According to Adam Smith

How to Prevent Economic Stagnation Icon

October 17, 2019

Stagnation was a common phenomenon for large and developed countries. It usually happened when everyone achieved their natural state of wealth and is called a ‘stationary’ state by Adam Smith:

In a country fully peopled.. the competition for employment would necessarily be so great as to reduce wages to the minimum needed to keep up the number of labourers. The population would not increase since the country is already populous.

In a country fully stocked with as much business and stock as possible, the competition would everywhere be so great. It would reduce the ordinary profit as low as possible.

But perhaps no country has ever reached this degree of opulence. China seems to have been long stationary, and had probably long ago acquired maximum riches consistent with the nature of its laws. But its riches might still be much inferior to what it could have been with other laws and institutions.

Prolonged Stagnation is Unnatural, Absolute Stagnation is Impossible

Smith gave Ming China as an example of a stagnating economy. Thus, the prolonged Chinese stagnation, as well as the decline of India during British colonialization, was a product of wrong policies and institutions. Such policies created an unnatural stagnation or decline, eventually leading to civil wars or revolutions.

The solution to breaking out of stagnation was to break free from the restrictive laws imposed by:

  • the imperial system in China
  • the mercantile colonial system in India

The solution to the imperial system was a gradual relaxation of imperial laws in order to grant more representation to the citizens.

  • discouragement of wasteful governments. This would prevent budget deficits and ensures the government always has money to spend (Book 5, Chap 3)
  • governments must be strong to protect the environment (Book 4, Chap 7):

The solution to the mercantile system was:

  • a discouragement on lobbying by vested interests. This will prevent monopoly which prevents the circulation of goods and services (Book 1, Chap 11)
  • a discouragement trading of securities by the general public. This will prevent stock bubbles or the loss of the people’s saved-up revenue. IPOs are still allowed though, so that companies can have access to funds. (Lecures, Chap 3)
  • zero income taxes on wages. This ensures the economy will run. (Book 5, Chap 2)
  • natural wages instead of a decreed nominal minimum wage. This also ensures a running, non-stagnating economy. (Book 1, Chap 10)
  • limiting of Intellectual Property to a shorter period. This ensures that new things and technologies can be produced, limiting stagnation (Book 5, Chap 1)