Introduction
Politics and economics have long been entangled with one another, and this makes it difficult to understand either of them. To clearly understand each of them, we must separate the two, acknowledging their connectedness, but understanding that the phenomena we witness is the result of the conflict or cooperation of two entirely different factors.
- Politics involves the principles that are applied to create social order
- Economics concerns the manner in which material goods and wealth are produced and consumed
Since Adam Smith, the two topics have been thus separated into pure economics and pure politics. However, neither can be observed in its pure form in nature.
In both domestic law and foreign policy, the intent to achieve harmony among people and nations respectively, and legislation seems more concerned with nouns (material objects) than verbs (actions that men may take). The behaviour of men is likewise driven for the desire to effect a material result rather than merely to undertake an activity for its own sake.
The two are therefore entangled, but independent: while it is generally accepted that liberty breeds prosperity, citizens of a nation led by a vicious tyrant can be very wealthy and citizens led by an elected council can be miserably deprived.
All human knowledge is interconnected, and cannot be understood outside of context. Separating topics can lead to greater appreciation of each, but also engenders the most foolish of fallacies unless we remain mindful of the connections between them and the manner in which they interact. As such, anyone involved in politics must acquire a knowledge of economics, and vice-versa.
Theory and Practice
In the author's time, theoretical systems are formed before the facts have been established, based entirely on "gratuitous assertions" as to what the facts might be. Consider the inductive approach to philosophy, which has contributed much to human knowledge, but is often woefully inapplicable for its failure to test its premises against objective reality. Ideas about politics and economics have suffered in much the same way, with pronouncements based entirely on imagination, unrestrained by factual evidence.
However, it is not possible to develop useful information on facts alone, as proof is by nature historical. He can state as a fact that metal becomes fluid when exposed to a certain degree of heat only after having melted a piece of metal. To assume that another metal will become fluid at the exact same temperature is a theory that lacks complete certainty. But if our goal is to smelt ore, we must accept this assumption as truth and have faith that the results of past experiments will be repeated.
In the hard sciences, such assertions can be made with a degree of certainty, the ability to control experiments and ensure all factors are identified can isolate the factors that effect an outcome. Not so with any field of inquiry that involves human behaviour on a large scale, so even attempts to identify facts and discover causal relations is frustrated by an uncontrolled environment and unknown factors.
Specific reference is made to statistics, in which too great faith is placed. The measurement of what should be easily known, such as the number of acres of farmland in a nation, as well as the estimation of what is unknowable, such as the amount of silver in an untapped mine, are derived from assumptions that may be incorrect. Statistical inquiry results in an estimation of probability that is often found to be egregiously wrong.
Moreover, the nature of things is such that, in order to gratify curiosity and arrive at a certain conclusion, one would have to destroy the object of study in the course of investigation. This is likely counterproductive, as the purpose of inquiry is to inform a decision to undertake an action that requires the object of study to remain unspoiled.
As such, inquiries into politics and economics are often limited to general observation of causal relationships that appear to be true, based on limited knowledge of an incomplete set of factors.
But even so, it would be foolish to dismiss theory entirely. Theory remains valuable in its ability to enable men to make decisions with greater confidence in the expected outcome, even though it does not render perfect certainty. To dismiss theory is to bumble about, undertaking random actions and achieving random results, with mere faith that the results will be positive.
(EN: This goes on for quite a while longer, and I'm going to fast-forward to the next topic, as the point is well made that theory is not perfect, but represents the best that can be done to inform decisions.)
A Historical Perspective
The literature of the ancients demonstrates their "utter ignorance" of the nature and origin of wealth and prosperity. They recognized the ability to amass wealth by fiat or by sword, and recognized it could be preserved by hoarding rather than spending it, but seemed to have little sense of how it could be created.
Specific reference to Xenophon of Athens, who extoled order and activity, but doubted that commerce could be profitable to the republic. Plato and Aristotle noticed some correlation between the act of production and the material produced, but saw production as valuable only in meeting the most basic needs: production for subsistence was a necessity, but production above the level of subsistence, or production of goods that would not be soon consumed, was termed "artificial production" and, while not categorized as a vice, was regarded to offer no valid benefit.
In Egypt, the law requiring sons to adopt the profession of their fathers led to the financial ruin of many when the goods they were required by law to produce were no longer in demand. The Romans regarded every branch of industry except for agriculture with contempt. Skipping past the barbarous middle ages, one can find a multitude of unfortunate laws relating to money, interest, and commerce, squandered wealth and laid a crippling taxation upon their subjects.
It was not until the dramatic increase in wealth and prosperity in centres of active commerce and industry such as Venice, Genoa, Florence, Flanders, and certain free cities in Germany that philosophers gave much consideration to the nature of wealth. The author mentions a list of names from the sixteenth through eighteenth centuries from Italy, France, and other parts of Europe (EN: The list goes on for quite a while), and examples of some of the basic theories they considered that would be echoed later in more detailed work of economists such as Adam Smith.
He pauses a moment to avoid the semblance of suggesting Smith plagiarized the ideas, many of the volumes being unavailable to him and in languages he was unable to read - the point being that it was a very slow consideration of basic principles that, like many things discovered to be true, were realized by different people in different locations and different times.
This is not to say that it was a clean and straightforward progression of knowledge, as there was quite a bit of very bad theory on the part of individuals such as Quesnay, Riviere, and Mirabeau, which did much to discredit the field of economic inquiry and cause many to regard economics as a ludicrous indulgence that was wholly inapplicable in practice.
Economics began to make significant progress in the mid-eighteenth century, and the author again provides a list of names from various nations at that time: Concordet, Turgot Beccaria, Filangeri, de Verri, and others. While these individuals did much in comparison to their predecessors, "none of their inquiries could lead to any important result."
Adam Smith
The foundational work of economics was Adam's Smith Inquiry into the Nature and Causes of the Wealth of Nations, which presented for the first time a systematic consideration of economics: the production of material goods for consumption and trade and the methods by which wealth could be created, preserved, exchanged, accumulated, and destroyed. Until this book was published, "the science of political economy did not exist."
Smith held that the original of all wealth was the labour of man, and his application to pursuits that produced things of utility from raw materials that had little purpose in their original state. From this, the realization that the vast majority of the wealth of nations did not consist merely in the form of precious metals, but in the many everyday articles that constitute the necessities and conveniences of life - and that coin had little value except in the willingness of people to exchange it for such things.
This perspective enabled Smith to consider the true function of money as a token of exchange that is essentially unproductive and correctly identify economic value as that which is created in the production and accessed in the consumption of goods. As such, metals, coins, notes, or any other mechanism for storing value are of far less importance to economic prosperity than had generally been assumed.
The author defends Smith's work as original and unique: while previous writers had expressed a number of the same ideas, this seems largely coincidental. Smith's conclusions were based on his own body of theory, which is significantly different to and more comprehensive than others who suggested some of the same ideas.
Smith's work, which worthy of reverence, is at the same time not flawless. For example, the author suggests that the idea that value is created by labor alone is a generalization that discounts other factors of production. This leads to some significant blind spots in Smiths' theory, such as failing to consider the value of technology, which has a significant influence in the production of wealth.
(EN: This is likely a fair criticism, though my sense is that this is more in the nature of a gap in Smith's theory rather than a fatal flaw. However, the same oversight had a much more detrimental effect on other economists, such as Malthus, whose argument is largely undermined by its failure to consider the effect of technology.)
Smith also presents only "obscure and indistinct notions" on the subject of commercial production; his analysis of the production itself was based on a general sense of industry rather than a rigid analysis of different manner of operations; he focused on the production of wealth and largely ignored the topic of its distribution in society; and he remained focused on the production side of economics with little concern for consumption.
As such, Smith's inquiry remains foundational to the study of economics, but generalizations and omissions such as those listed above have left a great deal of work for other theorists to refine and amend his basic theories in light of phenomena that have been discovered, or at least better understood, since the time of Smith's original writings.
The Present Inquiry
While much progress has been made in the study of economics, the author feels that in his time, there is great opportunity to expand and refine the theory toward being accurate and comprehensive, and while he does not presume to state that the present book completes the analysis, it may at least further progress toward that goal.
The author details his preparations for the present task, which include reviewing the work of previous economists to consider their perspectives, though not necessarily to accept them as given, recognizing that there is both good value and egregious error in the works of the past. He has also been observant of economics in action, considering the economic activity he witnesses, such as it is, as a means of assessing past theories and developing his own perspective.
He further asserts that his intent was to concertize the theory, to "never lay down an abstract principle that was not immediately applicable in practice" so as to avoid the fallacies that have arisen from distancing and isolating philosophy from the actual nature of things.
Some reference is made to earlier editions of this book, and some of the objections that arose, and the author accepts that "I should have taken care not to be misunderstood." He apologizes for this, indicates he has addressed the issues in the present edition, and yet accepts that it still is not a perfect work, but has "all the perfection within my reach."
He also mentions his failure to fully address in this work some of the "wild or antiquated theories" he encounters, as is the style of other authors of his time. His sense is that they can be refuted merely by presenting his own argument in a clearly structured manner rather than addressing them directly and picking apart their theories, which would require far more effort for the reader to piece together the concepts he means to communicate.
Obstacles to Progress in General
A problem with established fallacies is that the are given the supposition of soundness - simply because someone thought to write them down, and others thought to read and refer to them, there must be a basis of truth to them. JBS goes into rather a long consideration of why this is not so - though it should be axiomatic that the accuracy and the popularity of an idea are independent qualities, one of which has no bearing on the other.
A problem with describing thins as they could be is that there is likewise an inherent assumption that anything that does not presently exist could not possibly exist, and thus to patently reject the possibility that things could be anything other than what they presently are. JBS mentions that the Emperor of Japan collapsed with laughter when he was told that the Dutch have no king.
Another problem is intellectual inertia: people who live in comfort are hostile to ideas of change. In their experience, thins are fine as they are, and the proposal of any change fills them with discomfort and the desire to leave well enough alone. It is perhaps for this reason that the greatest advances are not made in civilized and prosperous societies, but in situations of desperation where the status quo is so unsatisfactory that any prospect of change is embraced, on the basis that there's nothing to lose.
Primarily, economics has a direct impact on the welfare of people. Other fields of inquiry are more abstract and academic in that a theory, good or bad, will have but little effect if it is experimented with in practice. The prospect of tinkering with the economy poses a direct threat to the material objects that constitute the necessities and conveniences of daily life.
The Progress of Economics
There are many causes that have "retarded the progress" of economics - but in spite of them, the author sees amble evidence that the study of economics is spreading rapidly. It is a recognized field of academic inquiry in the universities of Europe to the point that professorships in economics have been established. It is now considered an essential part in the education of political leaders as well as those involved in the trenches of commercial activity. Economic principles are being incorporated, to great advantage, into the study of other disciplines such as politics, history, and the arts.
In the author's time, the "grave posture of affairs in the criticized world" has fueled interest. The failure of large-scale commercial undertakings, the egregious mismanagement of public funds, and the enactment of egregious laws that have inflicted great suffering on the population have combined to create a demand for more rigorous consideration of economic principles by those whose decisions have significant impact on the welfare of many.
The disorders and calamities of Europe are all the more poignant in light of the rapid increase in prosperity in "another hemisphere" and in the spirit of the present age, the practices of the current economic establishment are being questioned as bulwarks of a culture in need of complete refurbishment. So, too, is the difference in the success of men of industry and commerce readily observable in contrast to the stagnation of those in professions that cling to the old way of things.
It is also an emerging principle of the author's age that societies are in a better position to prosper when knowledge is dispersed to the population, rather than being held by a small number of men who direct the actions of all others who mindlessly obey.
In countries "blessed with a representative form of government," each citizen is obliged to be knowledgeable with the principles of economics, as each citizen is entitled to deliberate in public affairs. The consequences of the dissemination of knowledge and responsibility can be readily witnessed in the comparison in the prosperity of such nations to the misery of those who live under autocratic rule.
Even in nations that remain under autocratic rule, it is plainly evident that a monarch may be well acquainted with the principles of prosperity, but is more effective when supported by advisors and ministers who are capable of understanding these same principles.
It is therefore the author's decided opinion that the study of economics should not be relegated only to statesmen, but to any person involved in economic activity.