Sunday, July 29, 2007

Was Adam Smith a Classic Liberal?

The myth of classical liberalism by John Dixon contains the following thoughts:

So called classical liberals have themselves failed to understand what liberalism truly means by believing that economics and ideology are inseparable or at most one and the same. They see the glorious days of Ricardo, Malthus and Adam Smith as the days of true liberalism, when it meant what it said on the tin. Free trade was the conventional wisdom and the evils of government intervention were negligible. To them this is liberalism, a free market, a small government and the public sorting public problems out themselves. Many within our party (and even more so within the conservative party) would agree. How wrong they all are.”

I shall ignore Malthus and Ricardo's views on the size of government, and concentrate on Adam Smith’s views because his views were somewhat different from Ricardo’s, as was his method of analysis.

For Adam Smith’s days, ‘Free trade was [NOT] the conventional wisdom’. His analysis of mercantile political economy and the behaviours of ‘merchants and manufacturers’ as monopolists and protectionists (I read on a blog recently that we should refer to these people as ‘isolationists’, and I am inclined to agree), showed that Britain was far from a free trade economy in the mid-18th century.

And he was ambivalent about free trade being introduced too quickly because of the disruption that would cause, especially for the working poor, and he supported the Navigation Laws because of the need to defend Britain as an island, dependent on the sea.

In similar vein, ‘the evils of government intervention were [NOT] negligible’. The point about his critique of mercantile political economy was that the government that drove it pursued ‘absurd’ and ‘false’ policies, which intervened in the ‘natural’ process of economic activities (Book IV, Wealth Of Nations].

His agenda for the proper role of government was quite extensive, way beyond images of the minimalist ‘night watchman state’ (Book V). Defence rose from about £5 million to £40 million a year during the 18th century (defence was more important than opulence – without the former you could end up without the latter).

Education, as he envisaged it as a compulsory government–led, but not totally publicly funded service, with a ‘little school in every village, would be an extremely costly addition toe the public budget. Health spending was needed to combat ‘loathsome diseases’ like leprosy, and was itself the beginning of a large increase in the budget.

Public works and public institutions, facilitating commercial activities was probably another object of public spending with enormous potential for substantial budgets as there was hardly a road anywhere in Britain that was not in need of major repair, and when built they would need large annual sums for maintenance, plus bridges, harbours and canals. Cities like London and other large towns needed pavements and street lighting, regular refuse collection, paid for out of local taxation.

Smith recommended that the post office and the bullion mint be run as public services, and also that government administer quality stamping of cloths and assay services. He also saw a role for the government in regulating the banks (though he favoured banks issuing paper currency notes).

The idea that Smith believed that there should be a minimal state-run sector is mythical, though he may not have been comfortable with the proportionate state sectors common today in capitalist economies.

That’s just a few thoughts on John Dixon’s version of Smith’s political economy. If anything Smith was a pre-classical liberal, Malthus, Ricardo and Mill were classical liberals and the profession today is dominated by neoclassical thinking.

The big difference between Smith and those that followed is that he studied the detail of the pre-classical economy and economics slowly drifted to studying abstractions from real economies, until in the neoclassical version they study a completely abstract mathematical version that has no human influence in it whatsoever. That does not make it wrong, but it does make it different.


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