Sunday, August 12, 2007

Natural Liberty Was Not About Laissez Faire

There is a debate underway between Alex Tabarrok and Dani Rodrik ‘about the blinkers (or otherwise) of libertarianism’, Henry reports from “Crooked Timber (‘Out of the crooked timber of humanity, no straight thing was ever made’ (here) from which I picked out this paragraph:

Now, I am the last person to deny that the invisible hand is a very powerful and valuable concept, and I’m certainly not going to deny the fundamental theorems of welfare economics; Debreu’s Theory of Value is one of my favorite books. Under certain precisely specified mathematical conditions, perfectly competitive markets inhabited by perfectly rational agents will allocate scarce resources in ways which cannot be altered without making some people worse off. Whether those conditions are satisfied by any economic system in the real world is an empirical question, and the answer is of course No. Given that those theorems do not apply, the efficiency of markets is another empirical question, or rather a whole series of questions, with answers depending on the market and the tasks they are being asked to perform. There are many situations where markets are a very valuable and powerful social technology, a useful way of coordinating actions, allocating resources, and eliciting valuable efforts. … There are other situations where they produce awful, even perverse results, and still others where they’d never begin to get off the ground, like funding basic research or national defense. …”

Debreu’s Theory of Value is a culminating example of neoclassical general equilibrium theory and the speaker’s assessment, despite it being a ‘favourite book’, is a lovely summary of the triumph of non-relevance over value: ‘Whether those conditions are satisfied by any economic system in the real world is an empirical question, and the answer is of course No.’

It reminds me of the misapplication of Natural Liberty, mentioned several times in Wealth Of Nations by Adam Smith, to laissez faire as if they are connected, or worse, identical. Unable to find a reference from Smith to laissez faire (he never mentioned the words) a sleight-of-hand occurred by labelling Natural Liberty as Smith’s theory of laissez faire.

This only exposes the limited grasp of those authors who trumpet their findings of the Natural Law theories as being about laissez faire, which were taught to Adam Smith as well as by him at the University of Glasgow. Smith would have been surprised to find himself credited in the 20th century with the original work of Hugo Grotius, Samuel von Pufendorf (both jurists) in the 17th century, Gersham Carmichael and Francis Hutcheson (both moral philosophers) in the 18th century. From Hutcheson, Smith taught Natural Law theories in his jurisprudence lectures on moral philosophy, including political economy.

Natural Liberty had a far larger role in moral philosophy than as a mere synonym for laissez faire. Natural law was about the fundamental human rights to protection by the negative virtue of justice from depredations by others on an individual’s person, reputation and estate, and his ‘right of trafficking with those who are willing to deal with him’ (Lectures in Jurisprudence, i.12: p 8). It was the basis by which all societies and all political regimes were to be judged. It was not linked to any specific society, regime or economy.

Laissez faire was associated with some supporters of the Physiocrats and Smith met with them during his tour of France in 1764-6. He did not accept that laissez faire was a policy with which he could agree whole heartedly, hence it does not appear in his books. His suspicions, to put it mildly, of the likely (and well known in experience) conduct of ‘merchants and manufacturers’ are well rehearsed in Wealth Of Nations and play a large part in his polemic against the mercantile political economy, largely promoted, lobbied for, and implemented by supine legislatures, from groups of the very same ‘merchants and manufacturers’ who demanded laissez faire, i.e., to be left alone to conduct their business without interference, not only of the state, but of the consumers who were victims of their depredations and breaches of natural liberty.

The examples that Smith gives of the victims of breaches in Natural Liberty are those labourers and business people denied access to specific trades and specific markets by cartels and monopolies run by the guilds and trades of most towns in the UK. Governments enforced the monopoly privileges that they had been induced to establish by the ‘sophistry’ of ‘merchants and manufacturers’.

Which institutions were selected to remove these breaches of natural liberty? It was not enough to set all trades free; the justice system, an arm of government (Book V), was needed to supervise the conduct of merchants and manufacturers because without such supervision they would revert to, or introduce, the conduct for which they were famous in Wealth Of Nations. This can be seen as the inner fallacy of laissez faire.

Smith acknowledged this is his disregard for the slogan and in his practical policies for reforming mercantile political economy. The best essay written on Smith’s non-support for laissez faire was published by Jacob Viner (University of Chicago) in 1928: (Viner, J. 1928. ‘Adam Smith and Laissez Faire’, Adam Smith 1776-1928: lectures to commemorate the sesquicentennial pf the publication of Wealth of Nations, Augusts M. Kelly, Fairfield, NJ). Viner details the tolerable exceptions to free trade:

● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’;
● Punishment and enforcement after the act for dishonesty, violence, and fraud;
● Sterling marks on plate and stamps upon linen and woollen cloth
● Enforcement of contracts;
● Wages by law to be paid in money, not goods;
● Regulations of paper money in banking;
● Obligations to build party wars to prevent the spread of fire;
● Rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’);
● Premiums and other encouragements to advance the linen and woollen industries’;
● 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]’;
● patrols by town guards, fire fighters and other hazardous accidents;
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours);
● Coinage and the Mint;
● Post office;
● Regulation of institutions, i.e., company structures (joint stock companies; co-partneries, regulated companies);
● Temporary monopolies, including copyright, patents, if fixed duration;
● Education of youth (‘village schools’, curriculum design,);
● Education of people of all ages (tythes or land tax)
● Encouragement of ‘the frequency and gaiety of publick diversions’:
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population;
● Encouragement of martial exercises;
● Registration of mortgages for land, houses and boats over two tons;
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’;
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’)
● Moderate export taxes on wool exports for government revenue;

Some of these he recognised were breaches of Natural Liberty and he defended that on grounds that natural rights between and among individuals could conflict and a decision would have to be made by legislators, backed by the justice system.

He also made the point, directed at the Physiocrats specifically, that demands for the imposition of Natural Liberty before freedom of trade could prosper, as Dr Quesnay and others insisted, were unnecessary:

Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that, in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political œconomy, in some degree, both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man, in the same manner as it has done in the natural body for remedying those of his sloth and intemperance.’ (WN IV.ix.28: p 675)

Natural Liberty, Natural Rights, and Natural Justice were principles of jurisprudence which Smith supported as indicators of human rights; they were not synonymous with the political economy of societies. Laissez faire was a doctrine for an economy, which Smith did not support. Some libertarians have either forgotten Smith’s elucidation of these points or did not know about them.


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