Thursday, July 31, 2008

A Correspondent Writes...

A correspondent writes:

I find Smith difficult, because after 800 pages extolling the virtues of free exchange and how bad the politicians are, he suddenly starts to suggest various public spending programmes. Justifiable if they, so to speak, lay down the highway along which commerce can travel, and make the process more efficient. Though a thoroughgoing free-marketeer might say that the market would do that itself - entrepreneurs would realize that new roads or bridges are needed, and build them, and find innovative ways of charging for them. Of course, Smith says that those who get most gain should do most of the paying, so that helps assuage the thoroughgoers a bit. But his ideas on education, with the public paying for builders but not, of course, for good reasons of incentives, the teachers, seem rathe woolly.”

Book V of Wealth Of Nations does seem to stand out from Books I-IV. It is, however, foreshadowed by his continual references to the misbehaviour of certain of the ‘merchants and manufacturers’ who leap at the first opportunity they get to ‘fix’ markets for their selfish interests by widening them with more customers and simultaneously narrowing the competition by monopolies and protection, to raise prices and enrich themselves as they lower the real incomes of consumers and narrow their choices.

Book V is about the duties of government which raises its finance by taxation, duties and borrowing. Let’s always start from the proposition that government spends our money not theirs. In the modern era it discovered yet more sources of increasing its funds, of which income tax was the most obvious, yet by no means then the most odious and dangerous. Government borrowing, bonds, and sinking funds (often spent on them accumulating, rather than used to clear government debts) was of lasting economic damage.

The need for such increased sources of funds was often occasioned by sudden needs to mobilise armed forces (army and navy) not usually to fight off invasion threats – the first duty of government – but to initiate military force against neighbouring trading partners in exhibitions of what David Hume called ‘jealousy of trade’, or to subsidise continental absolute monarchs who were (temporarily) friendly to Britain.

So, lets see Adam Smith’s advice to invest capital in projects that facilitated commerce (roads, canals, docks, and such like) and in public institutions that supported justice – popular knowledge that would replace illiteracy and ignorance, and potential ‘enthusiasm’, or wild disturbances of society. A belief that there were individuals around who commanded the vast sums needed for road building who were motivated by ‘free enterprise’ in mid-18th-century Britain is an exaggeration.

His schools programme was an attempt to lay the basis for universal education, at least for boys, that would benefit commerce (reading, writing and account, plus a little geometry) – even using a gaunt tale of factory work to frighten the middle class readers and upper class influencers into building a barrier against subversion by supporting the modest expenditures required. It was a better use of public money that £170 million spent on the Seven Years War. Smith even found a use for government combating ‘loathsome diseases like leprosy’ – again more socially useful that millions wasted elsewhere.

Smith was not an ideologue; he was pragmatic: which system of organisation and finance worked best: public funding with public commissioners or public funding with private companies?

The choice of independent free market subscribers required resort to the vehicle of Royal Chartered Joint Stock trading companies, awarded monopoly rights. There was not enough private capital around, or at least insufficient mechanisms for assembling them – that came later and was beyond Smith’s remit in Wealth Of Nations.

Today, the same battles need to be thought, especially with the state sector grown to incomparable heights, and taxation of our money on an unprecedented scale – not just income tax, but also value added tax; not just taxation of profits but also taxation of capital – and the spending agenda is not just foreign wars but also spending into every nook and cranny of private behaviour.

Today, Radio 5 discussed another government agency to tell parents what games their children should play and another idea was offered that suggested an ‘independent’ agency should decide what the police can do with the DNA records – neither will be cheap to implement, of course, and neither will resolve the problems they are set up to deal with.

There is a lot of work to do to roll back the ever expanding public control of how we live.


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