What Adam Smith Actually Identified as the Appropriate Roles for 18-century Governments

Andrew B. Busch writes (3 March) in the CNBC Guest Blog HERE

“Busch: Following The Father of Modern Economics”

“The father of modern economics supported a limited role for government. Mark Skousen writes in "The Making of Modern Economics", Adam Smith believed that, "Government should limit its activities to administer justice, enforcing private property rights, and defending the nation against aggression." The point is that the farther a government gets away from this limited role, the more that government strays from the ideal path that will ensure the fastest path towards the creation of "universal opulence" or wealth for workers.

How this issue is handled will decide whether the country can more closely follow Adam Smith's prescription for growth and wealth creation or move farther away from it.”

Comment
Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 in his “Adam Smith and Laissez-Faire” in the collection of essays published to commemorate the Sesquicentennial of the Publication of the Wealth Of Nations, reproduced by Augustus M. Kelly, Fairfield, New Jersey in 1968.

Here is a list of appropriate activities for government, which goes way, way beyond Mark Skousen’s extremely limited – and vague – 'ideal' government. That in itself is fair enough, if it is issued under Skousen’s name (everybody has a right to express an opinion), but he goes on to attribute his ‘ideal’ list to Adam Smith, which is not alright.

In fact, its downright deceitful, for which there is no excuse of ignorance (before attributing the limited ideal to Adam Smith we assume, as scholars must, that Skousen read Wealth Of Nations and noted what Smith actually identified as the appropriate roles of government in the mid-18th century.

But even if Skousen was in a hurry and without time to check through Smith’s two-volume tome (or the massive one-volume tome if he consulted the 1937 edition of Wealth Of Nations from Random House, New York, edited by Edwin Canaan), he, surely, was familiar with Viner’s 1928 essay, conveniently reprinted and widely available from Augustus Kelly from 1968?

No? Shame.

Here is a list extracted from Wealth Of Nations:

• the Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’ (WN464);
• Sterling marks on plate and stamps on linen and woollen cloth (WN138–9);
• enforcement of contracts by a system of justice (WN720);
• wages to be paid in money, not goods;
• regulations of paper money in banking (WN437);
• obligations to build party walls to prevent the spread of fire (WN324);
• rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’) (WN539);
• ‘Premiums and other encouragements to advance the linen and woollen industries’ (TMS185);
• ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
• ensuring the ‘cheapness or plenty [of provisions]’ (LJ6; 331);
• patrols by town guards and fire fighters to watch for hazardous accidents (LJ331–2);
• erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723);
• coinage and the mint (WN478; 1724);
• post office (WN724);
• regulation of institutions, such as company structures (joint- stock companies, co-partneries, regulated companies and so on) (WN731–58);
• temporary monopolies, including copyright and patents, of fixed duration (WN754);
• education of youth (‘village schools’, curriculum design and so on) (WN758–89);
• education of people of all ages (tythes or land tax) (WN788);
• encouragement of ‘the frequency and gaiety of publick diversions’(WN796);
• the prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population (WN787–88);
• encouragement of martial exercises (WN786);
• registration of mortgages for land, houses and boats over two tons (WN861, 863);
• government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’ (WN356–7);
• laws against banks issuing low-denomination promissory notes (WN324);
• natural liberty may be breached if individuals ‘endanger the security of the whole society’ (WN324);
• limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’) (WN539); and
• moderate export taxes on wool exports for government revenue (WN879).

"Viner concluded, unsurprisingly, that ‘Adam Smith was not a doctrinaire advocate of laissez-faire’.

That [Viner] needed to write this 150 years after Wealth of Nations to remind 20th-century readers conclusively that it contained detailed and specific evidence of advocacy of breaches of laissez-faire, popularly attributed to him, suggests that a substantial drift away from important elements of Smith’s legacy had taken place among early-20th-century economists.

How could Smith be so closely linked with laissez-faire policies when he so clearly and explicitly was not?”

[The list and the comment is reproduced from my “Adam Smith: a moral philosopher and his political economy”, 2008, Palgrave-Macmillan.]

Smith on Government Roles

Attorney Jonathan Emord writes(19 October) in News With Views HERE:

“OVERNIGHT SOLUTION TO THE NATION'S ECONOMIC WOES”

“There is an alternative to this highly paternalistic and historically failed approach to problem solving. It is the alternative view, understood to be a moral imperative by the primary author of it, that Scottish philosopher Adam Smith in his rebuttal to mercantilism, The Wealth of Nations. To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest. In short, self interest in the market causes those who would profit to find ingenious means to improve the human condition, for which others are willing to pay. For the benefit arising from invention, the inventor is given a just reward, profit. If the inventor is allowed to keep the lion’s share of that profit, he or she will have an incentive to invent yet again, and, if he or she guesses correctly, will hit upon yet another item that best suits the needs of consumers, lifting their standard of living in the process.

Rather than place faith in the market which has proven its profound power to transform and uplift, the present administration places boundless faith in government. Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs. As government has grown exponentially, it has proven itself in every nation incapable of solving the vast majority of the human problems that its political rulers expropriate private funds to solve.”

Comment
The sentiments, broadly speaking, expressed by Jonathan Emord should appeal to many people needing a headline slogan approach rather than a detailed policy, because the stuff of practical politics is much more complex when the details are examined for selection prior to implementation.

Emord’s theme is an “overnight solution”, typical of a lawyer’s thinking – review the facts, come to a verdict, pronounce it, and then leave other people to run with its consequences. And his “overnight solution” would certainly have consequences.

I am not sure that his star witness, Adam Smith, offered quite the passive advice attributed to him by Emord:

“To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest.”

What happened to the “brewer”, as in “the butcher, the brewer, and the baker”, all three apparently necessary for an 18th century “dinner” (WN I.ii.2: 27)? (I note that it is quite common for the “brewer” to be missed off such “paraphrases”, and also from supposed direct quotations, mainly, I presume, from religious hostility to the consumption of alcohol).

The main point, however, is that the motivation from self-interest is not a one-way bet; the self-interest of the potential consumer also counts and differences between the producer and consumer are reconciled by their mediating their self-interests into a price acceptable to both of them.

Smith advises consumers to “address” the other’s “self-love”, while refraining from addressing ”our own necessities”; instead address “their advantages” from concluding a transaction. In short, from offering them a “bargain”: “Give me that which I want, and you shall have this which you want” (WN I.ii.3: 26). The parties are not just “price” takers – they bargain, and do so in condition where there is competition emanating from the presence of other buyers and from other sellers.

Emord goes on to assert that “Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs.” I cannot speak with authority on the “Founding Fathers” viewing government as a “necessary evil”, as in that they preferred not have a government, but I suspect this view is exaggerated.

The duties of government, according to Smith, were to cover the expenses of “defence”, “justice”, certain “public works and public institutions” and the “dignity” of the “sovereign” (WN V.a.b.c.d.e.f.g.h:663-814).

Smith noted that defence was “of much more important than opulence” (WN IV.vii.30: 464-5), justice was the absolute necessity of society (without justice society “would crumble into atoms” (TMS II.ii.3.4: 86), public institutions were “necessary to facilitate commerce”, including public education (“gross ignorance and stupidity” threaten the “safety of the government” and “frequently occasion the most dreadful disorders” (WN V.i.f. 61: 788) and palliative health care (WN V.i.f.60: 787-8), and (substituting the ‘sovereign’ by ‘government’), enabling the government to “perform its several duties” (WN i.h.i.1: 814).

Smith denounced the role of several governments in pursuing the wrong policies, summed an “mercantile political economy” and challenged the competence of ministers to make decisions on behalf of the individual, but he did not preclude government enacting certain measures and enforcing them through the courts on the conduct of individual “merchants and manufacturers” when they acted against the public interest. In particular, the early forms of banking outside of any regulations to protect the public interests were dangerous to prosperity, and he advocated certain interventions to protect against “misconduct”.

These interventions he conceded were a “manifest violation of … natural liberty” but “ those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed (WN II.ii.94: 324).

The popular image among certain sections of Adam Smith being the enemy of government (the advocate of the “night-watchman state”) is quite false in its generality. Indeed, the metaphor of the “night-watchman state” was an expression introduced by Ferdinand Lasselle, the 19th-century firebrand socialist, and not Adam Smith!

It was the policies of 17th-18th century governments that Smith railed against, and not the fact that they had policies. Because Smith criticised many of the then existing policies of governments, many readers in a hurry concluded he was opposed to all government policies.

Adam Smith was not an ideologue. He observed that legislators and those who influenced them, especially the special interest groups of “merchants and manufacturers”, commonly were the worst offenders. From this background he did not advocate “laissez-faire” – he never used the words - because he could see where leaving policies to the parliamentary clients of “merchants and manufacturers” had led Britain.

Whether, Jonathan Emord’s “overnight” prescription would work if implemented – which would require the legislature to enact it, many of whom are tied, sometimes by “obligations”, others indirectly by constituency special interests – is another question. It is not a serious (as in likely to be enacted) proposition.

The Hesitant Hand by Steve Medema: Review Part 2

In the ‘Hands of Adam’ Steve Medema shows his class as an historian of economic ideas. I found his account of the role of self-interest in commercial society very fair, without the usual cliché errors found in many accounts.

Starting from the proposition in Moral Sentiments that our benevolence towards others diminishes as social distance increases without damaging the social fabric because all others have degrees of overlapping benevolence right across society, and benevolence is not, and cannot be, the sole, or even major force, for exchange behaviour, and, fortunately for human habitation and procreation, it is not necessary that it be so.

A society, we are reminded in TMS can exist with loving relationships, and it is well when it does, but it can also exist without such feelings provided there is a ‘mercenary exchange of good offices’.

Enter here the famous assertion by Smith of the ‘butcher, the brewer, and the baker’ and our need when engaged in an exchange transaction to appeal to their interests not ours (be ‘other centred’; never selfish). Steve shows that for Smith, self-interest is not a ‘one way street’ – what a lot of senseless twaddle would be saved if miss-readers of Smith would get that right!

Steve correctly sets out self-interest in Smith’s lexicon:

‘that the pursuit of self-interest serves the best interests of society as a whole, that self-interest and the social interests are partners rather than enemies’ (19). Self-interest should be facilitated rather than restrained.

The explanation of why this was true for Smith is wonderfully clear, though, Steve notes, ‘Smith is at once vividly descriptive and maddeningly vague’. Echoing Mirabeau (thinking you serve yourself, you serve others), the individual attempts to employ his capital where he expects to earn the highest return, and in doing so, he generally neither intends to promote the public interest, nor knows how much he is promoting it’, followed by the famous metaphor of ‘an invisible hand’.

Steve comments:

‘An invisible hand – this is a specific as Smith gets. What Smith meant by this is anyone’s guess, and plenty of guesses have been offered, ranging from God to government’. But whatever it is, Smith was convinced of its propensity to channel self-interest in socially useful directs’(20).

I can agree with that formulation as it encompasses Smith’s proper use of a metaphor, which is to explain something by adding ‘beauty’ when ‘so adapted that it gives due strength of expression to the object to be described and at the same time does so in a more striking and interesting manner’ (Smith: Lectures in Rhetoric and Belles Lettres, 1763).

A great deal of wasted ink and paper would be spared if only economists would read the nine paragraphs of Wealth Of Nations leading to the metaphor of the invisible hand and see how simply caps his technical description of economic and social process leading to people thinking they are serving themselves when in fact they serve general society, by his employing the common 18th-century metaphor of ‘an invisible hand’. Steve’s compromise treatment is masterly.

Smith develops the sense of ‘congruence’ (Steve’s word), even ‘harmony’ as ‘some would say’ (I prefer potential ‘congruence’) between private and social interests, to his critique of mercantile political economy and Physiocracy, both of which, Steve shows, inevitably distort by monopolies and misguided government interventions (those promoted by lobbying for special, especially corrupt, interests) and thereby interfering with the otherwise free actions of individuals judging their best interests in moral and legally constrained codes of behaviour and acting accordingly.

Here Steve highlights something that is worth developing (21). The absence in Smith’s work of a critique of the ‘internal logic’ of mercantile or Physiocratic thinking: on their own terms they promote the ends they seek (the accumulation of gold or the growth of agriculture output) – as China seems to be sliding towards in buying up the planet with its mountains of US treasury bills and hoping to hold down peasant incomes.

Smith disagreed with their consequences – state action by the former theories (necessarily at the sacrifice of liberty) versus growth of real wealth (the annual output of the ‘necessities, conveniences, and amusements of life’) through individual self-interest in conditions of liberty.

Steve confronts the conundrum of self-interested actions can be malign. Some voices, bought and paid for, advocate absolute freedom for corporations and individuals, the consequences of which are discussed widely. Unfortunately, the remedies (especially from the environmental lobby) of which involve draconian interventions by uncontrollable governments, agencies and neighbourly busy-bodies, plus ‘that insidious and crafty animal, vulgarly called a statesmen or politician’ (WN IV.ii.39).

Steve recognises that Smith was never a one-track voice for everything changing at once. He was far more pragmatic; never an ideologue. He did not make many predictions, nor did he expect much to change, except ‘slowly and gradually’, perhaps in many cases never quite reaching its end goal. He said as much in respect of free trade ever becoming accepted in Great Britain this side of ‘utopia’.

His message was that competitive markets were generally better than state grand plans. He didn’t even consider that ‘natural liberty’, as was envisaged by the Physiocrats, was a necessary condition for the spread of opulence – if it was, he opined, it is unlikely that any country would ever have progressed towards it (WN ix.28: 674).

Nor, Steve observes, were the necessary roles of government minimal (23) – Smith was not a laissez-faire purist or even near being so. The list of proposed roles for the state, collected in Book V and elsewhere scattered throughout Wealth Of Nations, is quite long, and probably much longer than the purveyors of Smith, the laissez-faire advocate, realise. Steve covers this material with both conviction and economically.

Smith, says Steve:

‘was not, as some have imagined, a proto-modern. Smith’s view of man is not economic man with his rational, single-minded pursuit of his self-interest’. Furthermore, Smith did not argue that private action was optimal, in the modern efficiency sense, nor even that it was superior to governmental alternatives. Smith considered the link between private and social interests partial and imperfect, but he was also of the mind that self-interest, properly channelle, tended to engender positive results, rather than negative ones, and that government interference with its operation in the economic sphere would generally lead to inferior results’ (25).

I think we can sum up Smith’s approach as being: ‘markets where possible; the state where necessary’.

Steve’s last line in this chapter is evocative:

‘Self-interest, then, had finally found legitimacy’.

[In Part 3 we move on to the ‘Harnessing of Self-Interest’ with ‘Mill and Sidgwick and the evolution of market failure’.]

Thought For The Day

‘What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these. Whatever beauty, therefore, can belong to civil government upon account of its utility, must in a far superior degree belong to these. On the contrary, what civil policy can be so ruinous and destructive as the vices of men? The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to’.
[Adam Smith, Moral Sentiments: TMS IV.2.1: 187; 1872 edition: pp 165-66]

Comment
Adam Smith was quite right. Utopian proposals and plans for reform that do not take account of human nature are prone to derision, if advocated, and to disappointment if implemented, and the unintentional results are obvious for all to see and suffer from.

As neat a description of party politics as could be offered for the many failings of governments. The only barrier to ‘human wickedness’ (which covers a multitude of crimes of commission and omission) is that of the system of justice, separate from government, and safeguarded by Liberty – democracy is a necessary but not sufficient condition (they ‘elect’ cruel dictators don’t they?).

In Search of Goldilocks

The long debate over the amount of government regulation of the details of a market economy is central to the political divisions today between those who want more (there are daily – hourly!- calls for regulating this or that on Radio 5, my regular station) and those who want less.

I came across an interesting contribution to this debate this morning (8 August), by someone called ‘Bonerici’ in Live Journal (a computer geek by resume). Read the whole article HERE:

“the problem with regulation and capitalism”

“Back during the cold war, it was all so very easy. It was a fight to the death between this idealized central authority run by either a committee or a man or a program vs the idea of a decentralized authority where the goods and services were not managed centrally but managed locally and the method of management was Adam Smith's "invisible hand"… [er, ignore the myth of the invisible hand…]

… During the Reagan era, there was this understanding that any regulation was too much. Later, this idea was encapsulated in the idea of shrinking government to such a small size that it could be drowned in a bathtub. I've said before that this was not Adam Smith's idea in his "Wealth of the Nations" for true capitalism. True capitalism is not anarchy! It is not a brawling wild west where people are free to steal and cheat and lie, where corporations can get away with dumping chemicals into the local stream, where toy makers can build toys full of arsenic and lead and it is buyer beware! I think this idea of caveat emptor is what many people think capitalism is or should be…

… Capitalism does not run well in a pure anarchy. It requires certain rules and regulations and restrictions, and these very restrictions make capitalism bloom. Deciding what these regulations will be is the task of capitalism in the coming years. First of all, it is clear that it is good to have solid secure banking regulations…

… That's the first step in regulations and Adam Smith talks about it in his book the "Wealth of Nations."… [See WN II.ii.1-106: pp 286-329 for Smith’s account of the need for banking regulations in a commercial economy]

… That, I think is the ideal goal of regulation in a good capitalistic society, where the regulation itself makes the goods and services less expensive for everyone. Where the con artists are weeded out of the system entirely…

… There's a fine line that has to be found. Between complete lawlessness, which inhibits capitalism because there is no trust, to stifling regulation which destroys a competitive marketplace…

… Finding the Goldilocks amount of regulation is not a challenge for the older generation. It's a challenge for the post-cold war generation. To figure out the perfect amount of regulation that encourages a great amount of trust between consumers and businesses while not stifling businesses, an amount that encourages them by providing an even playing field for both big and small businesses…

Comment
The debate of how much regulation: None? Goldilocks? Total?, is the major question for those who would manage a market economy.

Having absolutely no regulation is easy: abolish all regulations and rely on the Law, but is also too difficult: getting an administration elected that would implement the programme. It also needs a fail-safe in reserve, if the economy descends into criminal chaos.

Achieving total regulation is what we are drifting towards just now in Britain and Europe (even the USA is drifting that way, and I saw evidence of regulationitis in Canada this year in surfaces crowded with little notices about what not to do when stepping off a bus). Seeing where we are and where we going, it occurs to me that I don’t want to go further down the ‘total’ route.

‘Goldilocks’ is best. And Adam Smith had it right. Markets need trust to work efficiently. It’s not enough to rely on untrustworthy people being found out - they can poison the well of trust too far before the crooks are caught.

Passing regulations does not equate with them being obeyed. That’s the job of Laws and their rigorous application – the more chief executives and co caught with their hands in the till and cheating customers is a sign of a clean economy, not an excuse for moralising about the failing of capitalism.

The failings of individuals are to be expected – when their punishment is certain (make them poorer!), the effect is good for trust. It’s when they appear to get away with it that the stench of the poisoned well erodes the general trust necessary for markets to work.