Sunday, August 21, 2005

There are Regulations and Regulations: some help, others hinder

Adam Smith’s name is dragged into debates on all manner of issues, not always to good purpose. In today’s The Financial Express, 21 August 2005, in Daka, Bangladesh, is a clear example of an incorrect use of his name for a purpose to which he may not have been happy to be associated. Morgan Witzel writes in defence of regulations introduced by governments on business. He begins by citing Adam Smith’s defence of the Cromwellian ‘Navigation Acts’ in “Wealth of Nations”:

“Why red tape should not be dismissed as a company killer”
By Morgen Witzel

“Even Adam Smith, whose Wealth of Nations is regarded as the gospel of free markets, conceded that some regulation may be necessary. Writing in 1776, he supported the retention of the navigation acts, which barred foreign-registered vessels from landing cargoes in British ports, as he felt that the British merchant marine required protection; repealing the acts would allow British shipping companies to be undercut by foreign competitors.”

Some errors amidst the facts cited. I will ignore the usual hyperbole about “Wealth of Nations” being a “gospel of free trade” (historical curiosity: why so many allusions to ‘gospels’, ‘high priests’ and ‘disciples’ in reference to Adam Smith?) and move on to eagerly endorse the view that Adam Smith was not opposed to State regulations – he did not have to ‘concede’ this view – it was central to his approach.

Smith in Book V of “Wealth of Nations” favoured state investment in defence (the ‘first duty of government’); justice (without justice society would ‘crumble to atoms’); public works for projects beyond private finance (roads, canals, harbours and bridges); education of youth (a school in every village) and health (eradication of loathsome diseases). Given the scale of expenditure required to have met this public spending programme, Smith was not automatically
against large scale government activity. He was not an ideologue for ‘free markets’ and did not advocate laissez faire.

Morgen Witzel’s reference to the Navigation Acts needs clarifying. Britain is an island not a continent. The Navigation Acts, while using commerce as the vehicle for implementing them, were more to do with the defence of Britain (or, rather, England originally from Cromwell, mid-17th century, to the Act of Union between England and Scotland, 1707). Britain’s overseas trade required shipping and shipping required the instruments of defence, such as ships and, crucially, experienced seamen, lots of them, who could be mobilised in times of war.

Throughout the 17th and 18th centuries Britain fought several wars and the Navigation Acts provided the necessary naval resources for Britain to prevail. Now, I do not doubt for a moment that commercial interests also saw a gain for themselves in applying the Navigation Acts with vigour. It gave them a monopoly of sea trade to and from Britain. And like all commercial monopolies this diverted income to sea commerce at some expense to other home trades, and of course consumers.

Its economic cost to the UK was to ‘buy foreign goods dearer and sell domestic goods cheaper’. Smith recognised this and stated: ‘Defence is of much more importance than opulence’ (“Wealth of Nations”, Book IV.ii.30: 464-5). The ‘protection’ that Smith considered British shipping to need was not ‘trade protection’ as Morgen Witzel suggests; it was military protection (against the Dutch at the time). He did not endorse the Navigation Acts to develop the British economy; it was to survive if Britain was blockaded by a superior naval force.

Smith also favoured government regulations in the Mint, the Post Office, Assay services and Hallmarks for gold and silver; and such like.

Morgen Witzel writes:

“Much regulation is designed to protect business, not to crush it. Regulations and laws against corruption, restrictions on the formation of cartels and monopolies, regulations that require companies to deal fairly and honestly with their customers and employees, have the intent of ensuring fair competition and preventing unethical behaviour.”

Wrapping up such a list is commendable but as I am sure businesses in Bangladesh (and India and Pakistan) well know, the proliferation of regulations, permissions, licences, endorsements, official stamps and hosts of petty paperwork, common in these countries is neither benign to business (they add to costs, not revenues) nor do they prevent unethical behaviour’. Quite the reverse in the latter case. Wherever they exist they promote corruption, on a wide scale and at all levels. If you seriously wish to reduce corruption and unethical conduct, scrap at a stroke all these petty permissions, collect all the rubber stamps in and burn them, abandon all licences and the need for the endorsement of officials. These are the keys to private bank accounts for those tempted (often by low official pay) to become informal tax collectors for themselves.

Lastly, advice that should not be followed:

“The European Union's information and consultation directive, which comes into force this year, requires companies to consult their employees formally on a broad range of issues ranging from pay and conditions to strategic decisions.”

This is the antipathy of what Smith would advise. It is the European Union at its worst. Entrepreneurs do not need such regulations in Europe and neither do they in Bangladesh. Think of the opportunities for delaying decisions until managements ‘incentivise’ employees so that they can proceed with their ‘strategic decisions’!

Good regulations, yes; bad regulations, no.


Blogger David Friedman said...

"Smith in Book V of “Wealth of Nations” favoured state investment in defence (the ‘first duty of government’); justice (without justice society would ‘crumble to atoms’); public works for projects beyond private finance (roads, canals, harbours and bridges); education of youth (a school in every village)"

Except that Adam Smith did not "favour ... state investment in ... education of youth." He has a very long discussion of the arguments for and against government involvement in education, in the course of which he raises a number of possibilities, including a modest subsidy to local schools--one paying only a minority of their costs. By quoting from the arguments for government involvement one can make it look as though that was the position his supported. By quoting from the arguments against ("Those parts of education, it is to be observed, for the teaching of which there are no public institutions, are generally the best taught") one can create the reverse effect.

But his final summary is:

"The expense of the institutions for education and religious instruction is likewise, no doubt, beneficial to the whole society, and may, therefore, without injustice, be defrayed by the general contribution of the whole society. This expense, however, might perhaps with equal propriety, and even with some advantage, be defrayed altogether by those who receive the immediate benefit of such education and instruction, or by the voluntary contribution of those who think they have occasion for either the one or the other."

Or in other words, some public funding of schooling is not unjust but an entirely private system is also not unjust and might even be preferable.

1:53 pm  

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