Adam Smith on Wages and Wealth

[DuncanK]

I found a passage in the Wealth of Nations that I was looking for to add to a discussion on wealth tax. I knew I would find something that Adam Smith wrote that would show that he was against sorts of wealth that do not go towards an increase in wages or an increase the the production of goods and services.

In Book 1, Chapter 8 he compares England to America. He says that England is by far the wealthier nation, but wages in America are higher because the wealth is used towards the production of goods and services.

This clearly shows that Adam Smith knew that there were types of wealth that did squat for the economy. We have these types of wealth today, namely the stock market. We should follow this advice and prevent wealth from accumulating where it will not be productive. We should have a good wealth tax that directs resources into greater production.

[The Mad Monk]

Um...since the wealth in the stock market is tied into the finances of companies, isn't that precisely the kind of wealth that is used towards the production of goods and services?

[Sten Sture]

Cash under a matress does squat for an economy.

Equity values can be used as collateral for borrowing, which can help an economy by encouraging cash under a matress to be lent to someone who is going to do something with it.

[cavebear]

It is "non-invested, non-spent" wealth that does "squat" for the economy ("matress-money" is a good analogy). A good example of that is giving money to those who already have more than they spend. Like dividend-exemptions on taxes...

[Lawrence of Arabia]

Or tax cuts for the rich...

[Sten Sture]

Originally posted by cavebear
A good example of that is giving money to those who already have more than they spend. Like dividend-exemptions on taxes...

Right that has nothing to do with the spending side of the economy. It is just a correction to the mis-allocation of capital that occured because of the capital gains tax cut. The two need to be similar, but the spin folks on the hill know that the discussing capital allocation in the media would be smacking your head against a wall.

[cavebear]

I have to assume that those who push tax cuts for the rich assume that poor and middle-class people won't spend it. I don't understand that part. You give money to the rich, who haven't spent the money they have, and that is supposed to stimulate the economy. Yet, somehow, the non-rich would *not* spend any money they had immediately?

Most of the non-rich people I know have already spent the money from their next several paychecks! (not I, I am debtless and have a savings account) But most people actually have "negative savings". So wouldn't they spend it on more consumer goods (the cause of their negative savings) and stimulate the economy immediately?

[Lefty Scaevola]

Originally posted by The Mad Monk
Um...since the wealth in the stock market is tied into the finances of companies, isn't that precisely the kind of wealth that is used towards the production of goods and services?

Indead so. The stock market is for busines capitalization. DuncanK has got Bass-ackwards. But there are times when other forms of business capitaliztion, small companies of all different legal types, fuel, PROPORTIONALLY to their capital, more job formation, but they raise much smaller capital than publicly traded companies.

[Zkribbler]

Yeah. Examples of capital which is usually not used for production could include the following:

Gold, silver, jewelry.
Unimproved real estate.
Residences.
Art work.
Cash on hand.
Yachts, private airplanes, automobiles, helicopters, etc.

I'm convinced that taxing wealth would be more fair and would encourage more productive activities than does taxing income. I just can't figure out how to make it work.

[Sten Sture]

Originally posted by cavebear
I have to assume that those who push tax cuts for the rich assume that poor and middle-class people won't spend it.

There are two ways to get things going, one is by cutting taxes on the poor who will undoubtably spend a large portion of the money. The other is by cutting taxes on the rich who just invest the extra money making capital more available for people to borrow. The thought now is that people are spending enough money, but that businesses aren't able to borrow, so it may be better to free up money for (small) businesses to borrow - creating jobs in the process.

The government certainly wants the poor to be richer. More tax money for them to collect and less aid to pay out!

[Sten Sture]

Originally posted by Zkribbler
Yeah. Examples of capital which is usually not used for production could include the following:

Gold, silver, jewelry.
Unimproved real estate.
Residences.
Art work.
Yachts, private airplanes, automobiles, helicopters, etc.

Though the purchase of each of those items transfers cash to people who may use it: artists, carpenters, mechanics, etc...

[Zkribbler]

Initially, yeah. But then it just sits there. It's not like a steel factory that begins churning out I-Beams, employing people, etc.

[cavebear]

Originally posted by Zkribbler
Initially, yeah. But then it just sits there. It's not like a steel factory that begins churning out I-Beams, employing people, etc.

You are forgetting about the velocity of money.

If you are given an extra $100, you spend it in a grocery store, the grocery store buys more supplies from a wholesaler (or builds a new store). The company that receives that money spends it on supplies they need. Etc, etc, etc.

Your $100 has been used (multiplied) many many times before it eventually ends up in the hands of someone who does not use it. The kinds of purchases that stop velocity of money are usually luxury goods (art, real estate, jewelry).

Who usually owns luxury goods like that? Very wealthy people, that's who. Providing money to the rich is the *least* likely way to stimulate the economy.

[Master Zen]

The Stock market is an excellent way of obtaining investment, it is by no means does squat for the economy, quite the contrary it is a HUGE source of capital.

If you were a startup, had limited avalibilty of internal capital, no source for liabilities, the best way to go is with stocks.

I think the problem is not where the wealth is spent (the company who made the yacht employs people who earn part of the revenue of that yacht so it's not all bad even with luxury good), but rather how the wealth is distributed.

[DuncanK]

The only time that you invest in production is when you buy initial purchase. When you buy stock from someone else that doesn't go towards production.

[DuncanK]

To demonstrate my point look at the GNP and the Dow Jones. Sometimes the Dow Jones is flying high but GNP is just putting along. If all that money that was spent on stocks was going to increase production the economy would be flying high also.

[ravagon]

Originally posted by DuncanK
The only time that you invest in production is when you buy initial purchase. When you buy stock from someone else that doesn't go towards production.

Ummm. That's quite true. You are merely taking over the prior investment. The focus though is then on the prior investor (who now has your cash) to reinvest somewhere else...

[DuncanK]

Originally posted by ravagon


Ummm. That's quite true. You are merely taking over the prior investment. The focus though is then on the prior investor (who now has your cash) to reinvest somewhere else...

And when you see prices go way up it's because people are just trading stocks not spending their money elsewhere.

[ravagon]

Companies do stock reissues though (I may have the terminology wrong), when they need to raise capital for expanding production/facilities/outlets - reissues which are bought up by prior and new investors. The total number of stocks available is thereby increasing, not merely being strategically traded.

[DuncanK]

Originally posted by ravagon
Companies do stock reissues though (I may have the terminology wrong), when they need to raise capital for expanding production/facilities/outlets - reissues which are bought up by prior and new investors. The total number of stocks available is thereby increasing, not merely being strategically traded.

ok, the quantity of stocks are increasing, but the fact that stock prices go up or down is determined by supply an demand. Financial markets are perfect markets.

[DuncanK]

The unproductive nature of stocks is not the only problem with them. Stock market crashes can have devistating effect on the economy. These crashes are caused by bursting bubbles which are caused by excessive speculation in stocks. One type of tax on wealth could be a tax on stock transactions. It's commonly called the Tobin Tax. This type of tax would limit speculation in the stock market and I believe encourage more productive investments.

“It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is compared with Wall Street to the average American, inaccessible and very expensive. The jobber’s “turn”, the high brokerage charges and the heavy transfer tax payable to the exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market to rule out a large proportion of the transaction characteristic of Wall Street. The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States (Keynes, 1936, p.159-60).”

[Imran Siddiqui]

I'm convinced that taxing wealth would be more fair and would encourage more productive activities than does taxing income. I just can't figure out how to make it work.

But what if the wealth is greater than the amount of money the person has on hand? Would you prefer that the person sell the wealthy artifacts so that he would be able to pay his taxes?

And then those things such as art become solely the province of the rich.

And btw, yachts, airplanes, automobiles support massive industries which create those goods. Without these things (especially airplaines and automobiles) production means much less, because you lack the ability to quickly transport it.

To demonstrate my point look at the GNP and the Dow Jones. Sometimes the Dow Jones is flying high but GNP is just putting along. If all that money that was spent on stocks was going to increase production the economy would be flying high also.

You do remember your GDP formula, right? C+I+G+Xn? Investment makes a small part of it. Usually when the stock market is flying the GDP (ie, I goes up) soon follows, but not always.

[Imran Siddiqui]

This type of tax would limit speculation in the stock market and I believe encourage more productive investments.

This tax would also chill investment by causing people not to buy and sell stocks too much. The only companies that would get stocks bought would be those companies that are already large. Smaller companies that might need people to invest in their company probably would be left out in the cold.

[ravagon]

Originally posted by DuncanK

ok, the quantity of stocks are increasing, but the fact that stock prices go up or down is determined by supply an demand. Financial markets are perfect markets.

But this is only a general correlation. ie: Fluctuating stock prices do not reflect a net gain or loss in absolute value. This only occurs when an investor either enters or leaves individual stocks. ie: A drop in stock price isn't really harmfull unless one is divesting oneself of said stocks. Likewise an increase isn't of great benefit unless one is divesting. (and conversely for investors of course). I'm ignoring the consumer confidence aspect (which one shouldn't do) of a large scale increase/decrease and that such stocks can be used as securities (again I've probably got the wrong term) without being sold off, but overall the stock market does only indicate (and can implement) trends rather than defining absolutely how the economy functions.
Look at the Dow lately for example. 8000 or so, down from 10000 a couple of years ago. This doesn't reflect a 20% drop in US productivity over said time frame, or even a 20% loss in value. Only that investors extracting themselves from the market now (if they decided to do so) would expect a 20% net loss in value.

[Lefty Scaevola]

The ability to redily sell stock at a later date is a very important factor in value, including when issued, and thus increases the capital raised. The ration between the value of a publicly traded stock and one not so can be as hight as 6 to 1 for otherwise identical companies. People are not willing to buy investmest that they can not sell easily.

[DuncanK]

Originally posted by Imran Siddiqui

Quote:

To demonstrate my point look at the GNP and the Dow Jones. Sometimes the Dow Jones is flying high but GNP is just putting along. If all that money that was spent on stocks was going to increase production the economy would be flying high also.

You do remember your GDP formula, right? C+I+G+Xn? Investment makes a small part of it. Usually when the stock market is flying the GDP (ie, I goes up) soon follows, but not always.

The stock market has a lag effect on the economy. That is, the stock market will go up as the economy improves for three reasons. One, people have more money to invest. Two, people have more confidence in the future. Three, people have already invested in the means of production needed to expand the economy. Any further investment in the means of production will not look as good as an investment in the financial markets or some other speculative venture.

Thats not to say that if the economy was sluggish and people invested in the stock market that this money would go to production of the means of production. It wouldn't and the econony would not grow. That's why when the next tax cut is implemented you will see the stock market boom, but the economy will not grow much (unless there are some other factors).

[The Mad Monk]

Can you imagine what an audit for a wealth tax would be like?

[DuncanK]

Originally posted by Imran Siddiqui

Quote:

This type of tax would limit speculation in the stock market and I believe encourage more productive investments.

This tax would also chill investment by causing people not to buy and sell stocks too much. The only companies that would get stocks bought would be those companies that are already large. Smaller companies that might need people to invest in their company probably would be left out in the cold.

We could make an exception for initial investment.

[DuncanK]

Originally posted by ravagon


But this is only a general correlation. ie: Fluctuating stock prices do not reflect a net gain or loss in absolute value. This only occurs when an investor either enters or leaves individual stocks. ie: A drop in stock price isn't really harmfull unless one is divesting oneself of said stocks. Likewise an increase isn't of great benefit unless one is divesting. (and conversely for investors of course). I'm ignoring the consumer confidence aspect (which one shouldn't do) of a large scale increase/decrease and that such stocks can be used as securities (again I've probably got the wrong term) without being sold off, but overall the stock market does only indicate (and can implement) trends rather than defining absolutely how the economy functions.
Look at the Dow lately for example. 8000 or so, down from 10000 a couple of years ago. This doesn't reflect a 20% drop in US productivity over said time frame, or even a 20% loss in value. Only that investors extracting themselves from the market now (if they decided to do so) would expect a 20% net loss in value.

A Tobin Tax would discourage this type of sell off. I'm not saying that it would prevent them, but they would have less of an effect on the economy.

[DuncanK]

Originally posted by Lefty Scaevola
The ability to redily sell stock at a later date is a very important factor in value, including when issued, and thus increases the capital raised. The ration between the value of a publicly traded stock and one not so can be as hight as 6 to 1 for otherwise identical companies. People are not willing to buy investmest that they can not sell easily.

The point is to make more productive investment (like say the improvement of land) more desirable. Then wealth could be diverted from the stock market and pumped into the economy.