But the settled "natural" price of labour accepts raw power relations without any challenge or limits. Does economy has to be that amoral? Can't there be no theory or workable economy that includes abuse misery considerations seriously? What is the core value of the massive efforts to organize economy?

On Smith, I haven't read him, but I'm wondering to what extent he conceived of the concept of long term system wide per capita economic growth. Or in other words, did he buy into the just emerging belief in Progress and if so, how did he understand it?

Yes and no.

Smith argues that in the steady state, labour will be remunerated at a subsistence level (as will capital, by the way). However, as long as the economy is "improving" - that is, as long as society as a whole keeps getting richer, wages (and profits) can remain above subsistence level, because there is a time delay between the increase in demand for labour and the increase in its supply, which creates a shortage that allows for prices to rise. In the same way, of course, a declining society will push wages below subsistence level, leading to fewer people.

If this sounds tautological - people can get richer when people get richer - then that is because Smith does not have a good model of economic growth. He observed that it happened, and you can certainly re-cast much of what he wrote about growth in modern terms like increasing capital intensity or aggregate demand driven technological progress. But he doesn't quite present a convincing synthesis himself. His comparisons between China and England indicate that he believed that there is some physical limit to growth, related to how much crop you can get out of land. But it is never spelled out explicitly.

If you need eighty percent of the population working full time just to produce enough calories for themselves and everybody else, then there's not much room for the population as a whole to have well above subsistence standard of living.

Indeed, this is an important - no, essential - point for anybody who wants to understand the early classical economists. Agricultural land was the most important factor of production. Bar none, and it's not even a close contest. This is what lead the early classical economists to propose that labour and capital would end up, in a steady state, being remunerated at a subsistence level, because the bulk of the surplus value from production is captured by the constraining factor of production.

When Smith was writing, this factor of production was agricultural land. When Marx was writing, it was capital. When Keynes was writing, it was financial assets. When Galbraith was writing, it was specialised labour and sophisticated organisation. (Today we're back to financial assets, and re-fighting Keynes' fights...)

- Jake

Friends come and go. Enemies accumulate.

On Smith, I haven't read him, but I'm wondering to what extent he conceived of the concept of long term system wide per capita economic growth.  Or in other words, did he buy into the just emerging belief in Progress and if so, how did he understand it?  Because at first glance what he's describing is the way things had worked for the vast majority of the population in pretty much every civilization before the combined impacts of rapidly rising agricultural and manufacturing productivity outstripping population growth that only became fully apparent a couple generations after his death.

Smith was very familiar with the idea of progress, having been from late 1763, on David Hume's recommendation, the tutor to Henry Scott, the young Duke of Buccleuch at double his income from the Chair of Moral Philosophy at Glasgow and a pension of equal amount. This entailed touring Europe as well as tutoring and he spent time in Geneva with Voltaire and in Paris, where he spent time with Turgot and Quesnay, among others.

Smith was also familiar with the early progress of water driven mechanization of textile production in England and both the carding and spinning of thead had been mechanized by the 1740s and Arkwright had patented his improvements of Kay and Highs' spinning machines in the 1760s. Arkwright's first continuous cotton mill was in operation a few years before the publication of Wealth of Nations.

But Smith's sensibility had been formed well before the Industrial Revolution had begun and Wealth of Nations was published before the factory system had transformed English society. Smith's approach hearkened back to Bacon and Newton and was empirical and descriptive, not deductive.

"It is not necessary to have hope in order to persevere."

I suppose the argument goes something like this: for companies to be competitive, salaries cannot rise much faster than productivity, at least not in the long run.

That's perfect narrative logic - superficially convincing, but lacking real predictive power or insight.

What if the argument went like this: for companies to be competitive, salaries should be larger to create larger disposable incomes, increase the national tax base and boost both personal and public discretionary spending?

Or like this: for companies to be competitive, shareholder and management compensation should be limited in the short term, to maximise investment and shareholder return in the medium and long term?

Some or all of these could be true. Have they ever been tested?

I suppose the argument goes something like this: for companies to be competitive, salaries cannot rise much faster than productivity, at least not in the long run. As long as all countries have their own currencies, any refusal to moderate wage growth will be dealt with automatically by the weakening of the currency. With this escape valve blocked by a common currency, painful wage deflation is the only way forward when wages have gone too high

And that would be true under a gold standard, because under a gold standard you cannot simply debase the entire currency system. Under a fiat common currency, however, the alternative policy stance of increasing demand and/or inflation in the low-inflation/low-wage growth economies is becomes viable.

Concluding that flexible labour markets are necessary reflects an anachronistic preference for deflation over inflation.

The - uh - "theory" behind the budget deficit requirement is that budget deficits are supposed to be exogenous, with causality running from the budget position to the price level and current accounts imbalance. Meanwhile in the real world, the usual case is that the current accounts are exogenous, and the causality runs from the current accounts imbalance to the need for public deficits to cover the resulting private sector demand shortfall.

- Jake

Friends come and go. Enemies accumulate.

Indeed, I think that this argument does carry a certain weight: Ireland was getting out of its troubles faster than other peripheral economies, as many economic migrants have gone back to whence they came, and the swiftly falling real wages (="flexible" labour market) have pushed down unit-labour costs, increasing competitivity, saving the trade balance and making the bail-out more or less unecessary.

But Ireland already had a trade surplus.

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If you couple structural trade balances and fixed exchange rates with the GSP's government deficit limits, you end up with huge pressure to increase private debt in net importers. Hence the credit bubbles in the periphery funded by credit from the core. This is inevitable. Otherwise you have a depression in the periphery as in fact it was not rising incomes that fuelled demand, but rising indebtedness.

In the meantime, the core country depressed real wages, ran higher public deficits and debts than the periphery, and cut social benefits. Meaning all the growth in the Eurozone went to returns on capital in the core country.

Eventually, something has to give, and it has.

So, what's the policy proposal to get us out the hole? To keep digging, apparently.

Contractive monetary policy to stave off non-existent invisible inflation monsters, retain the GSP, don't punish the core for its now excessive debt (now as well as over the last 10 years) but punish the periphery for its "automatic stabilizer" deficits (the same "automatic stabilizers" that were used as an excuse for smaller monetary expansion in Europe compared with the US). Refuse to introcude negative feedbacks in trade imbalances. Force deficit countries to accept IMF-style "rescues" rather than default on its debts to the core.

Brilliant.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

So without touching the unions, the reverse could be implemented. Government could again be acting as employer of last resort (making sure if you can work you have a job). In effect abandoning the current policy of mandatory unemployment. Generous and secure social benefits for those unable to work could be reinstated.

However that does not solve everything. At the same time, EU has a common currency (means no automatic adjustment of productivity), and a common market for capital and labour (no legal barriers for capital and labour to move). Unless the periphery is to be depopulated (which will be rough on the population of periphery and core alike), there needs to be a cash flow to the periphery to compensate for the advantages of the core. This could be in different forms and may or may not include a policy for the periphery to catch up. But it is hard to see without some federal treasury.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

The euro has got these huge problems for a simple reason: salaries rose far too quickly in the periphery and far too slowly in Germany. At least that is true when we speak of Spain and Ireland as the periphery:

Salaries rise when house prices rise. Adam Smith said that wages must inevitably rise when the necessary living costs rise. The problem of Europe is high economic rent. Too much credit, unproductive loans and household debt, low or non-existent land tax, large monopoly profits. Competitive economy has a low economic rent. That is what competitiveness is. Banana republics (like eurozone?) have a large one. Labour and industries are punished, privileges rewarded. The German surplus, unproductive credit and debt was directed to peripherals not to Germany. And now Germany and neoliberals cannot accept the fact that german banks have destroyed the wealth of german savings, their labour and industry.