Can Adam Smith Help Us Recover From COVID-19?

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Over the past year, the COVID-19 pandemic has completely turned society upside down. Plagued by uncertainty the entire planet was alarmed in went into full panic mode. Leading us to the immediate question of how do we contain a novel virus when its origins are shrouded in mystery? Many of these reactionary policies may have modestly slowed down the spread of COVID-19, however, most of the state-sanctioned restrictions ended up causing unforeseen problems. The shelter-in-place orders resulted in the highest recorded rate of job loss since The Great Depression. The economic ramifications of various lockdown measures go beyond the immediate consequences. There was a November 2020 study conducted by USC projecting an overall GDP loss of $3-4 Trillion over the next two years.

Lengthy book treatments could be composed to fully detail all of the intricacies of the economic carnage of COVID-19. Unfortunately, the fall-out of the pandemic reaches well beyond the economic repercussions. Our overall health has been impacted. Not necessarily by the direct symptoms of COVID-19, but by a result of the lockdown orders. People have been less active leading to weight gain, which may lower an individual resistance to the virus. While physical health may be most salient to us because it can be observed by the naked eye, what about mental health? It is well documented that social isolation is a contributing factor to depression. A multitude of stories has been published describing the psychological struggles of Americans during the pandemic. The hardnosed statistician may be quick to dismiss these narratives as being purely anecdotal. However, many of the risk factors for suicide have been magnified since the beginning of the pandemic. There has been a notable increase in the suicide rate from 2019 to 2020.

The pandemic has also fractured relations between us and our fellow citizens. Clinging to our inner circles to avoid spreading COVID-19, we begin to become more tribal. The trust we once held for our neighbors has become eroded over the past year. Anytime someone sneezes we give them the side-eye. Fostering a climate of distrust and paranoia. This distrust has manifested itself in actual hate crimes and discrimination. Some reports estimate that hate crimes against Asian-Americans increased by 150 percent in 2020. What does this have to do with COVID-19? Quite a bit. It is speculated that the outbreak originated in the Wuhan province of China (p.2). Leading some to erroneously blame people of Asian ancestry for the spread of the virus. Creating friction between various communities across the country and only serving to make an already tumultuous situation worse. Asian Americans much like all other Americans have been grappling with the stresses of the pandemic. Adding racial tensions to the mix only serves to create more division and distrust. We need trust to have a stable society. 

Could a voice from the past help us navigate these difficult times? Provide us direction in helping us heal from the carnage caused by a global pandemic? I would argue yes. That voice of reason comes from no other than The Enlightenment-era moral philosopher Adam Smith Many readers are probably thinking to themselves “… isn’t this the guy that told us to follow our self-interest. In other words, to be selfish?”. In a sense, yes. However, limiting the body of Smith’s work to the following passage is nothing more than a caricature of his overall contributions to economics, never mind moral philosophy.

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their interest. We address ourselves, not to their humanity but their self-love, and never talk to them of our necessities but their advantages. (The Wealth Of Nations, Book IV, Chapter II, p. 456, para. 9)”

The above paragraph may be the most famous one ever written by Smith, but it does not wholly define his breadth of work. Smith believes that markets and morality were inseparable, and you could not have one without the other. At the crux of voluntary trade is interaction. If we treat each other poorly and do not foster a good-working relationship trade cannot take place. To foster strong relationships, we as a society need a firm moral backbone. Morality provides us with the precepts to facilitate just and fair interactions despite conventional wisdom, this is crucial to success in business. If you are not running your enterprise justly your client will eventually find out and choose to do patronize another vendor. 

Business ethics and social morality are intimately interconnected, one cannot exist without the other. That is why the two great works of Smith were meant to be read in tandem. The Theory of Moral Sentiments (1759) addresses social morality and The Wealth of Nations (1776) details the inner mechanics of economic exchange (catallactics). Both books dovetail together so well, reading one leaves you with a missing piece of the puzzle. COVID-19 has unquestionably harmed society economically and socially and both books contain the wisdom to help us get back on the right track. I am a great admirer of economist Don Boudreaux, but I do have to take issue with his recent assessment of Smith’s possible perception of the impact of social isolation resulting from COVID-19. Dr. Boudreaux states that Smith could certainly empathize with and rationally understand the distress caused by social isolation. I do not disagree with his inference, but I would surmise that Smith would want us to draw lessons from his work. To apply the concepts in both books to help us as a society overcome the hardships imposed by COVID-19. His work was not intended to be confined to the postulations of lofty ivory tower discussions, but also for practical application. What good is moral philosophy if it is never put to practical use? Why not look to the works of Adam Smith for guidance and solutions to help us navigate the uncertainty that is the COVID-19 pandemic?

The Whisk(e)y Wars- A Conflict Fought With Tariffs

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“…When there is no probability that any such repeal [of a tariff in a foreign country] can be procured, it seems a bad method of compensating the injury done to certain classes of our people to do another injury ourselves, not only to those classes but to almost all the other classes of them. When our neighbors prohibit some manufacture of ours, we generally prohibit, not only the same, for that alone would seldom affect them considerably, but some other manufacture of theirs. This may no doubt encourage some particular class of workmen among ourselves, and by excluding some of their rivals, may enable them to raise their price in the home market. Those workmen, however, who suffered from our neighbors’ prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods. Every such law, therefore, imposes a real tax upon the whole country, not in favor of that particular class of workmen who were injured by our neighbors’ prohibition, but of some other class…” (Bk. 4, Ch. 2)

 The Wealth of Nations- Adam Smith

The Biden Administration’s commitment to free trade is questionable at best. The extent to which he will champion laissez-faire policies is a difficult determination to make in the nascent period of his presidency. Biden being a centrist is more concerned with appeasing the median voter than taking principled policy positions. Only time will tell whether or not he will capitulate to the anti-market sentiment of the vociferous and passionate populous wing of the Democratic party. Epitomized in the heated rhetoric of elected officials such as Elizabeth Warren and Alexandria Ocasio-Cortez. However, there may be some light at the end of the tunnel. Free trade may not necessarily be dead in the water. Despite the multitude of flawed policies that have so far been supported and promulgated by the Biden Administration they may have done one thing correctly. Repeal some of the Trump-era tariffs. Arguably one of the most disturbing aspects of the Trump administration was his hostility towards foreign trade. Biden has taken one small step to repair America’s tarnished image in the arena of international trade. This attempt at redemption has manifested itself in an unlikely form, the abolition of the importation tariff on Scotch Whisky

The previous statement is not wholly accurate. The United States agreed to relinquish all tariffs on goods imported from the United Kingdom. Responding to the UK’s lift all of its tariffs on US imports back in January. Scotch Whisky is one of Scotland’s most highly esteemed exports. Making it an iconic symbol of the UK’s presence in the arena of global trade. Considering back in 2012 the United States was estimated to be the largest export market for Scotland’s prized spirit, it stands to reason that the tariffs were detrimental to United Kingdom’s economy. Even in light of the Trump tariffs the United States still maintained this position as top consumer nearly a decade later in 2020. Despite the United States remaining big-time scotch imbibing nation the tariffs still sent shock waves throughout the industry. It projected that since the 25 percent tariff was imposed back in 2019, Scotch producers lost an aggregate “$682 million (£500 million)” in sales. In 2019, the United States imported $2.07 billion worth of distilled spirits from the U.K., the majority of it being scotch whisky. The year 2020, delivered a two-punch blow to Scotland’s whisky producers. The COVID-19 pandemic also eroded profit. Leading to an overall 23 percent dip in global scotch sales. The US tariffs have been attributed to a 32 percent decline in overall whisky exports. As recent as last month the losses incurred by the tariffs have been described as “unsustainable” for some producers.

The United States did not escape with impunity from retaliatory tariffs being imposed by the United Kingdom. It should not be ignored that the UK is a significant trading partner of the United States. Approximately 20.3 percent of all agricultural exports from America to the UK were alcoholic beverages. The United Kingdom slapped a 25 percent tariff on American whiskey after Trump applied tariffs on steel imported from the UK. As predicted by several experts and commentators American whiskey serves as a salient target for reciprocal tariffs. The United Kingdom was previously viewed as the largest market for bourbon exports. Since the application of the tariffs overall exports declined by 35 percent. Overall, bourbon sales in the United Kingdom decreased by a staggering 50 percent. The United Kingdom did relax tariffs on American Brandy, Rum, and Vodka. However, the UK and other European Union countries will continue to maintain tariffs on American whiskey as a result of a “two-year trade war on steel and aluminum”. 

The question become what was the impetus behind this fatuous trade dispute between the US and the UK? It all came to a head in 2019, after a 16-year dispute between aerospace rivals Boeing and Airbus. The UK applying tariffs on up to $4 billion worth of goods over subsidies received by Boeing. The United Kingdom started to ratchet down the conflict by easing tariffs on some US goods and Biden reciprocated by lifting tariffs on UK imports. While Biden is not a perfect free trader, this was a shrewd decision on his part. Not from the standpoint of political strategy, but the point-of-view of sound economic theory. The words once-famous uttered by Ronald Regan ring true here: “If you want more of something, subsidize it; if you want less of something tax it”. Here is the crux of the idiocy of protectionism. Proponents seek to limit imports to encourage domestic consumption-based out on a sense of nationalism. However, they ignore the fact that their hostility towards foreign goods may stir the ire of lateral trade partners. Resulting in defensive actions that will result in the decreased consumption of American goods globally. Wouldn’t a proud nationalist prefer to see American goods consumed all across the world? After all, the two best-selling whiskies globally in 2019 were Jack Daniels and Jim Beam. This was not the byproduct of using taxation to punish Americans who enjoy drinking imported whiskies, but through many years of savvy marketing, product consistency, and rightfully earned brand recognition. 

Privatizing Defense- Reconnecting the Link Between War and War Time Spending

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The costs and externalities of engaging in military intervention are high. These costs are not limited to merely monetary expenditures. The price is also borne in the loss of life, productivity, civil liberties, economic freedoms, and so on. Historically, countries have long justified war efforts through comprehensive political campaigns. Demonizing the opposing regime and stressing the moral imperative of defeating the adversary. Propaganda campaigns can work wonders, persuading the masses that the armed conflict is a “just” war, but it is not the only variable at play. If the costs of going to war were more direct and salient to the public, constituents would be less apt to approve of military intervention abroad. In the decades since World War II, most of these campaigns have been more about nation-building than actually defending the United States and its allies. If the connection between the cost of war was more linear it would be reasonable to surmise American citizens would be screaming with indignation about the prospect of their tax dollars being used to “spread” democracy.

The question is how do we make the connection between the cost of war and military efforts more conspicuous to the taxpayer? A radical suggestion would be to privatize defense. To some extent, there is a lot of merit to this argument. There are also a lot of well-formulated objections. Any conventional application of Coase’s Theorem would like to view defense as a public service that cannot be provided by private firms. Due to ambiguity regarding property rights and the high transaction costs of providing defense services. The issue of unclear property rights is by far one of the strongest arguments against privatizing the production of defense services. Even as economist Chris Coyne points out in a recent paper, those free-rider problems are inevitable. In Coyne’s example, if missile defense services are provided to a city, one house that has opted out cannot be excluded from protection (Coyne & Goodman, 2019, p. 6). It was maybe inordinate to organize defense efforts on a national scale versus a regional threat. Example being when Russia annexed the Crimean Peninsula. This threat was confined to a specific region of Ukraine versus Russia posing threat to the whole country (Coyne & Goodman, 2019, p.2).

Another flaw in the free-rider argument is even when defense is provided by the government there are still people who receive service without contributing. American citizens who evade taxes still receive the benefits of state-provided defense. The homeless and unemployed who also do not contribute to the tax pool also enjoy the benefits of defense provided by the United States. The problem becomes that free-riders exist regardless if defense is provided by the government or private firm.

All the counterarguments aside, if people could see on a monthly or quarterly basis how much they were spending on foreign wars, they would be less apt to be ambivalent about these military campaigns. This is a fact that is displayed in the ubiquitous Public Choice maxim of dispersed costs and concentrated benefits. No service provided by the government is “free”. This merely an illusion created by the distribution of the cost of government programs and services across many taxpayers. Typically, there is quite a bit of mystery surrounding how tax dollars are allocated. Unlike a private-sector invoice that is itemized, how much, and how it will be specifically used.  Epitomizing the phenomenon of fiscal illusion. Severing the link between government spending and taxation creates confusion. By keeping the taxpayers’ ignorant, various government departments have more fungibility with how tax dollars can be used. Side-stepping any potential for accountability. This applies to all government spending, even defense and military expenditures. By reestablishing this link between war and taxation, every-day citizens would be more apt to question the efficacy of sending the military to a third-world dictatorship to reinvent them as a liberal democracy.

Government officials cannot be trusted to help facilitate the process of reconnecting direct costs of war with the corresponding military campaign. Few congressmen would go along with this policy. On the off-chance, taxpayers did start receiving itemized expenditure reports, who is to say that they will not be falsified. The only viable option would be allowing private firms to provide military-grade defense services to civilians. Effectively allowing for private competition in the provision of defense services. That could include private defense clubs, neighborhood militias, HOA funded auxiliary defense agents, or even larger corporate firms providing similar services. Whether you are picking up a rifle to participate in the neighborhood militia or you are paying a monthly bill for a corporate defense firm, you have skin in the game. Either you are paying with your safety and time or you are paying monetarily. Both contingencies align incentives towards avoiding frivolous conflicts. No one wants to pay exorbitant rates to receive defense services that do not even directly benefit their safety. Nor does anyone want to risk their life over minor conflicts. Objectives such as nation-building or ideological indoctrination would be off the table. Due to the high costs of such endeavors, most people would be much more cautious about engaging in such conflict. Confining most uses of military force for self-defense rather than offensive objectives.

The Anatomy of Lottery Revenue

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Few people like taxes. Most view them as a necessary evil. Some even view taxation as a form of theft. However, if we are going to levy taxes at the very least they should be effectual in generating revenue. Otherwise, the taxing of income, property, and inheritances are pointless. There must be some utility in this imposition for it to be justifiable. One salient target for raking in tax revenue is the taxable proceeds from gambling.  Which has served as the impetus for the liberalization of gambling regulations across the United States. Despite rates of taxation on lotteries and casinos being higher that of other industries gambling brings in only modest revenues. Rates on casino revenues ranging from 6.75 percent in Nevada and to the exorbitant rate of 50 percent in Illinois. Only $ 8 billion in tax revenue was collected by the states in 2011, this is out of an approximately $68 billion industry if the estimated revenues of tribal casinos are accounted for. If one was to consider the proportion of every dollar spent on lotteries that end up being recouped by the state, it would be tempting to assume that it was a better means of generating revenue. Especially when in 2018, $27.6 billion in revenue was generated by state and local lottery games.

Here’s a breakdown of how the portion of each dollar spent on lottery games retained in state taxes (Courtesy of the MERCATUS Center).

  • 20 % of every dollar spent is going towards administrative costs of maintaining and administrating the lottery.
  • 50 % is returned to the players in the form of prizes.
  • 30 % is retained by the state in the form of tax revenue.

My Mind Has Been Bought and Sold By The Ghost of David Koch

 

spooky ghost
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To the perceptive reader, it is conspicuous that the title of the essay is a sarcastic quip. This is not intended to be a diatribe against a man who is no longer able to defend himself due to his passing last summer. Rather this is a pointed argument against those who fixated on the invested interests in the Libertarian movement. This critique isn’t just relegated to the Libertarian movement but, any ideologue that promotes laissez-faire economic policies. The core assumption being that such convictions can only be perpetuated by the motive of avarice. If you have faith in markets over government institutions you have either been bribed or manipulated by the wealthy businessmen that fund pro-market think-tanks. Such misconceptions are commonly echoed throughout American culture. Along with a litany of other anti-market biases plaguing the collective consciousness of the average citizen.

 

Advocates of free markets are not chess pieces or hand-puppets of the Koch brothers. The irony is that rarely do those who express skepticism of markets address the motives of those sowing anti-market bias. Making me wonder if they entranced under the spell of a community activist or a power hungry bureaucrat. Much like affluent businessmen the government administrators respond to incentives. I hardly doubt anyone chooses to head a government department or ascend to the upper ranks of union leadership for truly altruistic purposes. Odds are benevolence isn’t guiding them but power and money. Generally the same motives ascribed to successful entrepreneurs and investors. Why is the bureaucrat and the union leader automatically perceived as having purer intentions than the businessman? When both the upper tiers of the public and private sectors have the same incentives for advancement. The only difference is that the public sector is funded by tax dollars.  This realization makes me wonder who is the one with the genuinely dogmatic views of markets? Unwavering faith in unions and government only being oriented towards “inherent good” is the definition dogmatic. Especially when you dismiss their salient agendas.

 

The myth of the grand network of Koch brother bribed academic institutions is on many grounds erroneous. For one, most establishments of higher learning lean left politically. The left-wing bias on college campuses is well documented. Only 9 % of surveyed faulty identified as being conservative [1]. It is certainly disingenuous to pretend there is some crazy right-wing/Libertarian conspiracy spearheaded by the Koch brothers. In stark contrast to popular perception, George Mason was pro-market prior to receiving any Koch money. It should be noted that it is public knowledge that the Koch brothers donate to George Mason and its affiliated research institute the  Mercatus center. A GMU faculty member wrote an opinion piece a few years back indicating that the donor relationship was “driven” by the economics department [2]. The circumstances behind the donor relationship may be unique to this one school, there are litany of other organizations and schools that the brothers donate to. The very fact that the dynamics of this relationship veer away from what is popularly believed  is imperative to understand. The notion of greedy billionaires are paying off professors to proliferate the theories of Hayek and Tullock evaporates in light of the truth.

 

Many of academic watchdogs shrieking in outrage over a pro-capitalist presence in higher education needs to realize/acknowledge they have their own donors as well. There are think tanks that range from advocating for comprehensive ideologues to  single local issues. In other words, you have invested interest backing just about any political philosophy in existence. The odds that your cherished belief system is free of the influence of wealth donors is not only naive but inaccurate. If supporting a certain set of beliefs will not increase their bottom line it will aggrandize the donor in other ways (more political influence or power). At the very least money being a core motive is easy to understand intellectually and morally. The lust of for power is much more unsettling.

 

Surprise, surprise! Left-leaning think tanks have their own high profile mega donors.  Few people (who operate on reason) are pontificating upon the conspiratorial machinations of these donors. This alone demonstrates a giant gulf in academic bias. If we have right-wing donors it is a crisis. If we have left-wing donors no alarms are raised. Which could lead one to believe such complaints are more partisan  than  a genuine concern for academic bias. Beyond the sheer hypocrisy, it may be usefully to examine the donations received by left-wing research institutes. For instance, the left-leaning Brookings Institute in 2019 received over 1 million dollars in donations from the Bill & Melinda Gates Foundation (Brookings Institute, 2019, P. 45) [3]. In 2018, the Gates Foundations provided over 2 million dollars in donations to Brookings Institute (Brookings Institute, 2018, P. 45) [4]. One could spend an innumerable amount of time collecting data linking the Gates foundation to a litany of various left-leaning institutions. It would only serve the same function of  connecting the dots in a disjointed attempt to fabricate a conspiracy.

 

Regardless of your political propensities it is very likely there is a donor with deep pockets funding the cause. Even the populous right has their big time financial backers  The Trump administration owes a great debt to the Mercer family in my humble opinion.  Making the observation that the vast majority of Libertarian-leaning institutions is funded by the Koch brothers is aimless. It is merely reaching around in the dark in a last ditch effort to diminish the credibility of organizations such as the Mercatus center.This attempt is not only is a partisan assault it is futile. Most fact checking websites find the research and articles published by Mercatus to be factual [5]. Does their ideological orientation really matter if they are publishing valid research? This leads me to believe contriving the narrative that the Koch brothers are pulling the strings on autonomous organizations is merely a desperate ploy to obscure facts that poke holes in anti-market rhetoric.

 

The arrogance displayed when such opponents claim that market orientated types of ordinary means have been “brain-washed”  is  awe inspiring. Most of these self-proclaimed “free thinkers” possess ideas that clearly did not originate from their own critical thinking. Sounds more like they are parroting the bombastic and hyperbolic talking points of labor unions, left-wing think tanks, community organizers, and liberal politicians. These folks are not re-inventing the wheel, but rather are regurgitating the agenda of invested interests. Interestingly enough what they claim those who are  right-of-center are doing. In order to avoid a circular argument, I will not continue to direct such claims at those are skeptical and hostile towards free-market capitalism. In contrast, I will state that the diffusion of ideas is not an isolated process. Ideas are generated the accumulation of information presented through mediums of communication. We typically file it away mentally as being either being valid or invalid. From this we tend to form our worldview.

 

To assume that you are a free thinker and that the opinions and observations of others exerts no influence on your views is a delusion. At best, is a twisted and fractured  piecemeal assembled form of relativism not fitting into a comprehensive philosophy. At worst, you are a devotee to a specific political philosophy, but are too blind to see this. The self-perception of being a “free thinker” is so compelling you are willing not ignore that you do belong to a tribe. For example, if you agree with 85 % of the Democratic party’s platform, you are a democrat. Anything else is an appeal to the bias of wanting to believe that you are more unique and individualistic than you truly are. Hence, my frustration with individuals who shelter themselves under the label of  being an Independent. Are you truly independent? If all candidates and positions on one side of the fence are completely abominable and the other half of the divide is completely reasonable. Guess what… you are not an Independent.  I would expect someone who is truly political independent to have more diversity in the policies they support.

 

The free thinker illusion provides a sense of sanctimony to anyone who wants to claim Libertarians and Conservatives are merely puppets of big business. One point that they tend to over look is that they anti-market types have donors with deep pockets. Also that their point of view has been carefully crafted by intellectuals on their side of the divide.  Considering I am not a billionaire I must be mistaken or hoodwinked by these greedy interests. It isn’t that I have been inspired by F.A. Hayek, Gordon Tullock, Ludwig von Mises, etc. It was my gullibility that allowed me to be manipulated and then  unwittingly become the mouthpiece for ideas that keep big corporations afloat. Maybe if I see the light I will see that error of my ways.

John Locke- Quantity Theory of Money

happy senior businessman counting money while sitting at table with laptop
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One of the age-old questions in the field of economics is whether or not money is neutral.  In other words, the introduction of new money into the economy only has a nominal impact [1]. It only raises prices and does not impact variables on employment or output (Cecchetti, P.1) [2]. The lack of influence of an increase in the amount of money on the aggregate economy is a core assumption of the Quantity Theory of Money.  An economic theory that was exposited by no other than John Locke. Locke is renowned for his moral philosophy and political theory often is overlooked in terms of his early contributions to economics.

 

In a broad application, the theory simply entails that the quantity of money is the key factor in the “changes in purchasing power” (Humphery, 1974, P.1) [3]. The theory stipulates that introducing new money will decrease the value of the currency resulting in higher prices (Humphery, 1974, P.1) [4]. This observation pertaining to alterations in purchasing power is generally widely accepted.

M= Stock of Money

P= Price Level (Humphery, 1974, P. 1) [5].

 

Locke explicitly detailed back in 1691 that the Price Level (P) is “always proportional” to the stock of money (M) (Humphery. 1974, P.4) [6].  Locke’s assumption the effects of introducing new money may have considered its impact on prices. However, it also assumes even that the changes in prices throughout the economy would be uniform. It is reasonable to question whether this assumption falls into the same folly that many other economic models suffer from. That is the gulf between theory and actual application. Wouldn’t it be possible for some actors in the economy to have access to the new money prior to the rise in prices?  Shouldn’t be also be considered that how the money is distributed could only magnify such potential effects? Whether due to the mechanism of distribution or institutional advantages.

….The mistake of this plausible way of Reasoning will be easily discovered, when we consider that the measure of the value of money, in proportion to anything purchasable by it, is the quantity of the ready Money we have, in comparison with the quantity of that thing and its Vent; or which amounts to the same thing, The price of any commodity rises or falls, by the proportion of the number of Buyers and Sellers; This rule holds Universally in all Things that are to be bought and Sold, bateing now and then an extravagant Phancy of some particular Person, which never amounts to so considerable a part of Trade as to make anything in the account worthy to be thought an exceprion to this Rule.  (Locke, 1691, P. 16) [7].

 

Locke may have been a brilliant thinker and the grandfather of liberalism, that does not make him above reproach.  The likes of David Hume and Richard Cantillon expressed disagreements with the assumptions of Locke.  Hume’s postulations are so similar to those of Cantillon that some have levied accusations of plagiarism (Bilo, 2015, P.4) [8]. I will provide no further commentary on that claim. Both Hume and Cantillon did not see the role of money in the economy as being neutral. It can be argued that this is not a realistic view of the function of money. Cantillon suggests that the point of injection of new money and the velocity of circulation plays a role in its impact (Thorton, 2006, P.4) [9]. A point that is clearly neglected in Locke’s account of the role of newly introduced currency. If money was neutral how additional quantities are introduced would not matter.

 

Both Hume and Cantillon noticed other factors that clearly demonstrated the nonneutral nature of money. Which include the following:

(1) the lag of money wages behind prices which temporarily reduces real wages, thereby encouraging increased demand for labor ; (2) the stimulus to output occasioned by inflation-induced reductions in real debt burdens which shift real income from unproductive creditor-rentiers to the productive debtor- entrepreneurs ; (3) so-called “forced-saving” effects, i.e., changes in the fraction of the economy’s resources diverted from consumption into capital formation owing to price-induced redistributions of income among socio-economic classes having different propensities to save and invest; and (4) the stimulus to investment spending imparted by a temporary reduction in the loan rate of interest below the profit rate on real capital. (Humphery. 1974, P.4) [10].

 

All of the listed observations are clearly distortions caused by the unequal distribution of new money throughout the economy. Those who have access to the new money first reap the advantage of the lower prices. As the reverberations of the new money have not echoed throughout the economy. In other words, prices have not increased to reflect the depreciation in the value of the currency. If the new money is introduced through highly centralized institutions this discrepancy will be quite salient. Versus being more evenly distributed. Those with early access to the new money will spend it prior to the rise in prices.  Such consequences being indicative of Cantillon’s eponymous theory the Cantillon Effect.

 

It is possible that Locke may have potentially oversimplified the more intricate impact that introducing more money has on the economy.  However, empirical research has not always yield findings congenial to Cantillon’s finding (Wagner & Daley, 2004, P. 8) [11]. Veteran economists Richard Wagner and Steven Daley suggest that “…comparative statics of monetary or macro aggregates.. “are inappropriate for studying Cantillon Effects. Rather we should focus on the “… structural composition of economic activity..” (Wagner & Daley, 2004. P.17) [12]. Despite my paucity of economic credentials, I would wholeheartedly agree. Locke’s Quantity Theory of Money lacks an acknowledgment of how money is circulated. If new money is distributed unevenly the adverse ramifications of inflation will be felt differently.