Academic journal article American Economist

Adam Smith and the Great Deceleration in the U.S. Economy

Academic journal article American Economist

Adam Smith and the Great Deceleration in the U.S. Economy

Article excerpt

I. Introduction

This paper presents an assessment of the long-run performance of the U.S economy from the perspective of Adam Smith. The time frame is the more than six decades that have passed since the conclusion of World War II. From a Smithian perspective, the most prominent macroeconomic happening of this period was not the empirical proposition known as the Great Moderation, although this has received considerable attention (Bernanke 2004). (1) Nor was it the apparent successor, the Great Recession of 2008-2009. Rather, it was what Smith might describe as the Great Deceleration, or the notable decline in rate of U.S. economic growth that has occurred in the post-World War II period.

This Great Deceleration has gone largely unnoticed. It is testimony to lower priority accorded Smith's long-run view. It reflects, in turn, the dominance of the more short-run macroeconomic perspective of followers of John M. Keynes. (2) The disproportionate attention given the Great Moderation, and more recently the Great Recession, is evidence of the pervasiveness of the Keynesian perspective.

Assessing the performance of the U.S. economy from the vantage point of Adam Smith resuscitates his predilection for the long-view. At the epicenter of Smith's perspective on long-run growth are counteracting forces involving the laws of human nature and actions undertaken by governments. Prior to examining the potential role played by such forces during the Great Deceleration, it is useful to briefly recount Smith's analysis of the causes of economic growth, and also his perception of how economic growth is properly measured.

II. Economic Growth

An Inquiry into the Nature and Causes of the Wealth of Nations is a treatise on economic growth. Smith's growth theory, while embellished with historical examples, has a distinctly modern flair. Economic variables accounting for growth are very similar to those enumerated by Robert Solow (1957) in his seminal study of the aggregate production function: 1) improvements in productivity; and, 2) growth of the factors of production.

While land, labor, and capital all contribute to economic growth, they are not all equally important. For Smith, labor is primary source of wealth creation. It is the property rights that each man has to the fruits of his own labor that lead to the development and improvements in other inputs, land and capital.

The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable. (Smith 1937, 121-122)

This emphasis on the input labor distinguishes Smith's work from that of modern theorists, who often give equal treatment to all factors of production.

It also differentiates Smith from some of his contemporaries. It was the French physiocrats who considered land the principal input, while the mercantilists often stressed the importance of a favorable trade balance for the process of wealth accumulation.

As testimony to the pivotal role played by labor, Smith devoted much of Book I in the Wealth of Nations to a discussion of those factors that contribute to increases in labor productivity over time. He was quick to acknowledge, however, that both increases in the quantity of labor employed and improvements in labor productivity do not occur independently of the other inputs. Indeed, neither will likely happen if there is not a prior increase in a nation's capital stock. As a consequence, the study of capital formation becomes central to Smith's analysis of the growth process, so much so that he devoted Book II (Wealth of Nations) to the subject.

It is noteworthy that Adam Smith's concept of capital included not only tools, machinery, and buildings (fixed capital), but also the wage goods (circulating capital). Inclusion of the latter is necessary because production is roundabout. Wage goods are required to support workers during the period of production. …

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