Why don't we listen to Adam Smith?

"The only thing we learn from history is that we don't learn from history."

This is quite possibly my favorite quote. It is the truth. We don't learn from our mistakes. How many booms and bust have happened in the past 400 years? More than enough that we could predict them the next time they come around, or so we like to tell ourselves.

The most important book written on modern economic theory, "The Wealth of Nations", by Adam Smith clearly lays out steps that could have been taken to prevent the impending collapse of the American economy. This book is basically required reading for anyone majoring in a business related major. However, since it is 232 years old, I guess Ben Bernake, Henry Paulson, George Bush, Barack Obama, and Timothy Geithner don't feel that it is relevant in today's current situation.

What would Adam Smith say about our current situation? He would probably be laughing hysterically. Smith spotted the precise cause of our economic collapse 232 years ago. Digest this quote from "The Wealth of Nations":

"A dwelling-house, as such, contributes nothing to the revenue of its inhabitant. If it is lett to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue"

Basically, Smith concluded that, although a house can make money for its owner if it is rented, "the revenue of the whole body of the people can never be in the smallest degree increased by it". What does this mean? It means that even though housing and property prices are rising and people think they are getting "richer", they really are not. It is fake wealth. The productive capacity of the economy has not increased. Therefore, people are not more wealthy. However, because people perceive being more wealthy they take out loans using their increasing property values as collateral and then when the market finally collapses, as all property bubbles do, they can't afford to pay off their loan anymore.

To stop a debt collapse and prop up already inflated asset prices Keynesians believe that the Fed should increase the money supply because it increases spending. However, this does nothing but create more credit/debt financed spending and inflation. In the end, someone has to pick up the bill and you will eventually have a collapse, just like we have now. This is what Adam Smith had to say about increasing the money supply to fund more debt financed spending and prop up overvalued asset prices:

"To attempt to increase the wealth of any country, either by introducing or detaining in it an unnecessary quantity of gold and silver (they used real money in 1772), it is absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils."

So how would Adam Smith fix the current problem? It can be summed up in one sentence.

“The answer to a decline in the value of speculative assets is to pay less for them”

You have to wonder, does anyone remember anything that the past has taught us. Are the ghosts of Adam Smith and our founding fathers going to rise from the dead and save us from ourselves? I don’t think so. What the United States needs is to remember where it came from. People need to remember the Constitution. People need to remember what a free market is. The people need to control government. It really is a sad day when I can make an argument for Communist China having more of a capitalistic free market economy than the very place where capitalism was born.

Why couldn’t we listen to Adam Smith?