Thursday, April 07, 2005

Smith's Legacy Applied in India and Britain!

Kalsa News Network, Punjab, India, 5 May 2005 (

KNT carries a feature that discusses Adam Smith’s views of public works and how they should be funded:

“Governments provide a solution to this problem [that of collecting revenue and monitoring usage] by constructing the roads and recouping the expenses through taxes such as the income tax and the gasoline tax. Other pieces of infrastructure such as the sewage and water system work on the same principle. The idea of government activity in these areas is not new; it goes at least as far back as Adam Smith. In his 1776 masterpiece, The Wealth of Nations Smith wrote:

"The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.

Higher taxes which lead to improvements in infrastructure can lead to higher economic growth. Once again, it depends on the usefulness on the infrastructure being created. A six-lane highway between two small towns in upstate New York is not likely to be worth the tax dollars spent on it. An improvement to the safety in the water supply in an impoverished area might be worth its weight in gold if it leads to reduced illness and suffering for the users of the system.”

The reference to Wealth of Nations is from Book V.i.c: 723. It is all right as far as it goes, but Smith explicitly states that the ‘system’ in operation on toll roads was ‘not of very long standing’ and abuses had not yet been eliminated. He was not happy with private ownership of toll roads, nor with public Commissioners running them. Both had disadvantages, particularly if governments used toll revenues to raise funds for other 'exigencies' besides repairing and maintaining the roads.

The author of the KNT piece applies the Smithian notion that only governments can afford infrastructure investment on the scale required in road building and for sewage and water supplies. Such is the growth of public expenditure in all developed countries that we have come full circle since the 18th century. Now the massive capital investment required for building and maintaining large-scale public works is beyond the ability (economic and political) of governments to fund them. Hence, they teh public sector descends into disrepair and low quality. When Galbraith spoke in the 1960s of ‘private affluence and public squalor’ he missed that point completely.

It is possible to meet the massive capital investments required for safe sewage and water systems by mobilising private capital under 'Public and Private Partnerships' where public authorities invite private organisations under contract to finance the erection, maintenance and operation of modern sewage and water works for long periods (20 to 39 years) for annual fees, paid out of taxation according to public usage and high quality and performance standards. This is a thoroughly Smithian principle applied to a practical problem.

I am glad these ideas are being discussed in the Punjab in India (and are being applied in Britain).


Blogger steven rix said...

Interesting, i just spotted this blog when I was looking on what positive and negative contributions could have done Adam Smith in India.

5:25 am  

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