Friday, November 23, 2007

Adam Smith's Relatively Large Agenda for Government

La Caixa, Economic Research Dept, of here asks, ‘What's to be done with Government?’

As in any other scientific discipline, economics continues to discover the limitations of earlier ideas. It is also learning what conclusions of the past continue to be valid. In any case, it must be recognized that many of the matters of economic policy being debated today were already controversial more than 200 years ago when the science of economics was born. These comings and goings reveal the difficulties that exist in extracting firm conclusions about matters subject to many influences and perceived from many different points of view. One of the most recurring themes thinkers in economic science have dealt with is the role of Government in the economy, a matter central to the organization of society.

The result is not greatly stimulating. Mercantilists believed that the government generally benefited the economy, at least when it supported domestic production intended for export. Adam Smith’s doctrine then pointed to the damage the Government’s action was capable of inflicting on the free operation of the market. Keynesians considered that the government could contribute to improving economic results and that intervention was a good thing. «Public choice» economists are convinced that the State can often ruin things. Those in favour of «rational expectations» believe that often economic policy is something of an illusion and that it cannot do much to change reality.

A somewhat truncated summary of the history of economic ideas that implies through gross simplification misleading ideas of what the protagonists were advocating.

Mercantile political economists (‘mercantalism’ was word invented in Germany and was not known in Adam Smith’s days) were not in favour of government intervention in any sense similar to what that concept means today. If anything, government intervention in the economy was even more hands-off than it is today.

What some ‘merchants and manufacturers’ wanted from legislators was legal enforcement of a domestic monopoly to prevent competition or to impose tariff costs from foreign traders. They preferred having a clear run at export markets. Beyond that they wanted to be left alone to run their businesses. Theirs was a ‘police’ operation, if you like, in their commercial favour.

Aside from the merchants and manufacturers, who were closest to the action of lobbying, influencing and ‘persuading’ gullible legislators and those who influenced them, there were intellectuals writing pamphlets and books on the higher purposes of the government’s role, linking national interests, reasons of state and the balance of trade to national prosperity. How connected the two forces were is another matter. The works of the latter have survived intact and may have greater influence on our perceptions than the confidential lobbying of the merchants and manufacturers seeking favours in pursuit of their self interests.

Adam Smith’s doctrine then pointed to the damage the Government’s action was capable of inflicting on the free operation of the market.’

The slip from what Adam Smith was writing in specific reference to the mercantile policies of the government (protection, bounties, tariffs, wars and colonies) to a general assumption that he opposed all government intervention is as easy to make as it needs to be qualified.

He did not oppose all government intervention by any means, though he did not conceive that government spending would rise to be such a high proportion of GDP. But it is wrong assume that he favoured a small state sector. Within the constraints of 18th century economies, he favoured quite a high amount of government expenditure, and if the full extent of his programme had been followed it would have amounted to sizeable government sector.

Defence, justice, public works and institutions, and the ‘dignity of the sovereign’ was a formidable agenda, especially if his proposals for education (‘a little school in every parish’), and the treatment of ‘noxious diseases’ were costed. In addition, he favoured government regulations of the banking system, interest rates, bank reserves, the stamping of products regarding quality, the post office, licences, and the patent system. The programme of public works need in Britain – thousands of miles of usable roads, pavements and street lighting in towns, harbours, canals and water supplies – amounted to large-scale public budget over many years.

Of course, he cautioned against allowing the government to attempt the impossible, such as directing how merchants and manufacturers should invest their scarce capital. Unfortunately, the free market cannot be left alone to pursue its self interest without any concern of the government. There was too much temptation to resort to monopoly, narrowing of the market, raising prices and protectionism.


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