Tuesday, September 09, 2008

Adam Smith Did Not Have a View on Government Bailouts

Ernest Werlin, a columnist at the Herald Tribune writes: “Too big to fail ... or to survive? Determining U.S. bailout policy” (HERE):

Adam Smith, the father of economics, criticized governments giving grants to private enterprises. Smith supported competition to provide most efficiently the needs of society.”

I am not sure where Adam Smith made such a statement and would appreciate a reminder.

In mid-18th century, the government certainly purchased from private enterprise (defence, justice and civil project builders) and it issued Acts of Parliament and the King issued Royal Charters that gave monopoly powers and patents to private organisations and individuals. But ‘bailing out’ private businesses going bust (for that is what Ernest Werlin’s article is really about in the aftermath of Fannie and Freddie’s troubles.

It is not that Adam Smith took a stand that is worthy of comment on this modern issue – there were hardly any firms of such note. The government ‘allowed’ Dr Roebuck’s Carron Ironworks to go bankrupt; it didn’t bail out the South Sea Company, of ‘bubble’ fame, even though the Prime Minister among others lost their money.

This was not an issue for Adam Smith. Supporting new businesses with monopoly charters was fairly common, and was a policy initiated in Elizabethan times when the Guilds were given legal status, plus a lot of legislation that had great intentions but soon turned into deadweight drags on economic growth (the Apprentices Statutes, Settlement Acts, Navigation Acts, and Colony Charters).

To assert whether Adam Smith would support taking over Freddie and Fannie is absolutely pointless; he never faced such a question. But we do know he was in favour of regulation of the banking system in matters of currency denominations (Book II, Wealth Of Nations) and it setting up quality standard marks in key products.

Much beyond that is anybody’s guess; it wasn’t yet agenda for Adam Smith.



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