Friday, November 28, 2008

Adam Smith Did Not Regard Taxation as 'Evil'

Michel Pireu writes (28 November) in Business Day HERE:

Laissez faire — the scapegoat of the crisis”

"The name of Scottish philosophy professor Adam Smith has been linked with the cause of economic freedom ever since he published his Inquiry into the Nature and Causes of the Wealth of Nations in 1776."

"He had a lofty view of the importance of the law of supply and demand, believing that it affected far more than the market. “The natural effort of every individual to better his own condition” was the foundation of all political, economic, and moral systems."

In Smith’s view, taxation was essentially an evil: first it was an infringement of liberty: second, it distorted the natural operation of the market."

He believed self-interest could be safely left to serve the common good. “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. In spite of their natural selfishness and rapacity (the rich) are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made, had the earth been divided into equal portions among all its inhabitants,” Smith declared.

Mainly from Ideas that Changed the World by Felipe Fernandez Armesto


Comment
Michel Pireu is not quite being fair to Adam Smith and verges on being misleading about his ideas.

Adam Smith never believed that ‘taxation was essentially an evil’; he recognised the need to fund the essential activities of the sovereign state: defence, justice, public works and education (Wealth Of Nations, Book V).

These were essential for the continuation of society and for social harmony within it – without defence the society could be overrun by the depredations of neighbours (‘defence is of much more important than opulence’, WN IV.ii.30: pp 464-5); without justice the society would ‘crumble into atoms’; without public works to facilitate commerce, the society would not reach opulence; and without education, the poor in the society would be exposed to ‘the delusions of enthusiasm and superstition’ (WN V.i.f:61: p 789; Canaan, p 740).

Neither did he consider that taxation “was an infringement of liberty”. He was a strong believer in Natural Liberty as a philosophical approach to human rights for all societies, including those ‘despotical’, from the Natural Law theorists, Grotius, Pufendorf, Carmichael and Hutcheson.

But he considered that as the duties of government were clear, they had to be paid for and his first maxim of taxation was the ‘the subjects ought to contribute towards the support of the government, as near as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state’ (WN V.ii.b.3: p 825; Canaan, p 777)

Now, of course, certain taxes and certain levels of taxation, especially those that breached his maxims, ‘distorted the natural operation of the market’. But this never meant that taxes should be abolished. Indeed, as staunch a supporter of free trade as he was, he was also pragmatic enough to note that even with his overall view, Britain could not become a totally ‘free port’ without some level of tariffs or duties on some goods, because customs duties played such a large part in government revenues.

On self-interest, Michael Pirue (or his sources, Felipe Fernandez Armesto – did Pirue not check his secondary sources before making definitive statements about what Adam Smith actually said?) achieves his alleged quotation from Adam Smith by advertenly running two separate sentences from Moral Sentiments and Wealth Of Nations together without informing the credulous among his readers about what he had done, and thereby giving the wholly false impression that Adam Smithbelieved self-interest could be safely left to serve the common good”.

Smith was never so imprudent (silly even) to assert such a thing.

The quotation from Wealth Of Nations about the ‘butcher, the brewer, and the baker’ comes from Wealth Of Nations (WN I.ii.p 26; Canaan, p 14) and the quotation about ‘natural selfishness and rapacity’ comes from Moral Sentiments, IV 1.10: p 184), and was about the delusion of rich landlords, not their exercise of self interest (and it has been discussed on Lost Legacy many, many times).

Adam Smith gave over 70 reasons why self interest cannot be assumed to always benefit societies and those in them in Books I, II, and II, of Wealth Of Nations.

He was not an ideologue; sometimes individuals benefited others (the propensity to exchange) and sometimes they didn’t (monopolists, protectionists, and such like – nowadays, polluters!).

Michael Pireu may want to reconsider the certainties by which he taints the legacy of Adam Smith. All he has to do is read for himself Smith’s works (or read Lost Legacy regularly).

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2 Comments:

Blogger Hank said...

Question: Does the quote "the subjects ought to contribute towards the support of the government ... in proportion to their respective abilities ..." imply a progressive tax, as some suggest (see Wikipedia article on "progressive tax")? The phrase “in proportion” would seem more likely to suggest an equal % (in contrast to an equal amount), i.e., a flat tax.

10:06 pm  
Blogger Gavin Kennedy said...

Hank

You raise a question that has exceited many a modern economist, and not a few politco's.

It could mean 'in proportion' - the larger the income enjoyed the larger the proportion (progressive) or the larger the proportion (larger amount but equal percentage).

But bear in mind there was no income tax while Smith was alive (died 1790), so modern comments are somewhat 'previous', as they say in London slang.

He critices taxing wages of labourers but not for those richer state offices that the public despise.

Book V of Wealth Of Nations is about taxation in the 18th century, when public spending was relatively low, and mainly spent on defence.

The case for a flat tax, should be made (or against it) on the basis of the tax system today and the much higher percentage of government expenditure.

I do not see how Adam Smith can be called in support or opposition for amy aprticular tax syste.

8:33 pm  

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