Smith on enforcing market contracts

Gianguido Piani (Moscow Times, 30 May 2005, page 8) makes a strong case against some serious problems of electricity supply in Russia. That he drags Adam Smith into his case is unfortunate. As he notes himself, Smith died long “before electricity could make its contribution to the wealth of nations”.

Smith did not exclude roles for government in his “Wealth of Nations” (Book V); roles, I suggest which far exceed the boundaries set for the state by those who have misused his legacy in their portrayal of him as a laissez faire zealot, which he was not. He never used the words laissez faire, nor did he support it as a general policy.

From his “Wealth of Nations” we can deduce how Adam Smith might have considered the situation described by Gianguido Piani that applies to interruptions in electricity through inadequate investment by private owners. For exactly the same reasons that Smith opposed monopolistic pricing and, interestingly, supported laws restricting lenders to only up to an official maximum of 5 per cent interest, he would have approached excess profits and inadequate investment in electricity in the same manner.

He would have favoured a policy of requiring electricity companies to fulfil their contracts with their customers, and being forced to do so by the courts. They enter into contracts to supply customers with electricity and interruptions in supply from inefficiencies in their services and outages caused by sub-optimal investment are breaches of contract. Smith would have favoured enforcement of those contracts by the State, including taxation of their profits and revenue.

Thus, when Piani writes: “As recently as last month in Sweden, power companies were made legally responsible for increasingly frequent service disruptions to force them to invest in grid modernization”, he reports a very Smithian stance on these matters.

When Piani also writes: “Adam Smith's often-abused metaphor of the baker and butcher, who benefit society by caring for their own wallets, does just not apply to power systems,” he misapplies his analogy (it does apply to power stations, too!) and he gets Smith’s point wrong.

The “butcher, the brewer and the baker”, like the electricity companies, offer contracts to their customers: “Give us the price we want for our products, and we will supply you with your dinner”. If, like the Russian electricity companies, they take the money and do not supply their products, they commit theft and should be liable for it. If food suppliers or electricity companies promise to supply customers with goods but do not deliver, leaving customers without their dinners and the means to cook them, they likewise commit fraudulent acts and should be liable for them.

Gianguido Piani's article is at MoscowTimes.com (issue 3176)