Adam Smith's Analysis of the Good (Sober People) and the Bad (Projectors, Prodigals and Imprudent Risk Takers): The Proper Role of the Central Bank in Generating the Wealth of Nations Using the Visible Hand to Empower the Sober People by Using Targeted Bank Policy

Abstract

Adam Smith, building on the work of Plato (Socrates) and Aristotle, who had analyzed the political, economic, and social conflict that engulfed Athens in the Fifth century B. C., identified two competing economic groups. These two were the (Middle Class) Sober people (merchants, small businesses, farmers) and the (Upper Class) Prodigals, Imprudent risk takers, and Projectors (financial speculators and manipulators, rentiers). The overall well being of the state over time required that the Sober people had to be able to maintain political and economic dominance over the Prodigals, Imprudent risk takers, and Projectors. Smith recognized that the Sober people used money mainly as a medium of exchange to engage in transactions that involved the production of consumer and producer goods over time. The purchase of producer goods was aimed at providing future consumer goods. Aristotle discussed this function and use of money as C-M-C’. Smith also recognized that the Prodigals, Imprudent risk takers, and Projectors did not generally use money for the production and consumption of present and future consumer goods. The Prodigals, Imprudent risk takers, and Projectors used money mainly for speculative purposes only. Aristotle had analyzed the misuse of money in terms of his discussions of M-C-M’ and M-M’. Aristotle recognized that society would end up with severe political, economic, and social problems, as occurred in Athens, if the Prodigals, Imprudent risk takers, and Projectors were to be able to dominate. The result would be a large decrease middle class and a large increase in the lower class. Aristotle did not know how to deal with this problem other than to condemn the uses of money that led to M-C-M’ and M-M’ results on ethical grounds that were related to the failure of such individuals to lead a virtuous life. Smith,on the other hand, saw how an independently functioning central bank could engage in banking policies that would strengthen the sober people and retard the influence of the Prodigals, Imprudent risk takers, and Projectors so as to allow the former to maintain dominance over the latter. The result would be economic growth and a growing, wealthy state. Economists who specialize on Smith have generally (Kennedy is an exception) ignored Smith’s 50 plus pages of exposition concerning the inherent dangers that will occur if Prodigals, Imprudent risk takers, and Projectors obtain the majority of bank loans and the Sober people are cut off from such loans, except at very high rates of interest. The result will be stagnant economic growth, increasing inequality, very low increases in the real wage, and a major decline in the middle class. Of course, neither Aristotle nor Smith would be surprised at what has happened economically since the late 1970’s, since they predicted exactly what has happened in the American and world economy 2,400 and 240 years ago, respectively. What is shocking is the nearly complete absence of any general understanding among modern day analysts and economists of the clear cut conclusions arrived at, first by first Aristotle and then by Smith. Keynes can be viewed as attempting to further explain, in a technical sense, what is already contained in the literary analysis in Aristotle and Smith.