Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

John Law and Adam Smith

Shinji Nohara, University of Tokyo

Some scholars have studied the Scottish bubble in 1760's. The Scottish contemporaries reflected on it. For instance, Sir James Steuart explored how the bubble happened, and what government should do against it. Adam Smith also considered the bubble, as has been studied. Indeed, in his Wealth of Nations, Smith was a keen observer on it, and criticized the irresponsible behavior of some banks and projectors. Smith knew well the bankrupt of the Ayr Bank. Smith's monetary theory, nonetheless, was not solely the product of this Scottish situation. When Smith considered monetary theory, he also focused on John Law's system. Smith regarded the Scottish banking system as influenced by Law. Some argued that Smith criticized John Law's monetary theory. Smith, however, did not fully oppose to Law's monetary theory. Certainly, he doubted on the feasibility of Law's banking theory. Despite that, Smith considered Law's monetary theory. This was especially because he reflected on a French debate on monetary and banking theories inspired by John Law. After Law, Jean F. Melon examined Law's system. Paris Duverney and Duto also discussed it. On that debate, they did not necessarily deny Law's system. On the contrary, they analyzed the merit and demerit of Law's system, and elaborated each different monetary theory. This evolution of monetary theories in France inspired Smith to articulate his own monetary theory. Smith knew and researched the debate. Smith's monetary theory was seen as a continuance of this French monetary debate. Despite this importance, the impact of this French context on Smith has not been studied sufficiently. When we investigate Smith's theory of money from the perspective of this French monetary debate, we can find out that Smith did not negate Law's system totally. Instead, Smith conceded that Law's monetary theory could work in a particular situation. This was related to his consideration on the Scottish banking situation. When examining it, he regarded it as connected with the Scottish economy, in which economy had not developed until recently. On this situation, Smith thought that Scottish economy required the adoption of the Scottish banking system, which was inspired by Law's system. In this sense, Smith's theory of money was, in one sense, a reflection on Law's system.

Area: Eshet Conference

Keywords: Adam Smith, John Law, money, finance, bubble

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