Tuesday, May 22, 2012

Adam Smith’s 25 arguments for the State’s role in market economy

I receive requests occasionally from readers to enumerate his arguments for the role of the State in a market economy:

Here is a list extracted from Wealth Of Nations:

1               the Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’ (WN464);
2  Sterling marks on plate and stamps on linen and woollen    cloth (WN138–9);
3 enforcement of contracts by a system of justice (WN720);
4 wages to be paid in money, not goods;
5 regulations of paper money in banking (WN437);
6 obligations to build party walls to prevent the spread of fire (WN324);
7 ‘Premiums and other encouragements to advance the linen and woollen industries’ (TMS185);
8                ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
9               ensuring the ‘cheapness or plenty [of provisions]’ (LJ6; 331);
10            patrols by town guards and fire fighters to watch for hazardous accidents (LJ331–2);
11            erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723);
12            coinage and the mint (WN478; 1724);
13            post office (WN724);
14            regulation of institutions, such as company structures (joint- stock companies, co-partneries, regulated companies and so on) (WN731–58);
15            temporary monopolies, including copyright and patents, of  fixed duration (WN754);
16            education of youth (‘village schools’, curriculum design and so on) (WN758–89);
17            education of people of all ages (tythes or land tax) (WN788);
18            encouragement of ‘the frequency and gaiety of publick diversions’(WN796);
19            the prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population (WN787–88);
20            encouragement of martial exercises (WN786);
21            registration of mortgages for land, houses and boats over two tons (WN861, 863);
22            government restrictions on interest for borrowing (usury laws) to overcome investor prodigality (WN356–7);
23            laws against banks issuing low-denomination promissory notes (WN324);
24            natural liberty may be breached if individuals ‘endanger the security of the whole society’ (WN324);
25            limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’) (WN539); and
moderate export taxes on wool exports for government revenue (WN879).

Contrary to assertions that Adam Smith was  a firm advocate of laissez-faire’, apart from him never using those words (he tended to avoid non-English language in his writing, despite being fluent in Greek, Latin, French and Italian), his statements above suggest an extensive programme of state intervention, some of them with longer-term more extensive consequences (the leprosy suggestion).

However, it would be wrong to draw from this the idea that Adam Smith as a Statist, or a social democrat, or ‘egalitarian’.  That reaction mirrors those of see Smith as an extreme advocate of laissez-faire and the ‘night-watchman’ state.  Both images are attributions without foundation in understanding his pragmatism – what works and what doesn’t – summed, I think, in the summary of his views as ‘markets where possible, the state where necessary’.



Blogger Unlearningecon said...

This is an interesting list.

Maybe it's just my bias, but it seems to me that Smith wouldn't find many of the public services the state provides now particularly objectionable, although I get the impression he'd be for more decentralisation. Do you think he'd support the NHS and welfare state?

9:04 am  
Blogger Gavin Kennedy said...

Hi Unlearningecon
It would take a long article to set out speculation on what Smith would favour today.
We know what the favoured in his times. We know of his outlook and approach to problems, as he saw them. Pragmatic to a fault.
From that perspective, we can be sure he would study how the situation developed over the decades - few things suddenly happen in society (except natural disasters). Even ideas come over time.
He advocated an end to ambitions of Empire (last paragraph of WN); instead Britain build a new empire and colonialism in the 19th century. He suggested a substantial reduction in tariffs; they are still with us, reducing (too) slowly. He preferred markets where possible, the state where necessary; most of the world has various degrees of state capitalism.
He knew that measures by the state have a tendency to grow over time (from the political influence of legislators and those who influence them).
On the NHS, consider his suggestion of state action to treat 'loathsome diseases'. Who could doubt that this necessary action would grow where socially necessary under its own momentum? Markets in health provision are prevalent in most countries, but inequalities in insurance provision are uneven (blatantly so in some countries). State provision has it own problems - note the hostility of NHS employee groups to any market interventions in support of NHS provision, even where they agree (privately), and it is obvious that certain interventions in the market would be beneficial for patients.
On the welfare state, such redistribution policies were unknown in his days and were not agenda until the decades after he died, and were tentative too for much of the next century.
See Thursday's post on poverty today.

10:37 am  

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