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.