Monday, March 24, 2008

Adam Smith On Government

John Chapman (24 March) writes on AEI (‘American Enterprise Institute for Public Policy Research’) from Washington DC. (HERE)

“Economic Stimulus v. Economic Growth

What drives economic growth? Adam Smith made this question the centerpiece of his famous book in 1776, entitled An Enquiry into the Nature and Causes of the Wealth of Nations. Smith's comprehensive answer, confirmed by David Hume and further elucidated by David Ricardo and John Stuart Mill, has been borne out in the centuries since. Modern economists would describe Smith's book, and indeed the classical vision more broadly, as one highlighting the institutions which drive growth, summarized as follows:

• Private property and limited government--Smith was a keen student of John Locke, who eloquently enunciated a natural right to liberty and property, rooted in the very nature of man. For Smith, in fact, property and limited government were the cornerstones of a system of natural liberty, and a necessary condition for the advancement of civilization itself. From the vantage point of the economist, property implies private ownership of the means of production (capital), and limited government implies a regime of low taxation and regulation. With this institutional backdrop, in fact, proper incentives are in place to guarantee maximal economic growth via development of other necessary institutions undergirding a society based on liberty
These are the necessary and sufficient institutional conditions which guarantee maximal growth in an economy (Keynes himself would agree, differing only regarding the relative stability of a market economy and government's role). Effective economic policy, both fiscal and monetary, thus consists in fully promoting this institutional mix.”

What claims to be about ‘classical fundamentals’ is suspiciously familiar as a modern presentation that relies on the association of ideas about Adam Smith rather than reflective of them.

Private property and limited government

Adam Smith certainly favoured private property in that the emergence of society from the Age of Hunting was what brought about the idea of property, and each successive Age (Shepherding, Farming and Commerce) developed the existence of property into ever more sophisticated forms.

That he favoured ‘limited government’ in the same sense (if at all) as a principle is a more complicated notion and a more questionable assertion. To some extent the assertion is brought about because of the detailed rebuttal of mercantile political economy in Book IV of Wealth Of Nations and his account of the roles of government in Book V, reflecting a far more primitive commercial economy in the 18th century than what may be required in the 21st century.

Mercantile governments from the 15th century pursued policies which inhibited optimal economic growth, evident in the 18th century when he was writing. These policies manifested themselves in the forms of the national pursuit of gold, instead of enhancing the annual output of the ‘necessaries, conveniences, and amusements of life’ (which we call GDP), of a ‘balance of trade’, by which was meant avoiding importing more than was exported, of ‘jealousy of trade’ by neighbours, seen as rivals rather than as partners, of the concomitant policies of protection, tariffs and prohibitions, domestic monopolies, and narrowing markets against competition, the Settlement Laws, the Apprenticeship Statutes, Primogeniture and Entails of land, and colonies and their associated wars.

These policies were seen by Adam Smith as a considerable burden of the wrong government policies, not a burden of government in itself.

Government was necessary for a vibrant economy in the stability of laws protecting property, defence capability to protect the nation, a nation-wide system of justice (without which society would ‘crumble into atoms’), and the promotion by the state of public works and public institutions of education, health, and the dignity of the sovereign. These too added to a formidable extension of government in the 18th century, funded by taxation and borrowing.

Given the state of Britain’s roads, harbours, bridges, streets in cities, lack of sanitation and such like, there would have to be a substantial increase in public expenditure just to get the infrastructure in place to facilitate commerce.

Those who link Adam Smith to ‘limited government’ have not appreciated (perhaps have never read) Wealth Of nations, Moral Sentiments, and Jurisprudence.

Be clear, the reason for relying on government was because individual private capital was in the main not large enough in the 18th century, and while government capital (from taxation and borrowing) was large enough, much of it was wasted on the above mercantile policies including the maintenance of colonies in America and the expenditure on foreign wars.

Adam Smith estimated the cost to Britain of the Seven-Years War with France was £175 million pounds. If this capital had been applied to increasing domestic output and productive employment in profitable enterprises, and the profits devoted to growth and not to prodigality and government waste, Britain would be able to ‘spread opulence’ that much sooner than it was likely to do if present arrangements and habits continued.


Post a Comment

<< Home