.760 --> 00:13:33.760 It seems clear in contrast that the mystery of Smith's abandonment of the price-specie-flow mechanism can be solved if we realize that this particular deterioration in his economic analysis was not unique. 112 00:13:33.760 --> 00:13:42.760 Indeed, we have noted a similar fatal deterioration in his value theory from the time of the lectures to the wealth of nations. 113 00:13:42.760 --> 00:14:11.760 It seems plausible that the cause of the decay in each case was the same. Smith's shift of concentration from the real world of market prices to the exclusive vision of long-run natural equilibrium, the shift from the real world of market process to focusing on equilibrium states, made Smith impatient with the process analysis that was the hallmark and the merit of the process. 114 00:14:12.760 --> 00:14:15.760 of the Specie Flow approach. 115 00:14:15.760 --> 00:14:22.760 Instead, Smith treats only a world of pure specie money and assumes that all countries 116 00:14:22.760 --> 00:14:25.760 are always in equilibrium. 117 00:14:25.760 --> 00:14:32.760 Moreover, any departures from world-wide monetary equilibrium are eradicated swiftly, 118 00:14:32.760 --> 00:14:37.760 leaving the world in a virtually perpetual equilibrium state. 119 00:14:37.760 --> 00:14:48.160 Smith's focus on the long run, in fact, led him to apply his general labor cost of production theory of value to the value of money. 120 00:14:48.160 --> 00:14:59.360 The value of money, that is, the value of the metal commodity gold or silver, then becomes the embodiment of the labor cost of producing it. 121 00:14:59.360 --> 00:15:09.860 In that way, Smith attempted to integrate the values of money and other goods by assimilating all of them into a labor cost theory. 122 00:15:09.860 --> 00:15:13.360 Thus Smith wrote in The Wealth of Nations, 123 00:15:13.360 --> 00:15:22.860 Gold and silver, however, like every other commodity, vary in their value, are sometimes cheaper and sometimes dearer. 124 00:15:22.860 --> 00:15:37.860 The quantity of labor which any particular quantity of them can purchase or command, or the quantity of other goods which it will exchange for, depends always upon the fertility or barrenness of the mines. 125 00:15:37.860 --> 00:15:49.860 The discovery of the abundant mines of America reduced in the 16th century the value of gold and silver in Europe to about a third of what it had been before. 126 00:15:49.860 --> 00:15:59.860 As it cost less labor to bring those metals from the mine to the market, so when they were brought thither, they could purchase or command less labor. 127 00:16:01.860 --> 00:16:18.860 Even those few economists who laud Adam Smith as really adopting the humane price-specie flow mechanism concede that he dropped this approach when considering a mixed monetary system, including banknotes or paper money. 128 00:16:18.860 --> 00:16:38.860 Indeed, even though Smith occasionally adhered to the quantity theory of specie money and its effects on prices, he here throws it over altogether, and asserts that convertible banknotes are always equal in value to gold, and hence their quantity will always remain the same. 129 00:16:38.860 --> 00:16:45.260 Any increase of banknotes beyond the total of specie will overflow the 130 00:16:45.260 --> 00:16:50.260 channel of circulation and therefore return to the banks in what was later 131 00:16:50.260 --> 00:16:55.700 called a reflux in exchange for specie which immediately flows out of the 132 00:16:55.700 --> 00:17:01.580 country. Smith therefore explicitly denies that an increase in banknotes 133 00:17:01.580 --> 00:17:07.540 can raise the prices of commodities. But why did Smith abandon the quantity 134 00:17:07.540 --> 00:17:14.100 The Theory completely here in exchange for such nonsense, plausibly because of Smith's 135 00:17:14.100 --> 00:17:21.380 need to integrate all-value theory on the basis of the labor cost of production. 136 00:17:21.380 --> 00:17:27.060 If he ever conceded that an increase in the quantity of paper money could affect values, 137 00:17:27.060 --> 00:17:33.500 even temporarily, then Smith would have had to admit an enormous hole in his labor cost 138 00:17:33.500 --> 00:17:43.500 For the labor cost involved in printing paper money obviously bears no relation whatever to the exchange value of that money. 139 00:17:43.500 --> 00:17:51.500 Therefore paper money, including bank paper, had to be assimilated tightly to the value of specie. 140 00:17:51.500 --> 00:18:02.500 Adam Smith wrote in an 18th century Britain where virtually all his predecessors had denounced the new institution of fractional reserve banking. 141 00:18:02.500 --> 00:18:19.500 Reserve Banking as Inflationary and Illegitimate. His friend, David Hume, 1752, had called for the radical repudiation of this institution on behalf of 100% Specie Reserve Banking. 142 00:18:19.500 --> 00:18:31.500 Other important writers had taken the same position, including Jacob Vanderlint, died 1740, in his Money Answers All Things, 1734, 143 00:18:31.500 --> 00:18:45.500 and Joseph Harris, 1702 to 1764, Master of the Royal Mint, in his An Essay upon Money and Coins, 1757 and 1758. 144 00:18:45.500 --> 00:18:54.500 Harris had stated that banks were convenient so long as they issued no bills without an equivalent in real treasure, 145 00:18:54.500 --> 00:19:11.020 If Smith had continued in his predecessor's footsteps, his commanding authority and prestige 146 00:19:11.020 --> 00:19:17.680 might have been able to bring about a fundamental reform of the fractional reserve banking system. 147 00:19:17.680 --> 00:19:26.080 But unfortunately, Smith, in his need to meld all monetary theory into a long-run labor-cost-of-production 148 00:19:26.080 --> 00:19:33.040 approach, abandoned the quantity theory and the speciflow price mechanism in his discussion 149 00:19:33.040 --> 00:19:35.080 of paper money. 150 00:19:35.080 --> 00:19:41.640 He thus set economic theory once again on an erroneous and fateful road by embracing 151 00:19:41.640 --> 00:19:45.680 the institution of fractional reserve credit. 152 00:19:45.680 --> 00:19:51.740 No longer holding such credit to be inflationary, Smith went on to adumbrate one of the major 153 00:19:51.740 --> 00:19:56.400 defenses of paper money still held to this day. 154 00:19:56.400 --> 00:20:02.000 That gold and silver are mere dead stock, accomplishing nothing. 155 00:20:02.000 --> 00:20:07.960 The banks, by substituting their paper notes for specie, enable the country to convert 156 00:20:07.960 --> 00:20:13.920 a great deal of this dead stock into active and productive stock. 157 00:20:13.920 --> 00:20:23.920 Indeed, so far did Adam Smith rhapsodize about paper money that he likened its accomplishments to providing a sort of highway through the air. 158 00:20:23.920 --> 00:20:41.920 The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. 159 00:20:41.920 --> 00:21:02.920 The judicious operations of banking, by providing a sort of wagon way through the air, enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase considerably the annual produce of its land and labor. 160 00:21:02.920 --> 00:21:09.920 Adam Smith failed to realize that the stock of gold and silver was far from dead. 161 00:21:09.920 --> 00:21:25.920 On the contrary, it performed the vital function of being a money commodity, among other functions providing to every member of society an insurance against paper money inflation, whether launched by government or banks. 162 00:21:25.920 --> 00:21:33.920 The stock of gold, in short, performs a store of value service, which Smith totally overlooks. 163 00:21:33.920 --> 00:21:48.920 Smith's critique of specie as dead stock also stems from his belief that money is not a commodity serving as a medium of exchange, but a claim, a sign, a voucher to purchase. 164 00:21:48.920 --> 00:21:58.920 The French economist Charles Reist is justly highly critical of the dead stock approach and its influence on later generations. 165 00:21:58.920 --> 00:22:06.360 This idea was seized upon with extraordinary alacrity and found high favor. 166 00:22:06.360 --> 00:22:10.680 It dominated the thought of English writers in the 19th century. 167 00:22:10.680 --> 00:22:17.280 The belief that the use of metallic money is a retrograde and costly system to be discouraged 168 00:22:17.280 --> 00:22:24.200 by all possible means is firmly fixed in British thought on currency and banking. 169 00:22:24.200 --> 00:22:31.600 The use of the check and the banknote was, for a long time, regarded only from this point of view. 170 00:22:31.600 --> 00:22:36.840 These two instruments were considered merely as means of economizing money. 171 00:22:36.840 --> 00:22:41.440 The idea was taken as the guide to the country's currency policy, 172 00:22:41.440 --> 00:22:47.520 and the most disastrous conclusions were drawn from it. 173 00:22:47.520 --> 00:22:52.000 8. The Myth of Laissez-Faire 174 00:22:52.000 --> 00:22:58.520 If, then, Adam Smith contributed nothing of value to economic thought, if, in fact, he 175 00:22:58.520 --> 00:23:04.560 introduced numerous fallacies, including the labor theory of value, and thereby caused 176 00:23:04.560 --> 00:23:10.680 a significant deterioration of economic thought from previous French and British economists 177 00:23:10.680 --> 00:23:17.600 of the 18th century, did he make any positive contribution to economics? 178 00:23:17.600 --> 00:23:23.240 A common answer is that the significance of the wealth of nations was political rather 179 00:23:23.240 --> 00:23:29.620 than analytic, that his great achievement was to initiate and take the lead in the advocacy 180 00:23:29.620 --> 00:23:34.620 of free trade, free markets and laissez-faire. 181 00:23:34.620 --> 00:23:40.200 It is true that Smith articulated the political-economic sentiments of his day. 182 00:23:40.200 --> 00:23:47.200 As Joseph Schumpeter wrote, those who extolled Adam Smith's work as an epoch-making, original 183 00:23:47.200 --> 00:23:53.920 Achievement were of course thinking primarily of the policies, he advocated. 184 00:23:53.920 --> 00:23:59.680 Smith's views, Schumpeter added, were not unpopular, they were in fashion. 185 00:23:59.680 --> 00:24:05.480 In addition, Schumpeter shrewdly noted that Smith was very much a judiciously deluded 186 00:24:05.480 --> 00:24:10.840 Rousseauian in his 18th century egalitarianism. 187 00:24:10.840 --> 00:24:16.400 Human beings seemed to him to be much alike by nature, all reacting in the same simple 188 00:24:16.400 --> 00:24:23.040 are all ways to very simple stimuli, differences being due mainly to different training and 189 00:24:23.040 --> 00:24:25.780 different environments. 190 00:24:25.780 --> 00:24:31.500 But while Schumpeter's explanation of Smith's vast popularity, that he was a plotter in 191 00:24:31.500 --> 00:24:37.940 tune with the zeitgeist, holds part of the truth, it still scarcely accounts for the way 192 00:24:37.940 --> 00:24:44.620 in which Smith swept the board, blotting out general knowledge of all previous and contemporary 193 00:24:44.620 --> 00:24:46.700 for the Economists. 194 00:24:46.700 --> 00:24:50.660 This puzzle will be examined further in the next chapter. 195 00:24:50.660 --> 00:24:56.740 For the mystery of Smith's total triumph deepens when we realize that he scarcely originated 196 00:24:56.740 --> 00:24:58.840 laissez-faire thought. 197 00:24:58.840 --> 00:25:04.580 As we have seen, he was merely in an eighteenth century tradition, flourishing in Scotland 198 00:25:04.580 --> 00:25:07.380 and especially in France. 199 00:25:07.380 --> 00:25:14.380 Why then were these preceding economists analytically far superior to Smith, and also in the laissez-faire 200 00:25:14.620 --> 00:25:23.820 Smith's greatest achievement has generally been supposed to be the enunciation of the 201 00:25:23.820 --> 00:25:31.180 way in which the free market guides its participants to pursue the good of the consumers by following 202 00:25:31.180 --> 00:25:33.820 their own self-interest. 203 00:25:33.820 --> 00:25:39.800 As Smith wrote in perhaps his most famous passage, a man will be more likely to prevail 204 00:25:39.800 --> 00:25:45.480 Well if he can interest their self-love in his favor, and show that it is for their own 205 00:25:45.480 --> 00:25:49.960 advantage to do for him what he requires of them. 206 00:25:49.960 --> 00:25:55.560 It is not from the benevolence of the butcher, the brewer or the baker that we expect our 207 00:25:55.560 --> 00:25:59.520 dinner, but from their regard to their own interest. 208 00:25:59.520 --> 00:26:05.440 We address ourselves not to their humanity, but to their self-love, and never talk to 209 00:26:05.440 --> 00:26:12.560 to them of our own necessities but of their advantages, and in an equally famous passage 210 00:26:12.560 --> 00:26:19.300 bringing out the general principles of this point, as every individual therefore endeavors 211 00:26:19.300 --> 00:26:26.040 as much as he can both to employ his capital in the support of industry and so to direct 212 00:26:26.040 --> 00:26:32.560 that industry that its produce may be of the greatest value, every individual necessarily 213 00:26:32.560 --> 00:26:38.840 Murray labors to render the annual revenue of the society as great as he can. 214 00:26:38.840 --> 00:26:45.040 He generally, indeed, neither intends to promote the public interest, nor knows how much he 215 00:26:45.040 --> 00:26:47.000 is promoting it. 216 00:26:47.000 --> 00:26:53.260 By directing that industry in such a manner as its produce may be of the greatest value, 217 00:26:53.260 --> 00:26:56.080 he intends only his own gain. 218 00:26:56.080 --> 00:27:03.080 And he is, in this, as in many other cases, led by an invisible hand to promote an end 219 00:27:03.080 --> 00:27:06.020 which was no part of his intention. 220 00:27:06.020 --> 00:27:13.580 Smith goes on to caution wisely against alleged aims to promote the public good directly. 221 00:27:13.580 --> 00:27:18.280 Nor is it always the worse for the society that it was no part of it. 222 00:27:18.280 --> 00:27:24.780 By pursuing his own interest, he frequently promotes that of the society more effectually 223 00:27:24.780 --> 00:27:52.780 Hostile critics of laissez-faire have latched on to Smith's terminology of the invisible hand to indict him for ostensibly beginning his analysis with a mystical, and therefore flagrantly unscientific, a priori assumption that providence manipulates people for everyone's good. 224 00:27:52.780 --> 00:27:57.780 Manipulates People for Everyone's Good by an Invisible Hand 225 00:28:22.780 --> 00:28:31.780 are alive to the pernicious consequences of government's creation of monopolies and its conferring privileges on special interest groups. 226 00:28:31.780 --> 00:28:41.780 Smith, a religious man, was simply expressing his quite justified wonderment at the harmonizing influence of the free market, 227 00:28:41.780 --> 00:28:51.780 and his buy-an-invisible hand was a metaphor which contained an implicit as-if before his use of the phrase. 228 00:28:51.780 --> 00:29:00.780 Despite the undoubted importance of these passages, however, Adam Smith's championing of laissez-faire was scarcely consistent. 229 00:29:00.780 --> 00:29:12.780 In the first place, Smith retreated from the absolutist natural law position that he had set forth in his ethical work, The Theory of Moral Sentiments, 1757. 230 00:29:12.780 --> 00:29:20.380 In this book, free interaction of individuals creates a harmonious natural order, which 231 00:29:20.380 --> 00:29:24.880 government interference can only cripple and distort. 232 00:29:24.880 --> 00:29:31.600 In wealth of nations, on the other hand, laissez-faire becomes only a qualified presumption rather 233 00:29:31.600 --> 00:29:37.940 than a hard and fast rule, and the natural order becomes imperfect and to be followed 234 00:29:37.940 --> 00:29:40.460 only in most cases. 235 00:29:40.460 --> 00:29:50.460 Indeed, it is this deterioration of the case for laissez-faire that German scholars were to label Das Adam Smith Problem. 236 00:29:50.460 --> 00:29:56.460 Indeed, the list of exceptions Smith makes to laissez-faire is surprisingly long. 237 00:29:56.460 --> 00:30:04.460 His devotion to the militarism of the nation-state, for example, induced him to take the lead in the pernicious modern view 238 00:30:04.460 --> 00:30:12.460 and the view of excusing any government intervention that might plausibly be labeled for the national defense. 239 00:30:12.460 --> 00:30:22.460 On that basis, Smith supported the Navigation Acts, that bulwark of British mercantilism and systemic subsidy for British shipping. 240 00:30:22.460 --> 00:30:30.460 One of Smith's reservations about the division of labor, indeed, is that it leads to a decay of the martial spirit, 241 00:30:30.460 --> 00:30:40.460 And Smith goes on at length about the decay of the martial spirit in modern times and about the great importance of restoring and sustaining it. 242 00:30:40.460 --> 00:30:50.460 The security of every society must always depend, more or less, upon the martial spirit of the great body of the people. 243 00:30:50.460 --> 00:30:59.460 It was an anxiety to see government foster such a spirit that led Smith into another important deviation from laissez-faire principle. 244 00:30:59.460 --> 00:31:06.900 Principle, His Call for Government-Run Education, It is also important, opined Smith, to have 245 00:31:06.900 --> 00:31:13.720 governmental education in order to inculcate obedience to it among the populace, scarcely 246 00:31:13.720 --> 00:31:17.780 a libertarian or laissez-faire doctrine. 247 00:31:17.780 --> 00:31:24.060 Wrote Smith, An instructed and intelligent people, besides, are always more decent and 248 00:31:24.060 --> 00:31:27.300 orderly than an ignorant and stupid one. 249 00:31:27.300 --> 00:31:33.280 They feel themselves, each individually, more respectable and more likely to obtain the 250 00:31:33.280 --> 00:31:39.800 respect of their lawful superiors, and they are therefore more disposed to respect those 251 00:31:39.800 --> 00:31:41.500 superiors. 252 00:31:41.500 --> 00:31:47.980 They are less apt to be misled into any wanton or unnecessary opposition to the measures 253 00:31:47.980 --> 00:31:49.940 of government. 254 00:31:49.940 --> 00:31:55.480 In addition to navigation acts and public education, Adam Smith advocated the following 255 00:31:55.480 --> 00:32:21.480 Following Forms of Government Intervention in the Economy, Regulation of Bank Paper, including the outlawing of small denomination notes after allowing fractional reserve banking, Public Works, including highways, bridges and harbors, on the rationale that private enterprise would not have the incentive to maintain them properly, 256 00:32:21.480 --> 00:32:32.320 Government Coinage, The Post Office, on the simple grounds, which will draw a bitter laugh from modern readers, that it is profitable, 257 00:32:32.320 --> 00:32:44.280 compulsory building of firewalls, compulsory registration of mortgages, some restrictions on the export of corn, that is, wheat, 258 00:32:44.280 --> 00:32:53.120 The outlawing of the practice of paying employees in kind, forcing all payment to be in money. 259 00:32:53.120 --> 00:32:59.280 There is also a particularly lengthy list of taxes advocated by Adam Smith, each of 260 00:32:59.280 --> 00:33:02.500 which interferes in the free market. 261 00:33:02.500 --> 00:33:08.700 For one thing, Smith paved the way for Henry Georgism and the single tax by urging higher 262 00:33:08.700 --> 00:33:36.080 Adam Smith's Calvinist Abhorrence of Luxury is also seen in his proposals to levy heavy 263 00:33:36.080 --> 00:33:39.120 He called for heavy taxes on luxurious consumption. 264 00:33:39.120 --> 00:33:46.120 Thus he called for heavier highway tolls on luxury carriages than on freight wagons, specifically 265 00:33:46.120 --> 00:33:50.560 to tax the indolence and vanity of the rich. 266 00:33:50.560 --> 00:33:57.920 His puritanical hostility to liquor also emerges in his call for a heavy tax on distilleries. 267 00:33:57.920 --> 00:34:03.620 In order to crack down on hard liquor and induce people to drink instead, the wholesome 268 00:34:03.620 --> 00:34:29.760 Adam Smith advocated the Soak the Rich Policy of Progressive Income Taxation. 269 00:34:29.760 --> 00:34:37.240 Smith's most flagrant violation of laissez-faire was his strong advocacy of rigid usury laws, 270 00:34:37.240 --> 00:34:43.840 a sharp contrast to the opposition to such laws by Catillon and Turgot. 271 00:34:43.840 --> 00:34:49.440 Smith did not, indeed, wish to adhere to the medieval prohibition of all credit. 272 00:34:49.440 --> 00:34:56.040 Instead, he urged an interest rate ceiling of 5 percent, slightly above the rate charged 273 00:34:56.040 --> 00:35:02.420 to Prime Borrowers, a price which is commonly paid for the use of money by those who can 274 00:35:02.420 --> 00:35:05.760 give the most undoubted security. 275 00:35:05.760 --> 00:35:11.540 His reasoning followed his predilection, as we have already noted, for hostility to free 276 00:35:11.540 --> 00:35:16.880 market time preferences between consumption and saving. 277 00:35:16.880 --> 00:35:23.340 Driven by Calvinist hostility to luxurious consumption, Smith tried to skew the economy 278 00:35:23.340 --> 00:35:30.500 Money in favor of more productive labor in capital investment and less in consumption. 279 00:35:30.500 --> 00:35:36.580 By forcing interest rates below the free market level, Smith hoped to channel credit into 280 00:35:36.580 --> 00:35:42.980 the sober hands of prime borrowers and away from credit into the hands of speculators 281 00:35:42.980 --> 00:35:46.180 and of prodigal consumers. 282 00:35:46.180 --> 00:35:53.180 As Professor West admits, Adam Smith condemned the demand for loans by prodigals and projectors 283 00:35:53.180 --> 00:36:01.180 in which the prodigal dissipates in the maintenance of the idol what was destined for the support of the industrious. 284 00:36:01.180 --> 00:36:10.180 In that way, the ceiling on interest rates, as West notes, would reallocate credit into the most productive hands. 285 00:36:10.180 --> 00:36:17.180 Yet West, a free market adherent who is generally an uncritical admirer of Smith, 286 00:36:17.180 --> 00:36:29.180 Then maintains that Smith was curiously inconsistent in not realizing in this one case that price controls would create a greater shortage of credit. 287 00:36:29.180 --> 00:36:43.180 Here West echoes the brilliant essay, The Defense of Usury, by the Smithian Jeremy Bentham, in accusing the master of inconsistency in his usual advocacy of the free market. 288 00:36:43.180 --> 00:36:51.180 But as Professor Garrison indicates in his comment on West, Smith knew only too well what he was doing. 289 00:36:51.180 --> 00:36:57.180 In urging a reallocation of credit by the government into the most productive hands, 290 00:36:57.180 --> 00:37:05.180 Adam Smith was precisely trying to create a shortage of credit for consumers and speculators, 291 00:37:05.180 --> 00:37:12.180 and thereby to channel credit into the hands of sober, low-risk businessmen. 292 00:37:12.180 --> 00:37:20.180 As Garrison points out, Smith was not interested in reducing the cost of borrowing with his credit controls. 293 00:37:20.180 --> 00:37:26.180 He was trying to reduce the amount of funds borrowed for certain categories of loans. 294 00:37:26.180 --> 00:37:30.180 And his anti-usury scheme was well suited for this. 295 00:37:30.180 --> 00:37:39.180 Smith notes that money is lent to the government at 3% and to sound businessmen at 4 and 4 and a half. 296 00:37:39.180 --> 00:37:50.180 Only prodigals and projectors, people who are most likely to waste and destroy capital, would be willing to borrow at 8 or 10 percent. 297 00:37:50.180 --> 00:37:55.180 Smith, therefore, recommended an interest ceiling at 5 percent. 298 00:37:55.180 --> 00:38:07.180 This policy was not aimed at allowing the prodigals and projectors to obtain funds more cheaply, but at preventing them from obtaining any funds at all. 299 00:38:07.180 --> 00:38:14.180 These funds would be diverted then into the hands of those who are more future-oriented. 300 00:38:14.180 --> 00:38:24.180 In short, Smith knew full well that a low-interest ceiling would not benefit marginal borrowers by providing them with cheap credit. 301 00:38:24.180 --> 00:38:33.180 He knew that usury laws would dry up credit altogether for marginal borrowers, and he sought precisely that result. 302 00:38:33.180 --> 00:39:03.100 For Smith virtually embraced the idea of zero-time preference as the ideal, the non-time preference of his mythical impartial spectator, and, concludes Garrison, it is not difficult to see how Smith's standard of zero-time preference, coupled with his awareness of sharply positive time preferences, could lead him to make the very policy recommendations that West found to be surprising. 303 00:39:03.100 --> 00:39:10.100 He sought to reallocate resources away from the present and toward the future. 304 00:39:10.100 --> 00:39:19.100 Perhaps most important of all, how do we square Smith's alleged role as champion of free trade and laissez-faire, 305 00:39:19.100 --> 00:39:25.100 with his spending the last 12 years of his life as a commissioner of Scottish customs, 306 00:39:25.100 --> 00:39:33.100 Cracking Down on Smugglers, Violating Britain's Extensive Mercantilist Laws and Evading Import Taxes 307 00:39:33.100 --> 00:39:37.100 Did he treat the job as a sinecure? No. 308 00:39:37.100 --> 00:39:46.100 Recent studies show that his role as a top enforcer of mercantilist laws and tariffs was active and hard working. 309 00:39:46.100 --> 00:39:49.100 Was he driven by penury? Hardly. 310 00:39:49.100 --> 00:39:56.600 Since, with his great reputation, he probably could have commanded an equivalent sum in a top academic post. 311 00:39:56.600 --> 00:40:05.100 Did he suffer from qualms of conscience? Apparently not, since he not only approached his job with enthusiasm, 312 00:40:05.100 --> 00:40:14.100 but was also particularly vigilant and hard-nosed in trying to enforce the onerous restrictions and tariffs to the hilt. 313 00:40:14.100 --> 00:40:32.100 Edwin West, an inveterate admirer of Smith as an alleged devotee of laissez-faire, speculates that he entered the high customs bureaucracy as a practical free trader trying to remove or lighten the customs burden on the Scottish economy. 314 00:40:32.100 --> 00:40:39.620 But, as Anderson and others reply, if Smith had been deeply concerned with reducing the 315 00:40:39.620 --> 00:40:45.860 cost to the economy resulting from customs, the most effective strategy at the level of 316 00:40:45.860 --> 00:40:52.700 his responsibilities would have been to reduce the efficiency of the enforcement apparatus. 317 00:40:52.700 --> 00:40:55.420 But Smith did not do this. 318 00:40:55.420 --> 00:41:01.420 On the contrary, Smith showed no appreciation whatever of the social and economic value 319 00:41:01.420 --> 00:41:06.860 of the Underground Economy, or the Great British tradition of smuggling. 320 00:41:06.860 --> 00:41:13.820 Instead, he tried his best to make enforcement of the mercantilist laws and burdens as efficient 321 00:41:13.820 --> 00:41:15.660 as possible. 322 00:41:15.660 --> 00:41:21.540 Neither did he use his high post to promote reforms in the direction of free trade. 323 00:41:21.540 --> 00:41:28.220 On the contrary, his major reform proposal as commissioner was for compulsory automatic 324 00:41:28.220 --> 00:41:34.500 warehousing of all imports, which would have made inspection and enforcement far easier 325 00:41:34.500 --> 00:41:40.480 for the customs officials, at the expense of the smugglers, international trade, and 326 00:41:40.480 --> 00:41:42.840 the nation's economy. 327 00:41:42.840 --> 00:41:49.400 As Anderson and others note, Smith was proposing a reform that was likely to increase the costs 328 00:41:49.400 --> 00:41:53.200 to the economy from customs duties. 329 00:41:53.200 --> 00:41:59.540 And finally, Smith's correspondence as Commissioner shows no particular desire to cut tariffs 330 00:41:59.540 --> 00:42:01.540 or restrictions. 331 00:42:01.540 --> 00:42:08.440 In contrast, his dominant emotion seems to have been pride at cracking down on smugglers, 332 00:42:08.440 --> 00:42:11.780 and thereby increasing government revenue. 333 00:42:11.780 --> 00:42:18.760 In December 1785, he writes to a fellow customs official that, it may perhaps give the gentleman 334 00:42:18.760 --> 00:42:29.760 It is my own pleasure to be informed that the net revenue arising from the customs in Scotland is at least four times greater than it was seven or eight years ago. 335 00:42:29.760 --> 00:42:41.760 It has been increasing rapidly these four or five years past, and the revenue of this year has overleaped by at least one half the revenue of the greatest former year. 336 00:42:41.760 --> 00:42:46.760 I flatter myself it is likely to increase still further. 337 00:42:46.760 --> 00:42:52.760 Well, happy day! This, from an alleged champion of laissez-faire. 338 00:42:52.760 --> 00:42:59.960 9. On Taxation 339 00:42:59.960 --> 00:43:05.240 Over the centuries, economists have contributed little of interest or value on the subject 340 00:43:05.240 --> 00:43:11.480 of taxation. In addition to describing forms of taxation, they have generally approached 341 00:43:11.480 --> 00:43:18.040 the subject from the point of view of the state, as a kindly or not-so-kindly despot, 342 00:43:18.040 --> 00:43:24.320 seeking to maximize its revenue while doing minimum harm to the economy. 343 00:43:24.320 --> 00:43:29.400 There are variations among the different schools, but the general thrust is the same. 344 00:43:29.400 --> 00:43:36.040 Thus, the Cameralists were frankly interested solely in maximizing state revenue, as were 345 00:43:36.040 --> 00:43:38.320 the French absolutists. 346 00:43:38.320 --> 00:43:46.160 The more liberal economists admonish the government to keep tax rates lower than had been customary. 347 00:43:46.160 --> 00:43:52.560 The more liberal economists had tried to strictly demarcate functions which government should 348 00:43:52.560 --> 00:43:55.120 and should not perform. 349 00:43:55.120 --> 00:44:00.880 By ruling out various kinds of government intervention, the thrust, other things being 350 00:44:00.880 --> 00:44:06.400 equal, is to reduce total government taxation and spending. 351 00:44:06.400 --> 00:44:10.440 But they have offered us very few guidelines beyond that. 352 00:44:10.440 --> 00:44:16.580 If for example, as in the case of Smith, the government is supposed to supply public works, 353 00:44:16.580 --> 00:44:21.060 how many should it provide and how much should be spent? 354 00:44:21.060 --> 00:44:27.700 There have been almost no preferred criteria then for total spending or for overall levels 355 00:44:27.700 --> 00:44:29.980 of taxation. 356 00:44:29.980 --> 00:44:34.760 There has been more discussion of the distribution of taxation. 357 00:44:34.760 --> 00:44:41.720 That is, given from some arbitrary external dictate that the total level of taxation should 358 00:44:41.720 --> 00:44:50.280 be a certain amount, T, there has been considerable discussion of how T should be distributed. 359 00:44:50.280 --> 00:44:57.680 In short, the two main problems of taxation are how much should be levied and who should 360 00:44:57.680 --> 00:45:04.240 pay, and there has been considerably more thought devoted to the latter question. 361 00:45:04.240 --> 00:45:07.040 But none of this has been very satisfactory. 362 00:45:07.040 --> 00:45:13.760 Again, the basic point of view seems to be that of a highwayman or slave master interested 363 00:45:13.760 --> 00:45:19.360 in extracting the maximum from his charges while keeping their complaints as minimal 364 00:45:19.360 --> 00:45:20.960 as possible. 365 00:45:20.960 --> 00:45:27.400 In the discussion in 18th century France, there were two favorite tax proposals. 366 00:45:27.400 --> 00:45:33.360 Proportional income or property taxation, or as in the case of Marshall Vauban and later 367 00:45:33.360 --> 00:45:40.680 Under the Physiocrats, a single tax on land, revenue to a fixed and visible source of income 368 00:45:40.680 --> 00:45:47.120 that seems fixed, unchanging and therefore easy for the state to get at. 369 00:45:47.120 --> 00:45:52.560 Adam Smith's discussion of taxation in the wealth of nations became, like the rest of 370 00:45:52.560 --> 00:45:59.600 his work, a classic, setting the central focus for economic thought from that point on. 371 00:45:59.600 --> 00:46:05.280 Like the rest of the work, it was a confused mixture of the banal and the fallacious. 372 00:46:05.280 --> 00:46:12.640 Thus, Smith set forth four canons of evident justice and utility in taxation, which were 373 00:46:12.640 --> 00:46:15.640 to become famous from then on. 374 00:46:15.640 --> 00:46:21.560 Of the four, three are banal, that the tax payment be made as convenient as possible 375 00:46:21.560 --> 00:46:27.120 for the payer, that the cost of collection be kept to a minimum since the State does 376 00:46:27.120 --> 00:46:32.880 does not even benefit from these levies on the taxpayer, and that the tax be certain 377 00:46:32.880 --> 00:46:35.580 rather than arbitrary. 378 00:46:35.580 --> 00:46:42.640 The substantive canon was Smith's first in the list, that tax be proportional to incomes. 379 00:46:42.640 --> 00:46:48.800 Thus, the subjects of every state ought to contribute toward the support of the government 380 00:46:48.800 --> 00:46:55.660 as nearly as possible in proportion to their respective abilities, that is, in proportion 381 00:46:55.660 --> 00:47:01.720 and to the revenue which they respectively enjoy under the protection of the state. 382 00:47:01.720 --> 00:47:06.920 The expense of government to the individuals of a great nation is like the expense of a 383 00:47:06.920 --> 00:47:14.800 great estate, whoivided in proportion to respective interests to the estate. 384 00:47:14.800 --> 00:47:21.900 In the first place, this passage is hopelessly confused in presenting, as if they were identical, 385 00:47:21.900 --> 00:47:29.700 Two very different criteria for justice or propriety in taxation, the ability to pay 386 00:47:29.700 --> 00:47:33.020 and the benefit principles. 387 00:47:33.020 --> 00:47:39.340 Smith maintains that people's ability to pay taxes is proportionate to income and that 388 00:47:39.340 --> 00:47:44.700 benefits derived from the state are proportional in the same way. 389 00:47:44.700 --> 00:47:50.260 Yet he offers no justification for either of these dubious propositions. 390 00:47:50.260 --> 00:47:57.820 On ability, it is by no means clear that people's ability to pay, however that be defined, is 391 00:47:57.820 --> 00:48:00.300 proportionate to income. 392 00:48:00.300 --> 00:48:06.900 What for example of the influence of a person's relative wealth as contrasted to income, his 393 00:48:06.900 --> 00:48:10.620 medical or other expenses, etc. 394 00:48:10.620 --> 00:48:17.660 And one thing is certain, Adam Smith presented no arguments for this bald assertion. 395 00:48:17.660 --> 00:48:23.660 The idea that one's benefit derived from the state is proportional to one's income is 396 00:48:23.660 --> 00:48:25.460 even shakier. 397 00:48:25.460 --> 00:48:31.540 How precisely do the wealthy, by virtue of that wealth, benefit proportionately from 398 00:48:31.540 --> 00:48:34.740 the state as compared to the poor? 399 00:48:34.740 --> 00:48:40.260 That would only be true if the government were responsible for the wealth by means of 400 00:48:40.260 --> 00:48:45.680 a subsidy, monopoly grant, or some form of special privilege. 401 00:48:45.680 --> 00:48:52.280 If not from special privilege, then how do the rich benefit proportionately to their income? 402 00:48:52.280 --> 00:48:57.260 Surely not from redistributive measures, by which the state takes money from the wealthy 403 00:48:57.260 --> 00:49:00.840 and gives it to bureaucrats or the poor. 404 00:49:00.840 --> 00:49:08.360 In that case, it is the latter group who benefit, and the rich who suffer from this redistribution. 405 00:49:08.360 --> 00:49:12.400 So who then should pay for such benefits? 406 00:49:12.400 --> 00:49:18.960 by the Bureaucrats and the Poor and Benefits from Police Protection or the Public Schools 407 00:49:18.960 --> 00:49:24.560 but surely the wealthy could far more afford to pay for private provision of these services 408 00:49:24.560 --> 00:49:30.920 and therefore the rich benefit less than the middle class or certainly than the poor from 409 00:49:30.920 --> 00:49:33.400 such expenditures. 410 00:49:33.400 --> 00:49:39.120 Neither would it save the theory to say that since A, for example, makes five times as 411 00:49:39.120 --> 00:49:41.120 The Theory of Money and Credit 412 00:50:09.120 --> 00:50:15.640 The reverse argument would be far more plausible, that the differential between A's and B's 413 00:50:15.640 --> 00:50:23.740 incomes is due to A's superior productivity, and that society, if indeed it can be held 414 00:50:23.740 --> 00:50:30.200 to be responsible for anything specific at all, can be held responsible for their equal 415 00:50:30.200 --> 00:50:34.280 core incomes below that differential. 416 00:50:34.280 --> 00:50:40.380 The implication of that point would be that both persons, and therefore all persons, should 417 00:50:40.380 --> 00:50:46.800 pay an equal tax, that is, a tax equal in absolute numbers. 418 00:50:46.800 --> 00:50:54.360 Finally, whatever society's claim to part of people's incomes may be, society, the 419 00:50:54.360 --> 00:51:01.640 division of labor, the body of knowledge and culture, etc., is in no sense the state. 420 00:51:01.640 --> 00:51:07.480 The State contributes no division of labor to the production process and does not transmit 421 00:51:07.480 --> 00:51:10.480 knowledge or carry civilization forward. 422 00:51:10.480 --> 00:51:18.400 Therefore, whatever each of us may owe to society, the State can hardly claim, any more 423 00:51:18.400 --> 00:51:24.800 more than any other group in society to be surrogate for all social relations in the country.