Quantitative easing? Bah humbug!
TIRED of lightweights bickering over the financial crisis and its aftermath? Of economic upheaval becoming merely fodder for intellectually dishonest political campaigns? Wonder what biggest thinkers might have to say? Our efforts to consult the giants of economics have been hampered by an unfortunate fact: many of the most important ones are not only dead, but they died long before governments and central banks began to concoct such unconventional policy tools such as quantitative easing. That explains their absence from the argument—so far.

In an attempt to cross this divide, notwithstanding the obstacles, your correspondent attended a lecture at the Harvard Club of New York on January 21st by James Otteson, a professor of political economy at Wake Forest University and the editor of a new book, “What Adam Smith Knew, Moral Lessons on Capitalism from its Greatest Champions and Fiercest Opponents”. And he asked what the great Scottish economist might have to say about the most recent crisis.
Mr Otteson was kind enough to channel Mr Smith in response by citing a string of illuminating passages. It is no surprise that the man who coined the term "invisible hand" would be no fan of overt government intervention. His dissent could be split into three intertwined categories: the temptation of governments to meddle at long-term cost to society; the dangers of paper money; and how the issues of debt and money shift wealth from the future to the present. That, he thought, constitutes a form of generational theft.
The first these, the temptation to meddle, touches on a core component of Smith's philosophy, most notably captured, Mr Otteson says, in the great economist's first book, “The Theory of Moral Sentiment” (1759). The "man of system" makes the mistake of thinking he can arrange the pieces of human society as if they were pieces on a chess board, but a human being has "a principle of motion of its own altogether different from that which the legislature might choose to impress upon it". Unintended consequences may result from governments imposing their ideas on society by coercion, thereby creating ongoing strife.
In "The Wealth of Nations"(1776), Smith's more famous work, he frequently discussed the fragility and moral hazard of paper money, noting that it can disguise the growth of debt and provide an appearance of wealth that is hollow; a devastating "juggling trick". It is not a stretch to imagine that, if Smith were to come back and produce a revised edition, he might cite central-bank balance-sheets as an illustration of this.
Much of the extra regulation that was imposed after the financial crisis was justified as protection for individuals, but Smith would have been suspicious of such a top-down system. "The real and effectual discipline which is exercised over a workman is that of his customers," Smith wrote. "It is the fear of losing their employment which restrains his frauds and corrects his negligence."
All these points suggest that the financial crisis might better be thought of in two pieces, the initial tumult and the response, whose pernicious consequences lay ahead. Beyond the vast amount of public debt created during the crisis, the mere act of bailing out the institutions involved undermined the fear that Smith said was essential to prevent future fraud and negligence. What then is the alternative, if ever greater reliance on Mr Smith's "man of system" and his flaws is to be avoided? In seeing what has unfolded, Smith would be forgiven if he were to ask an obvious question: how could his ideas and his name continue to be so widely circulated while their meaning is ignored? It is left to the reader to decide whether Smith can provide all the answers for the modern world.