Adam Smith and the Steady State Economy

Adam Smith and the Steady State Economy

In discussions about the end of economic growth I have found a number of people who believe that the stock market and the practice of loaning money for interest will still be perfectly effective means of allocating production resources even in a steady state or declining economy. Such people claim that some parts of the economy will still be profitable and will thus provide a suitable field for seeking investment income. In point of fact, even in a steady state economy all businesses which survive for any length of time will profitable in the sense that they will bring in more income than will pay for the total capital investment in the business. If they were not profitable in this sense then the people doing the work of the business would either starve to death or die of exposure. But profitability in this sense does not mean that there will be enough money left over to give to non-productive financiers.

Adam Smith wrote about fully developed economies in Wealth of Nations, Book I, Chapter 9 (Of the Profits of Stock):

In a country which had acquired its full complement of riches, where in every particular branch of business there was the greatest quantity of stock that could be employed in it, as the ordinary rate of clear profit would be very small, so that usual market rate of interest which could be afforded out of it, would be so low as to render it impossible for any but the very wealthiest people to live upon the interest of their money. All people of small or middling fortunes would be obliged to superintend themselves the employment of their own stocks. It would be necessary that almost every man should be a man of business, or engage in some sort of trade.

It is clear that this hypothetical country with a 'full complement of riches' and 'every branch of business fully capitalized' represents a steady state economy. Smith imagines a class of hereditary fat-cats who have the right earn a living by loaning out their capital simply because he cannot conceive of economic organization in any other terms. It is clear, however, that even if this independently wealthy class existed that their total income cannot increase with making the rest of society poorer. If you were one of the people of 'middling fortunes' then the only way you could enter the class of the idle rich would be by displacing one of the currently existing rich people or by taking money away from working people.

Furthermore it is not clear why such interest charging hereditary fat-cats are needed at all. Why not simply create public or community banks funded with tax monies which make interest free loans with the purpose of keeping the economic machinery of society functioning in a healthy manner? The bankers would be paid salaries for services rendered but would not receive income in proportion to the volume of the loans they floated. In a steady state economy money making money is a form of feudalism in which the laboring class supports an unproductive elite.

May 1, 2008