Thursday, December 15, 2005

Nothing 'Tricky' in Smith's Criterion for Public Projects

Business Day (Thailand’s Business News in English) 15 December, carries an article by Dr Biswas: ‘A cautionary tale of the role of government in commerce’.

Dr Biswas writes:

It is generally conceded these days that free markets, the basis of capitalism, are good things. Yet, even Adam Smith, in Wealth of Nations, realised that there are limits to the social goods that free markets can deliver.

Smith suggested that the proper roles of government were in the defence of society, administration of justice, facilitating commerce and promoting the instruction of the people. … But facilitating commerce is a tricky one. What does this mean? And what should government get involved in?

Some capitalist thinkers feel that the government should only get involved in areas of market failure. This often occurs where socially essential goods and services such as education and health care must be delivered to people who cannot afford to pay market rates. In an area such as education, for example, making sure that all citizens in a country have a proper basic education has a large social benefit, yet it may be difficult to create a profitable business providing education to poor kids. Hence, there is agreement that government must be involved in the education of poor children.

How does this apply to facilitating commerce? Roads, bridges and airports all facilitate commerce, and most people would agree that government has a role in developing major infrastructures such as these.”


It is not clear why Dr Biswas uses the phrase ‘even Adam Smith’ as if this is remarkable, when the fact is this can only be surprising to someone who has not read “Wealth of Nations” and who holds to a view of Adam Smith (as taught in Economics 101 in many campuses and endlessly repeated by journalists) that bears no relation to his Works.

Nor is it clear why ‘facilitating commerce, is a tricky one’. It was not a ‘tricky one’ to Smith and should not be to readers of “Wealth of Nations” or ‘Lost Legacy’. He is quite clear of his criterion for public investment in ‘facilitating commerce’:

The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those publick institutions and those publick work 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 expence 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 and maintain’ (Wealth of Nations, V.i.c. page 723)

What is the ‘tricky’ problem with that clear criterion? As Smith was writing in the mid-18th century his concerns about ‘individuals or small number of individuals’ was on an entirely different scale to the availability of capital for such projects in the 21st century. That does not prevent governments with vast tax raising and borrowing powers investing in public projects that could be undertaken by private companies but which they choose to undertake as publicly financed projects.

The United States has undertaken all coastal and river dredging schemes using the US Army Engineers as the state monopoly constructor and operator for decades (they built the levees that were breached in the recent Katrina incident outside New Orleans), when other countries demonstrate that the use of private dredging contractors is perfectly feasible and as reliable.

Britain’s privatised BAA, the owner and operator of the UK’s main airports and former state monopoly (now a private monopoly), can and does construct major terminals and runways using privately raised funds. Of course, BAA makes cases for access to tax payers’ funds and grants, but that it a facility dictated by government (and European Union) policy, or their acquiescence in making such funds available, and is not an economically necessary criterion in Smith’s sense. In his day, harbours, bridges, canals and roads formed a formidable agenda of needed public works to facilitate commerce.

Privately sourced funds are available for new airport projects in the USA, but they are sometimes stymied not by the absence of ‘individual or small number of individuals’ to undertake them without government funding. The main problem is government regulation (local and national) that use zoning laws and permissions preventing projects they disagree with for various reasons, including their other local past investments in an airport elsewhere and ‘cosy’ relationships with other private airlines. (I discussed a case here some months ago in Texas.)

Dr Biswas goes on to discuss US energy deals (Enron) and I am not tempted to follow him because my knowledge of the details is less than adequate. It may be regarded as a purely modern phenomenon pre-dating by a couple of centuries anything Adam Smith could have written about.

Those more competent in US energy in the past few years can follow Dr Biswas at:


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