“As soon as government management begins it upsets the natural equilibrium of industrial relations, and each interference only requires further bureaucratic control until the end is the tyranny of the totalitarian state.”

– Everett Dean Martin, on the philosophy of Adam Smith

August 14, 2024 — We’ve been preoccupied with an escalation in violence in the Ukraine and the Middle East. More, tomorrow.

Today, Managing Editor Andrew Packer wraps up his travels to the UK by sharing some experiences from his time in Scotland. Along the way, Andrew explores the idea of how today’s society is running on the fumes of an engine built hundreds of years ago, and what may happen next. Enjoy ~~ Addison

Coasting on the Knowledge of Giants

Andrew Packer, Grey Swan Investment Fraternity

Edinburgh, Scotland – Halfway down the Royal Mile between Edinburgh Castle and Holyrood Palace (the Royal Family’s Scottish residence), is one statue that gets less attention than the rest.

In this great city, recognized as a UNESCO site for its contributions to literature, stand numerous monuments. The most prominent is for Sir Walter Scott, inventor of the modern novel with his Waverly series.

Edinburgh is also home to other notables such as children’s author Robert Louis Stevenson, detective writer extraordinaire Arthur Conan Doyle, and in our times, J.K. Rowling.

But arguably the most important book produced by an Edinburgh resident isn’t a novel. It was a book written by a professor of moral arts.

First printed in the year 1776, this book likely influenced the world over, and helped act as a “blueprint” for the then-forming United States of America.

This important tome? The Wealth of Nations.

Author Adam Smith is considered the father of economics thanks to this work alone.

And in a sense, that’s true. Smith lived during the age of mercantilism, when countries strove to enrich themselves by trying to expand trade with other countries, while keeping as much of their money in circulation at home.

Smith smashed those arguments, arguing instead that free markets worked best, thanks in part to the “invisible hand” of billions of decisions made by millions of free persons throughout their daily lives.

This view of the world helped fuel the industrial revolution. Technological innovation upended centuries of the status quo. New jobs related to those technologies drove wages and costs of living higher.

Did Smith imagine a perfectly free market? No. Government would exist as a player, at the very least as a referee to enforce the proverbial rules of the game.

Today, we’re coasting off of this engine of progress that Smith developed.

We can see that with ever-declining GDP growth rates in real terms.

With each regulation created, with each new line of the tax code added, more weight is being pulled by the engine of capitalism.

Neither Smith, nor the monarchs of his time, would imagine that today the average citizen faces so many regulations, impacting so many facets of everyday life, enforced by a standing army of bureaucrats greater than any force they could ever assemble, and protested by so few.

Today, China operates much like the mercantile systems that once dominated Europe. Western nations have bent over backward to provide China with technology and resources, all for cheaper goods.

Perhaps not surprisingly to the student of history, China’s attempt to grow its own middle class has fizzled out.

In 2023, China was supposed to see massive growth as they ended draconian Covid-era lockdown policies.

They did grow by 5.2% – it’s amazing how much GDP growth you can have thanks to the fact that government spending is added to GDP, not subtracted. But it was far less than expectations for 6-8% growth.

More importantly, China’s neo-mercantilist policies have soured with the investment community.

Companies have spent billions to expand manufacturing outside of China, whether still far away, or with near-shoring in Mexico, or even re-shoring for America’s semiconductor manufacturing renaissance.

Perhaps it’s because, despite China’s massive economic growth over the past few decades, there’s very little individual freedom. Or, perhaps, it’s simply because there’s no good translation of The Wealth of Nations.

Adam Smith should get credit for another concept that helped fuel the Industrial Revolution: sound money.

Smith notes:

“The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.”

In today’s age, with our memory about sound money fading, a generation of fiat has led to massive wealth destruction.

Bubbles are more easily fueled by fiat money over sound money – yet at the right time and circumstances, they’re just as easy to pop. Just witness the recent market air gap as the carry trade against the Japanese yen unwound.

And for those in the know, it’s allowed for the creation of the largest concentration of wealth in history.

While Adam Smith is far from a perfect economist, he gets the big picture generally right.

And the fact that we’ve strayed from his fundamental truths about human existence with playful ideas like universal basic income (UBI) to endless money-printing is to not just our loss, but to future generations who will come to think of these abhorrent economic concepts as the norm. ~ Andrew Packer, Grey Swan Investment Fraternity

So it goes,

Addison Wiggin
Founder, The Wiggin Sessions

P.S.: Smith’s radical insight roughly around the time the colonists were getting uppity in the New World is still radical. In short, he argued that a nation’s wealth was not derived from political power or its military might, but the stream of goods and services the industrious folks of the nation create.

“What can be added to the happiness of a man,” Smith, the moral philosopher, also asked, “who is in health, out of debt and has a clear conscience?”

It’s a damn good question.

As noted above, we’ll return tomorrow with thoughts on the “unprecedented escalation” in the war between Russia and Ukraine… the U.S. effectively trying to goad Iran into attacking Israel… most of all what effect these warmongering efforts will have on the U.S., the dollar and planning for your own future.

In the meantime, we refer you again to our Wiggin Session interview with netwar tactician John Robb.

As you’ll see, Robb’s greatest concern globally is China will seize the opportunity of escalations in Europe and the Middle East to launch a drone attack on Taiwan. He makes a compelling case.

P.P.S.: How did we get here? A provocative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on to Empire of Debt— all three books are available in their third post-pandemic editions.

(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at AmazonandBarnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)

Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com