Projectors as Men of System ADAM SMITH’S ADVOCACY FOR USURY LAWS

EDWARD AUSTIN MIDDLETON

GEORGE MASON UNIVERSITY

JULY 21, 2015

The legal rate [of interest] … ought not to be much above the lowest market rate.

Adam Smith Wealth of Nations

II.iv.15

…the greater part of the money which was to be lent would be lent to prodigals and projectors…

WN II.iv.15

Problem Prodigals:

“Let [kings and ministers] look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”

WN II.iii.36

“Princes, however, have frequently engaged in many other mercantile projects … [and]… have scarce ever succeeded. The profusion with which the affairs of princes are always managed renders it almost impossible that it should.”

WN V.ii.3.6

Responses to Smith 1787: Jeremy Bentham’s Defense of Usury

1800’s: Dugald Stewart’s Lectures on Political Economy

1811: William Playfair’s edition of Wealth of Nations

1828: J.R. McCulloch’s edition of Wealth of Nations

1835: E.G. Wakefield’s edition of Wealth of Nations

Afterwards all adopt Bentham’s “Projector qua Entrepreneur”

Modern Explanations of Smith Stiglitz (1981): imperfect information in credit markets

Levy (1987): macroprudential encouragement of particular sectors

Stigler (1988): unsystematic lapse of judgment

Sen (1999): wasn’t committed to markets

Hollander (1999): lender risk-preference mitigation

Rockoff (2003): excludes high-risk entrepreneurship

Paganelli (2003): moral constraints on public policy

Toporowski (2004): compels a Real Bills Doctrine policy

Rockoff (2009): regulatory response to credit shock

Projector’s Use in Literature

Projectors Reconsidered in Context Sturteveant, Metallica (1611): inventor

Brugis, Discovery of a Projector (c. 1630): rent-seeker

Wilson, The Projectors (1665): trickster

Hartlib, the Royal Society, (1660’s): scientist

Defoe, An Essay upon Projects (1697): social engineer

Swift, Gulliver’s Travels (1727): fashion-trender

Shaftesbury, Characteristics of Men etc (1737): social scientist

Diderot, Encyclopedie (1752): grand designer

Johnson, Dictionary (1755): imprudent planner

Ferguson, Essay on the History of Civil Society (1767): legislative reformer

Millar, Origin of the Distinction of Ranks (1771): legislative reformer

Burke, various sources (1770-1790): manipulative statesman

Jefferson, Letter to Benjamin Rush (1811): philosopher

Uses in Smith’s Corpus

In Wealth of Nations:

I.x.b.42-43: projectors create new channels of commerce

II.ii.59-106: projectors are unsecured debtors

II.iv.15: projectors make gambles

II.v.37: projectors propound agricultural development

V.iii.67: projectors optimistically estimate future revenue streams

In Life of Adam Smith:

Projectors - and government - impose on markets in similar fashion

Projectors (Red) and Entrepreneurs (Blue)

Related, but distinct: Entrepreneurs as a Subset:Identity:

Adam Smith Jeremy BenthamPost-Bentham

Projectors are those with revolutionary, large-scale, and systematic designs.

Entrepreneurship is not a necessary characteristic.

Projectors as Gamblers

Let x be a simple gamble with:

winning payoff x2 with probability p

losing payoff x1 with probability (1-p)

status quo x

Assume x1 < x < x2

Reclusive expected gains:E(x) = p∙x2 + (1-p)∙x1 – x

Sympathetic expected gains:E(A(x)) = p∙A([x,x2]) + (1-p)∙A([x,x1])

Take bet when E(x) + E(A(x)) > 0

The proud minister of an ostentatious court may frequently take pleasure in executing a work of splendor … which is frequently seen by the principal nobility, whose applauses not only flatter his vanity, but even contribute to support his interests at court.

WN V.i.3.I.16

Esotericism Justified