Thursday, October 23, 2008

Adam Smith, Merit and Demerit

In commenting on the "Joe the Plumber" election side show, Steve Coll points out in this week's New Yorker that Adam Smith, in 1776, wrote that
"The necessaries of life occasion the great expense of the poor...The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess...It is not very unreasonable that the rich should also contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
(Ugly writing, but makes the point.) Whether you disagree with the notion of flat tax (as Smith did) or not, recent events encourage us to revisit Smith and his English and French contemporaries.

In Wealth of the Nations, Smith also confessed that the success of capitalism depended on the propagation of the myth of human equality, noting that the myth is a necessary “deception which arouses and keeps in continual motion the industry of mankind.” And in his Theory of Moral Sentiments, the ever-candid Smith observed that this new liberalism was a system of “merit and demerit” (italics, mine). In other words, capitalism doesn't just reward one for his labors, it also holds reward back (and in effect, punishes) for one's losses (or non labors).

If the ratings agencies lied, if NINJA mortgages (no income, no job, no assets) were hidden in securities, if lies were told, then let's see the system of demerit in place!