Monday, November 16, 2009

Adam Smith on Government Roles

By Dr Bharat Jhunjhunwala writing (22 November) in Organiser (HERE):

Economy Watch - In defence of regulation of markets”

“This veneration of free markets was first propounded by famous economist Adam Smith about 200 years ago. He said that competition in a free market establishes public good as if an invisible hand was guiding the businessmen. There was no need to separately worry about public good. His logic was like this. Competition in the market pushes the businesses to produce goods at a lowest cost. This leads to cheap goods being made available to the people. For example, I had brought an electronic calculator from United States for my father in 1973 for 100 dollars or about Rs 1,000 at that time. Today, a much better calculator is available for Rs 50 because of the improvements brought about by competition. The slum-dwellers today have the pleasure of watching the TV and drinking cold water from the refrigerator because of the steep reduction in the price of these goods. Thus Adam Smith suggested that the government must not interfere in the market
.”

Comment
Question to Dr Bharat Jhunjhunwala:

Exactly where does Adam Smith makes the statement: “that competition in a free market establishes public good as if an invisible hand was guiding the businessmen. There was no need to separately worry about public good?”

This is a paraphrase at best and a distortion of Adam Smith.

He never used the words “as if and invisible hand was guiding businessmen”. The addition of “as if” to his use of the metaphor of an invisible hand is fairly common among those who have not read Wealth Of Nations in general and the single paragraph in Book IV (chapter 2, paragraph 9: page 456) in which he uses the metaphor of ‘”an invisible hand”.

He most certainly never linked the metaphor to “competition” (which he discussed in Books I and II). He expressed reservations about leaving all decisions to “merchants and manufacturers” and such personages as bankers and their clients, especially where this “might endanger the security of the whole society” (WN II.ii.94: 324).

Nor did Adam Smith suggest such an extreme view “that the government must not interfere in the market”.

He saw a role for government, or public agencies, in stamping cloth and conducting assay tests on precious metals, to ensure that they been inspected for quality, that it should manage the currency and coinage, run the post office and general supervise markets and contract-making through an independent judiciary, and provide wholly or in part a national education system – and make a start on dealing on palliative care with “obnoxious diseases” like leprosy. All this, plus “facilitating commerce” by public works.

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