Adam Smith Improved Aristotle's System with Respect to His Assessment of the Commercial Aspects of the State: Smith Never Rejected Any Part of Aristotle's General Theory of Economics, Politics, Civics, and Institutions

Abstract

The misbelief that Smith ultimately rejected Aristotle's analysis of the general, primary causes creating economic problems afflicting Athens in the Fifth century, B. C., when Athens was at the center of the world’s major, commercial, trading countries, in incorrect. The decline of Athens between the fifth and fourth centuries, B. C., was brought about by the conflict between the middle class "sober" people, who made use of money using the C-M-C' formula versus the upper class "Projectors, Prodigals, and Imprudent risk takers", who made use of money using M-C-M' and M-M' formulas. Aristotle did not explicitly identifying his upper class speculators as Smith’s Projectors, Prodigals, and Imprudent risk takers or Keynes's "speculators and rentiers".

Aristotle identified the problem as being one involving certain upper income class citizens who were not interested in the making of consumer and producer goods, but sought to make a profit by speculation and financial manipulation, which was tied in to the formulas M-C-M' and M-M'.

Smith explicitly explicated Aristotle's exchange formula categories by linking them to either a category he described as Projectors, Prodigals, and Imprudent risk takers (M-C-M' or M-M') or a category he described as the Sober people (C-M-C'). Smith realized that the world economy was composed of both categories. The negative impacts of the Projectors, Prodigals, and Imprudent risk takers (M-C-M' or M-M') on the Athenian state was analyzed by Socrates, Plato, and Aristotle. This also was the problem effecting Scotland and England in the 18th century and the USA in the 1890’s,1920’s, and the time period from 1978-2017.

Smith made improvements to Aristotle's analysis by showing how the creation of a central bank could be used to prevent loans from being made to Projectors, Prodigals, and Imprudent risk takers, while simultaneously ensuring that private bankers (Aristotle’s private financiers) were required to make loans only to the sober people, who would use the loans to expand their small businesses by investing their savings and bank loans in additional producer (investment) goods that would expand the economy, make workers more productive, lead to higher real wages, reduce poverty and inequality and increase employment through economic growth over time. The great danger to Smith's innovation, that Aristotle would surely have pointed out to him, could occur if the upper class Projectors, Prodigals, and Imprudent risk takers were able to take control of the government and/or the central bank, which is what has happened in the USA since 1979, starting with the appointment of Paul Volcker by President Carter to be the head of the FRB in Washington. The Central bank must be independent from the Government and especially from the private banking industry. Otherwise, you get the same type of financial bubbles that Smith analyzed, such as the Tulip, Mississippi, and South Seas Bubbles, or the collapse of the Ayr Bank in Scotland in 1772.

Keywords: Smith, Virtue ethics, Benthamite Utilitarianism, Aristotle, money, banking, prodigals, Imprudent risk taker, projectors

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