Sunday, May 30, 2010

Economic News from the Birthplace of Modern Economics

There is probably little argument with the Wikipedia claim that Adam Smith "is widely cited as the father of modern economics," primarily on the basis of his having authored An Inquiry into the Nature and Causes of the Wealth of Nations. Smith was a Scot and did some of his most productive work at the University of Glasgow, but he had the opportunity to take a tutoring position that enabled him to travel to Europe. His Wikipedia entry offers a nice summary of the benefits of his travels:

After staying in Geneva, the party went to Paris, where Smith came to know intellectual leaders such as Benjamin Franklin,[22] Turgot, Jean D'Alembert, André Morellet, Helvétius and, in particular, Francois Quesnay, the head of the Physiocratic school, whose academic products he respected greatly.[23] The physiocrats believed that wealth came from production, in contrast to mercantilism, which was the dominating economic theory at the time. They also believed that agriculture produced wealth, and that merchants and manufacturers did not.[22] While Smith did not embrace all of the physiocrats' ideas, he did say that physiocracy was "with all its imperfections [perhaps] the nearest approximation to the truth that has yet been published upon the subject of political economy".[24]

One could thus probably make the case that travel provided both the inspiration for The Wealth of Nations and the motivation for Smith to set down his own "approximation to the truth."

I offer this background, with a particular emphasis on Smith's Scottish roots and sensibilities, as a context for reading one of those rare reports of positive economic news. This story showed up on the BBC News Web site last night and happens to be a dispatch from Scotland:

Scotch whisky is worth nearly £4bn to the Scottish economy, according to research carried out for the industry.

The analysis shows the extent of the boom in whisky from 2000 to 2008, when years of sharp export increases were stopped by the global recession.

The Scotch Whisky Association (SWA), representing the major distillers, said the product had as much impact on the Scottish economy as tourism.

It said it produced earnings per worker 12 times higher than those of tourism.

Only the oil and gas sector has more impact, and represents higher earnings per worker.

Given what is currently happening in the Gulf of Mexico, I suspect I am not the only one hoping that its impact on the overall economy will eventually overtake the oil and gas industries.

If we wish to understand the logic behind this good news, however, we should turn not to Smith but to his English "successor," David Ricardo, who developed a theory of rent to provide a model for the value of land, which Friedrich Hayek then generalized to a theory of price. From this point of view, we should recall that, while Ricardo's rent theory was preceded by work on a theory of value, Nobel laureate Robert Solow has held adamantly that "value" is too vague a concept for economic theory and that "price" is the primary concept on which any theory should be grounded. Here, then, is what Hayek wrote about price in 1942:

What is true of the theory of rent is true of the theory of price generally: it has nothing to say about the behaviour of the price of iron or wool, of things of such and such physical properties, but only about things about which people have certain beliefs and which they want to use in a certain manner. And our explanation of a particular price phenomenon can therefore also never be affected by any additional knowledge which we (the observers) acquire about the good concerned, but only by additional knowledge about what the people dealing with it think about it.

Speaking as one who has taken the consumption of single malt whiskies very seriously, I have to say that my personal beliefs play a very strong role in my purchasing decisions. From just about any point of view, such consumption should be regarded as a luxury; but it is a luxury that has earned itself a place in the budget that I now manage scrupulously. Thus, my beliefs are as strong as they were (if not stronger) when I had more resources at my disposal to explore and experiment among the many varieties of these whiskies.

This now brings us to the issue behind the BBC decision to report this story in the first place. The new coalition government in the United Kingdom has announced a commitment to review alcohol taxation, and the SWA is in strong support of this review. More specifically, the Association seeks a duty structure that will be more supportive to both production and exporting. This, in turn, can have a positive effect on the production system, bringing more people into the business while (hopefully) maintaining the level of skill that figures so heavily in the quality of the product.

Those of us who appreciate that quality and are willing to pay for it may constitute the best example of an "asocial global community." For the most part we do not know each other; and I suspect I am hardly the only one who sees no need to be part of a "social network." (I have not even bothered to check how many whisky blogs are out there.) Indeed, the only thing we have in common is the seriousness with which we consume the product; and for many (most?) of us, that is a solitary pleasure. However, it amuses me to think that, because of this particular approach to budgeting for a luxury, my purchasing power may have more impact on an economy than any investment I have made in shares of IBM or in bonds for a California water project, neither of which were motivated by beliefs as passionately embraced as those I hold about a good single malt!

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