On the Updating and Reformulations, Added by Adam Smith and J M Keynes, to Aristotle's Universal, General Theory of Economics, Politics, Civics, and Institutions

Abstract

Some 2,400 years ago, Aristotle, based on the previous oral and written work of Socrates and Plato, created a general theory of Economics, Politics, Civics, and Institutions that applies for all times and all places. However, while the basic framework elaborated by Aristotle will always be applicable, certain updates and reformulations needed to be added as technological innovation, obsolescence and advances altered the nature of economic exchange in the market place over time both internally and between nation states. After updates on Aristotle done by Augustine and Thomas Aquinas, Smith updated Aristotelian ethics and economics by modifying the system of Aristotelian virtue ethics and economics to take into account the ongoing expansion of the market based system of exchange, based on the standard Platonic understanding of the positive relationship that existed between the division and specialization of labor over time and increases in the size of the market economy in a city-state. Aristotle correctly identified the major internal threat to the stability and existence of a republic as resulting from the misuse of money (M-C-M’ and M-M’, instead of C-M- C’), which led to the rise and dominance of a speculative, utilitarian minded, upper income class whose economic and political policy goals, objectives, and views would, if implemented, be inimical and negatively impact the optimal size of the middle class by significantly reducing the middle class and substantially increasing the lower class. The goal of reducing the size of the middle class is a political one. Members of the middle income class usually vote. Members of the lower income class usually do not vote. Shifting more and more of the population into the lower class means that the upper income classes’s, who always vote, voting power is dramatically increased. This would serve to undermine the foundations of the republic, which must be based on the permanent dominance, both politically and economically, of a very large, middle class. This is precisely what the upper income classes oppose.

Adam Smith saw that there was a way to prevent this outcome from occurring by creating a central bank, independent of the private banking industry and the government, that would prevent the private commercial banking system from making loans to the certain segments of the upper income classes, which Smith identified as consisting of “projectors, imprudent risk takers, and prodigals”. Loans would be skewed heavily toward the “sober”, middle class citizens that would use the bank loans to create businesses or expand existing businesses, so that the C-M-C’ use of money as a medium of exchange would be enforced and dominate over the M-C-M’ and M-M’ uses. Thus, enterprise would come to dominate over speculation if the central bank followed through and made sure that most of the credit went to the sober people.

Keynes further developed Smith’s analysis of the role of the demand for money and banking by expanding and developing it into his Liquidity Preference Theory of the demand for money. Keynes redefined “Smith’s projectors, imprudent risk takers, and prodigals” as being “speculators and rentiers”.

Keynes’s goal was to emphasis the very negative impacts resulting from the speculative use of money in the economy that Aristotle identified. Keynes’s Liquidity preference approach incorporates C-M-C’, M-C-M’ and M-M’ into a modern, improved version of Aristotle’s initial discussions where the speculative demand for money is identified with the M-C-M’ and M-M’ outcomes. Keynes sought to move the economics profession back toward the type of ethical concerns that were discussed in Smith’s TTMS and WN and away from the Benthamite Utilitarianism that had come to dominate the profession since the deaths of Adam Smith and Benjamin Franklin in 1790.

Both Smith’s “projectors, imprudent risk takers, and prodigals” and Keynes’s “speculators and rentiers” attempt to earn an economic return or profit without any production of any newly produced goods and services ,by simply manipulating various types of financial products using debt finance, based on borrowed money from private commercial banks ,to leverage their debt position to the maximum possible. These kinds of approaches do not use C-M-C’, which is what both Smith and Keynes recommend, but the M-C-M’ and M-M’ approaches. The result of the M-C-M’ and M-M’ money and banking approaches is a continuing, ongoing series of financial crises, bubbles and crashes leading to inflation and deflation that significantly reduces the size of the middle class and increases the size of the lower class and upper class. This process will repeat itself again and again periodically over time if the projectors, imprudent risk takers, and prodigals are able to dominate the money and banking or monetary policies of the central bank.

Carmine Gorga (see references) is the only modern day economist who has concerned himself with these issues. He has provided an analysis in his Concordian Economics approach that has the same type of generality as possessed by Aristotle’s theory and aims for the same kinds of outcomes in terms of a dominant, very large, stable middle class.

Keywords: Aristotle ,Plato,Socrates,Smith,Keynes,Gorga,Virtue,Utilitarianism,ethics,economics

JEL Classification: B10,B12,B14,B16,B20,B22