David R. Henderson  

Russ Roberts on Adam Smith's Rules for Living

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The prudent man, claims Roberts, does not smoke, is "physically active and keeps his weight under control," and "works hard and avoids debt." On debt, I must part company. It was by taking on what seemed like a massive debt at the time--1986--that my wife and I managed to buy a house in coastal California. I doubt that Roberts would have criticized our decision even prospectively. So I think he must mean something like "avoids too much debt" or "consistently spends beyond his means." Being just is relatively easy to understand: don't cheat. It's important, note both Roberts and Smith, not to cheat in even little ways. If we do, there will be, writes Smith, "no enormity so gross of which we may not be capable."

Beneficence is harder to define. The rules of beneficence are, according to Smith, "loose, vague, and indeterminate." Some aspects of beneficence, writes Roberts, are "friendship, humanity, hospitality [and] generosity." He discusses his challenges in following these rules while raising four children. One beneficent rule he created was always to take his daughter's or son's hand when offered. A rule I created for myself before my daughter was a year old was, when she asked me to play with her or do anything with her, to say yes at least 90 percent of the time.


This is from "Adam Smith's Guide to Living," my review of Russ Roberts's latest book, How Adam Smith Can Change Your Life.

I mentioned one of the main things I learned from the book--Roberts's "Iron Law of You"--in an earlier post.


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COMMENTS (14 to date)
Kevin Erdmann writes:

I wonder if that point about debt relates to the most significant change in the post- Adam Smith developed world - the rise of middle class human capital. Human capital can't be traded or time-shifted. In effect, mortgage-lending banks are intermediaries between young households with a lot of undepreciated human capital and the future versions of those households. Like astronomers estimating dark matter with unexplained gravitational forces, mortgages are the sign of otherwise unmeasured capital.
It's crazy to me that there are shelves full of bestsellers based on the presumption that mortgage growth in the 90 s was a product of middle class desperation, especially when 90s were followed by a housing boom.

Pedro Albuquerque writes:

The prudent man will die without knowing the pleasures of a Cohiba.

Brad writes:

Your response “It was by taking on what seemed like a massive debt at the time—1986—that my wife and I managed to buy a house in coastal California” leaves the reader wondering why your case is special and why Smith’s advice doesn’t apply to you.

Besides, I can’t help but imagine what America’s housing market would have looked like in the absence of mortgages. Surely the ease with which folks can borrow has contributed to the unprecedented rise in housing prices. If, on the other hand, folks had to pay in full when purchasing homes, housing would likely be more affordable today. So, I can’t help but agree with Smith that avoiding debt is an important way to avoid financial trouble.

David R. Henderson writes:

@Brad,
Your response “It was by taking on what seemed like a massive debt at the time—1986—that my wife and I managed to buy a house in coastal California” leaves the reader wondering why your case is special and why Smith’s advice doesn’t apply to you.
I don’t think my case is special. That’s my point. If my case were special, I would not have bothered mentioning it.
And it’s not “Smith’s advice” that doesn’t apply to me; it’s Russ Roberts’s advice.

Kevin Erdmann writes:

Brad, you think that the country would be better off by making it difficult to own a home so that few could do it, but those that could would earn very high returns on investment?

Brad writes:

@Kevin - do I think the "country" would be better off? Not sure who this "country" is, but I do think that being able to borrow nearly every dollar to purchase a home has resulted in price inflation, and that has priced many folks out of the market.

I think you would agree that student loans have resulted in run-away price inflation vis-a-vis tuition. Simply being able to borrow money for a good doesn't always mean it's the right thing to do. Of course, we all should be free to make our own decisions, but high levels of consumer debt have wrecked a lot people's finances and lives.

ColoComment writes:

Another consequence of an absence of mortgages to purchase homes might be fewer of the 3k sq. ft. to 5k sq. ft (or more) homes with four+ bedrooms, each with its own bathroom, family rooms, great rooms, living & dining rooms, cathedral ceilings, massive kitchens, three+ car garages, etc., in which family members could go for weeks without seeing each other, should they desire (ok, that's an exaggeration). All of which needs to be furnished, heated, cooled, and cleaned.
The ease of borrowing to purchase a home has resulted in growth in the size of residential dwellings to what our grandparents might have likely considered conspicuous waste & squandering of resources.
We buy bigger because we can borrow money to do so & pay it back over time. But, really, how many of us stay in a home for 15 to 30 years, or long enough to pay off a mortgage loan? Most of us move in less than 10-15 years (SWAG, for sure), and with mortgages front loaded with [taxpayer subsidized] interest, we end up borrowing over and over again while paying down but a small part of loan principal.

Kevin Erdmann writes:

Brad & ColoComment,

Liquid, accessible credit markets are a pretty clear example of a public good. I'm all for getting rid of tax subsidies, etc., but arguing against access to ownership is basically arguing for a banana republic. The direct result would be a significant increase in variance of housing consumption. The wealthy would be able to live in expansive mansions at much lower expense than they do now, and rents for everyone else would be higher.

Do you think we should make everyone pay cash for automobiles, too?

I think, among other things, you are both confusing consumption of housing and investment in housing. The consensus position among financial advisors and planners conflates these things, so you're hardly lacking company in these views.

Kevin Erdmann writes:

Brad,

The student loan issue is problematic, but not because of any similarities it has with the mortgage market.

Mark V Anderson writes:

I have heard that before the Great Depression, most houses were bought with cash or with much shorter mortgages than the now common 30 or even 15 year varieties. Again, what I have heard is that FDR wanted more home ownership, so he encouraged these longer mortgages through various subsidy measures.

I suspect that our economy would be much more stable without all these long mortgages out there. I think a large part of the cause of the Great Recession was too much debt and not enough equity. This is what causes all the potential defaults when a large financial firm goes under, and thus the concept of Too Big To Fail. Mortgages are only a piece of this issue, but a significant piece.

ColoComment writes:

Sorry. I wasn't implying that my perceived consequences of current mortgage availability were either bad, or good, as social issues. IANAE, but I believe that access to credit is one of the reasons that our economy has been historically innovative and expansive.

Nor was I trying to argue against access to home ownership. Any individual should have the freedom to arrange his personal & financial affairs as best suit his situation. If he wants mobility and freedom from home ownership obligations, by all means let him be a tenant. If he wants permanence and all the responsibilities of home ownership, by all means let him purchase, however he might arrange that financially. Same with his vehicle. Some lease; some buy. Whatever floats the boat. Or house. Or car. :-)

However, neither arrangement should reflect any government tax preference.

...I recall that, prior to the Reagan tax reforms c. 1986, ALL loan interest (personal and mortgage) was tax deductible (as were all medical expenses.) Those were some of the tradeoffs for lower rates. I guess the RE industry exerted a stronger political influence at the time than did the auto industry, et al.

TMC writes:

Brad & ColoComment,

You can build a 2000 sq ft house anywhere in the US for $150 - $200k anywhere in the US. The more folks who build, the more they make drywall and harvest lumber. It is the land that boosts that house to $600k or more. Mostly by artificial land restrictions. Look here for the house price inflation.

Mark, I bet the 30 yr mortgage has done more to stabilize people's lives than most things FDR ever though of. HELOCs, maybe not so much.

Jay writes:

@Brad

I'm not sure anyone here would agree that student loans alone are responsible, subsidized student loans or loans who's interest rate is artificially held down most likely.

ColoComment writes:

TMC - this info seems to contradict your assertion of lot v construction costs. Of course, this is average, and will greatly vary by location.

However, you did say "anywhere in the U.S...."

http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=221388&channelID=311

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