Famed economics professor Vernon Smith is known for his calls for the greatest possible freedom for business. Is he changing his mind because he is now blessed with age wisdom?
Nearly 100-year-old economics professor Vernon Smith has sent out cautionary words. “We are experiencing a dangerous intervention spiral,” the economist told the German magazine “Wirtschaftswoche.”
During the coronavirus pandemic governments intervened in the markets with gigantic spending programs and central banks financed the programs with the printing press, the scientist criticized.
He should know, after all, he earned his doctorate at the U.S. University of Harvard and was awarded the Nobel Prize in Economics in 2002 for groundbreaking research on experimental economics.
Fighting fire with fire
Nor would it take a clairvoyant to realize that sooner or later these programs would drive inflation, Smith continued. “Now the U.S. government is putting in place a new spending program ostensibly to fight inflation,” he said.
This needs to be imagined – a government spending program to fight inflation, the professor, who these days still teaches at George Mason University in Virginia, monologued.
“The inflationary malaise will continue as long as the government ramps up its spending and competes with private economic actors for scarce economic resources,” the 95-year-old continued.
Firefighters set fires
“The fact is, politics often fights problems that it previously created itself,” Smith pointed out. Basically, the state does nothing really productive. One only has to look at the state school system in the U.S. or state hospitals with their often miserable services.
Governments are good at spending and redistributing money. “But then they need inflation to devalue the debt,” the economics professor warned. So Switzerland has to be careful about that, too.
Less for consumption
Smith always argued that the economy should be given the greatest possible freedom and that, in fact, only consumption should be taxed. “When a person consumes goods, he withdraws resources from the economy that are no longer available to other people,” he continued.
“If, on the other hand, the state taxed income and profits, people would have less money to save. This slows down investment, reduces capital formation and reduces future consumption opportunities,” he warned.
But why does he think the capitalist profit motive is good? He really takes a swing at that question: “At its core, capitalism is based on voluntary exchange relationships among people for mutual benefit,” he explained.
Protection from state
This, he said, was already recognized by America’s founding fathers, who enshrined in the U.S. Constitution an economic system with the protection of the individual from the state.
“If people fail to bring the state under control, it cannot protect them from enemies from within and without,” Smith further emphasized.
Many anti-capitalists would oppose war, environmental destruction and racial discrimination. In doing so, they make their movement attractive to younger people who merely want to make the world a better place. “But making corporate profits more expensive is sheer nonsense. They need profits to invest.”
This also applies to the oil companies that are now being so heavily criticized, he cautioned and is with his high age still up to date.
Energy market as example
“Low energy costs are the secret of global success in the fight against poverty,” he said.
That’s why he also sees research on markets for things that were not previously traded in markets as worthy of a Nobel Prize. “Economists have long believed that to generate and distribute electricity, you need the state, either as an owner or as a regulator.”
Threats to freedom
But today, he outlined, energy systems in many countries are organized through markets. In his opinion, it is precisely this research into how markets should be designed in order for them to function that deserves a Nobel Prize.
“State paternalism is a danger to freedom and the market economy,” said the 95-year-old, who will remain true to his course into old age.
Capitalism must be preserved, Smith alerted, even if this sometimes entails major social conflicts.