Saturday, December 08, 2007

How Laissez Faire was Adam Smith?

Greg Whiteside writes in The Condo Metropolis Blog (7 December) here: “ADAM SMITH MUST BE ROLLING OVER IN HIS GRAVE RIGHT NOW”

Arguably the father of modern economics, Adam Smith was a proponent of a Laissez-Faire style of economics. Translation: government does as little as possible and the natural laws of supply and demand will determine price levels and purge the market of any impurities. Very much a “might makes right” kind of approach. Admittedly, there are certain functions that government must perform in a regulatory capacity to keep the playing field level, but things seem to have gotten out of hand. Exactly like a drug-addict, we are addicted to economic intervention by our leaders.”

‘Rolling over in his grave’? Not quite. I’m glad Greg Whiteside began with ‘arguably’. He wasn’t so sure then, and he shouldn’t be because Adam Smith did not recommend laissez faire economics, though he had many opportunities to do so. He doesn’t mention laissez faire (leave alone; or ‘laissez nous faire’, leave us alone', in its original format) in Wealth Of Nations, nor in anything else he wrote, including his correspondence.

That he is reputed to be a proponent of laissez faire is a fault of the people who started this assertion on no other basis than they had not read Wealth Of Nations through, confining their reading to selected quotations. If they had read Wealth Of Nations they would find items on the following list:

To the generally accepted roles for government, Smith added others of a more controversial nature. For some, it is an issue of fundamental principle; for others it is a boundary dispute. Among these issues Smith identified:

● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’;
● Punishment and enforcement after acts of dishonesty, violence, and fraud;
● Sterling marks on plate and stamps upon linen and woollen cloth
● Enforcement of contracts by a system of justice;
● Wages 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 of 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 (publicly funded ‘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

In short, Adam Smith was more concerned with what worked in a commercial society than he was with abstract principles. He did not believe that the exercise of self interest ensured that social benefits would necessarily follow and he gave 50 instances in Books I and II of the malign outcomes of self interest from ‘merchants and manufacturers’, ‘rulers of mankind’, ‘legislators’ and people who influence them, ‘sovereigns’, and ‘employees of monopolists’. On historical precedent, the situation was not likely to change quickly. In fact it still hasn’t and, if anything, in many aspects it has got worse.

Living not far from where Adam Smith is buried in Edinburgh, I can report there have been no reports of any unusual disturbances from his grave site.


Blogger V said...

Fascinating - If this is true, then Adam Smith has been miss sold to me!

The issues regarding that he would recommend a premium on the woollen industry, and that he would try to prevent cases of investor stupidity seem to imply that he was as open to spending other people's money on closing markets to competition and harbouring a nanny knows best attitude as many of today's politicians!

With society being bigger and more advanced these days, I don't think Adam Smith, if he was alive today, would actually be advocating a much smaller government than the one we have - which is a shame!

10:13 am  
Blogger Gavin Kennedy said...

I am not sure I would agree with you about Adam Smith's views on the size of the state, though there is a real debate about the boundary (decided by elected legislatures).

There is great scope for downsizing government and the politics of what stays in, what goes out, and what might be added is the stuff of politics. 'Left' minded would want more on welfare transfers; right minded would want less on state activities that could be better served by markets.

Adam Smith was not an ideologue; his principle aim was utility - which did the job best?

He was sceptical, indeed suspicious!) of salaried state officials making decisions that were best left to individuals, but where need exceeded capability ('noxious diseases' is one example; basic education another), he favoured a mixture of capital spending by government, administration of the service bu whichever agencies, public, charity or private) would do the better job.

All such measures would be backed by active systems of justice, independent of the executive and the legislature.

It's not pure size of government that matters, but the composition of what it does and what markets do.

10:29 am  
Blogger Richard H. Serlin said...

Cornell economist Robert H. Frank notes in his New York Times Economic Scene article of May 25, 2008:

ADAM SMITH’S modern disciples are far more enthusiastic about his celebrated invisible-hand idea than he ever was. In their account, Smith’s assertion was that purely selfish individuals are led by an invisible hand to produce the greatest good for all. Yet Smith himself was under no such illusion.

On the contrary, the relevant quotation from his “Wealth of Nations,” which describes a profit-seeking business owner, is far more circumspect. It says that this owner “is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” It continues: “Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

In short, Smith understood that the invisible hand is often benign, but not always.


4:28 am  

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