Revisiting Adam Smith

Since the early stages of human civilization, mankind had felt the need to possess material. First such possession was by aggression or violence, then barter and finally with currency. The desire for material possessions have always led to the perversion of the tools devised to enable progress and innovation. Currency is one of those tools.

Adam Smith argued that people are predisposed to be sympathetic to their suffering brethren; he also advocated the division of labor to improve productivity.  The Industrial revolution bought a lot of productivity but at the same time the wealth of certain nations exploded while the industry of certain nations was relegated to mining and farming. Those that were relegated were the colonies.

Building the wealth of nations continued with these nations getting wealthier and the capital investor getting richer. Capital markets enabled more people to participate with varying levels of risk appetite to harness gains. As these capital market instruments matured to provide precise levels of controls and risks, the focus became to be consistently increasing profitability of enterprise.

No longer did it seem like people were predisposed to be sympathetic to their suffering brethren when the concept of outsourcing started. Erstwhile colonies and laggards of the industrial revolution with teeming millions of workers seemed to be the solution to keep increasing the profits. As a result, the efforts of capital no longer aimed to build wealth of the nation but instead ended up building wealth of the capital owner.

Local unemployment and income disparity in developed nations increased while in the developing countries we had newly minted millionaires presiding over an army of underpaid (by first world standards) workers.

The credit card and home equity line of credit helped boost the demand for goods and buffered the declining employment quality and purchasing power of the consumers in the developed nations. The lure of buying a cheaper and better car, TV or phone seduced the people from looking at the reality.

The great housing market crash in the USA bought into sharp focus the excesses of borrowing and consumerism. However, it was the taxpayers who ultimately paid the price for the misadventure and nothing has changed much since then. Popular products are still in high demand despite news of the products being produced by employees in third world working in deplorable conditions for low wages.

The other side of the coin is the real estate scene in Vancouver where lots of foreigners are pumping money and buying up property. The average cost of housing in Vancouver is more than a million and locals working in Vancouver, especially the younger generation is unable to afford housing. Ironically, there are reports that most of these houses are empty. My theory is that this phenomenon will continue because the newly minted millionaires in the developing countries will seek out havens of good governance to invest for their future. So while corporations in the first world continue to outsource and make profit margins, local unemployment and customer base will diminish. Corporations will negotiate and move their domicile to nation states that offer favorable decreasing corporate tax rates. In the bidding war between nations, we will probably see the demise of the sovereign and the ascendance of the mighty corporation whose annual budget will be way bigger than any nation.

Wonder what Adam Smith would have thought if he were alive?

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