Money and Taxes

The following conversation between readers on line of a new college textbook "The Economic Conversation" and Deidre McCloskey (an author, along with Klamer or Ziliak, of the new book,) concerns Chapter 3 and its conclusion and summary paragraphs.

It begins with Benjamin Mitra-Kahn questioning the results we see in our world of markets— when such markets are free of intervention by governments with national and humanitarian objectives in mind.

Mitra-Kahn would like better results — in terms of human happiness — than are represented by the status quo to date.

In item 11 of the conversation I return to Mitra-Kahn's critique.

Benjamin Mitra-Kahn 20-May-07 at 10:45 am

The next chapter will open with the conclusion that Adam Smith’s notion of the market has been laid to rest with the discussion of the ‘invisible hand’, but whose hand is that? Adam Smith used the term ‘invisible hand’ three times (in total!), once in each of his books, and the reference was not necessarily to the functioning of markets.

Rather he spoke of the way that a deity would maintain the total happiness in the world, and maintain society in its current state… It was in many ways a defense of the status quo class system, where those at the bottom who were unhappy or poor should not complain or better their lot, but rather appreciate that the ‘great author’ had given them these trials and tribulations, to be enjoyed in the afterlife. Yes, markets have their own ways of functioning, and are probably better at moving goods and services (and innovation) along faster than other systems to date - but towards what ends?

Efficiency is an odd final destination, particularly when said efficiency is the very specific ‘Pareto’ efficiency. Arguing that markets work well because of this, or by extension (as is inevitable) that a society in free trade is at the optimum ‘happiness’ place and should not be re-arranged no matter the distributive nature of said society is indeed very Smithian, but is it really sound economics?

Deirdre McCloskey 20-May-07 at 7:17 PM
Dear Mr. Mitra-Kahn:

You’re right that Smith put little weight on the phrase “the invisible hand.” It appeared once only in each of his two published books, and not in the same sense in each (I attack in The Bourgeois Virtues [2006], pp. 456-460] the trickle-down sense he used it in the Theory of Moral Sentiments [1756, 1790]).

But I think you are still letting the gross overemphasis on the phrase in later reports on Smith influence your view of what he said. Smith was at most a deist, and did not admire the orthodox Christian doctrine you describe (”the ‘great author’ had given them these trials and tribulations, to be enjoyed in the afterlife”). Smith is in fact highly egalitarian (for this see Samuel Fleischacker’s brilliant work on Smith) and this-worldian. He can be claimed for the left (and Fleischacker is not the only person to do so: see the late Robert Heilbroner’s writings on Smith).

So it is not—I repeat, not—”Smithian” to run through the Pareto optimality conditions and call it quits, as modern and especially Samuelsonian economists do (Pareto himself, by the way, would find it obnoxious, too).

Our book is more Smithian than Samuelsonian.

And realize: in this Chapter 3 we are giving the Samuelsonian view its due. Later we modify it—though McCloskey wants to modify it much less than Klamer or Ziliak do!

Sincerely,

Deirdre McCloskey
John Gelles 21-May-07 at 4:15 PM
In this chapter’s concluding summary, item 3, we read:

“Every market has a demand side and a supply side. A market requires a means of payment - usually money - and the exchange of commodities at a particular price.”

Focusing on the requirement for a means of payment, i.e., MONEY, we go to the heart of the matter of reform aimed to bring political democracy closer to “economic democracy”.

FDR on January 11, 1944, defined economic democracy–everyone has a good job at a fair wage or a business of their own that makes a decent living. FDR demands this to avoid the economic swamps that breed political dictatorship and the war that will surely come where dictatorships clash with each other or with democracies.

FDR did not specify where the MONEY demand in free markets (or in a mixed economy) would be found to keep them working in the interest freedom (from war, crime and fear and want) 24 hours a day, seven days a week.

In practice, we insist on finding MONEY for (1) private income — from employment and ownership of capital assets and for (2)government income — from TAXES on sales, income and trade, from lenders, and from miscellaneous other sources in lesser amounts.

I have emphasized MONEY and TAXES because I believe they are at the the heart of the heart of matter.

If taxes are required only to prevent hyperinflation, an opening is found for government to SPEND money it does not need to match by taxation, borrowing or any other source.

Such SPENDING can be a special form of government investment of unlimited MONEY–until concern for hyperinflation stops the SPENDING and may even call for taxes to dry up excessive demand for essentials in short supply. (Other tools, like rationing and subsidies will have been used to prevent hyperinflation by increased supply and inflation protected savings to discourage consumer demand).

Today’s money fails to support producers and consumers who would elect to pursue the public interest if they could.

Nature arranges scarcity. MONEY motivates work which overcomes scarcity. Money itself must never be to scarce for it to maximize the public interest.

MONEY can be an IOU. But it can also be a gold coin. It can also be MOTIVATIONAL MONEY that government can spend into circulation for as long as people want more than they have and will work to earn it.
Deirdre McCloskey 21-May-07 at 5:44 PM
Dear Mr. Gelles:

I think perhaps there is a problem with the accounting here. Private income does not come from taxes: rather the reverse. Hyperinflation is not caused by taxing and spending imbalances but by (often associated) printing of currency.

In any event there’s nothing very mysterious about money–or MONEY. Means of payment, nothing more fancy.

Regards,

Deirdre McCloskey
John Gelles 22-May-07 at 2:11 am
Dear Ms. McCloskey,

I tried to say government income came from taxes. (Private income came from work and ownership of capital assets.)

The great mystery concerns government’s means of payment not private player’s means of payment.

The mystery is why government does not spend money until all its needs are met — or until the threat of hyperinflation suggests that government keep its spending within bounds set by the supply of things that money must buy.

This would motivate government to keep output higher and higher so that it could spend enough to create economic democracy and defend the same from all enemies, including those who prefer autocracy or worse.
John Gelles 22-May-07 at 2:44 am
The Achilles heel of the “Invisible Hand” is “means of payment”.

Real means of payment in a barter economy is “production”.

When Adam Smith generalized the free market he forgot that either gold or debt were substituted for production. Neither gold nor debt reflects production.

A modern version of any successful economics, beyond the type that suffers from the contradictions in our current systems, requires, something like a cash subsidy or government expenditure to make sure that there will always be adequate demand to create the business to pay for full employment.

Less than full employment is traditionally justified by the common sense knowledge that hard work and the motivation to do it are behind the good life we want for everyone.

The common sense is correct. But there are better ways to motivate work and high output than fear of unemployment.

One of the best ways is with money and the idea that we can, as individuals, never have to much luck or too much money.

(Before you reject this truth, consider the mizer and all the gold he hoards. Individuals who save and do not spend, who accumulate and re-invest is the productive system all around them, can never have too much money.

That is why unless the rich are causing hyperinflation by their spending or business practices, the mere fact that they love money is no reason to tax them. The more they love and save money the the less the poor have to be taxed at all. Government can spend more and more money into circulation until it represents a counterweight to the work and production of a great and perfectly green economy — which can also never be too much. (Perfectly green means we are NOT producing toxic waste — we are producing cures for cancer and misunderstandings.)

Money taken out of circulation by savings, taxes or investment that raises supply far more than demand, is the money that will never fit the phrase, "too much money chasing too few things for sale".)

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