Wednesday, March 08, 2006

One of Three Good Sense Articles Today

Today we have had three most interesting representations of what Adam Smith actually believed in three different publications. This is a rare event in a single day. Usually, Lost Legacy corrects incorrect notions about Adam Smith’s contributions but it is a pleasure to report on good sense when it appears.

In a Heritage lecture, Brett D. Schaefer, Jay Kingham Fellow in Inter­national Regulatory Affairs in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shel­by Cullom Davis Institute for International Studies, at The Heritage Foundation, discusses:

How the Scope of Government Shapes the Wealth of Nations.”

What is the optimal level of government to max­imize economic growth? It is an old question dating back to the birth of modern economics and Adam Smith’s Wealth of Nations, which in part discussed the proper role or scope of government in facilitat­ing wealth. Smith advocated a free market under which rational self-interest contributed to general economic well-being—the famous invisible hand.”

However, Smith did not reject government as altogether unnecessary or detrimental to economic prosperity. On the contrary, he believed that gov­ernment had an important role to play through enforcement of contracts; provision of patents and copyrights to encourage innovation; construction of public works like roads and bridges unlikely to tempt private investment; and, of course, providing for national security both internally through law enforcement and externally to protect the nation from foreign threats.

The basic premise set forth by Adam Smith— i.e., that there are certain key functions of govern­ment that facilitate economic activity and thereby contribute to increased economic growth—is near­ly universally accepted by economists. Indeed, almost everyone can identify circumstances in which government spending enhances economic growth. As noted by Heritage Foundation econo­mist Daniel Mitchell, “Economic activity is very low or nonexistent in the absence of government, but it jumps dramatically as core functions of govern­ment are financed.” Even in this beneficial role, however, government is not costless; it simply means that the benefits outweigh the costs. All of this is related to a concept, called “dead weight loss,” used by economists to reflect economic loss caused by government inefficiencies.”

I would quibble with the following:

Smith advocated a free market under which rational self-interest contributed to general economic well-being—the famous invisible hand.”

The adjective ‘rational’ in front of ‘self-interest’ does not qualify adequately the incorrect notion that self-interest contributes to ‘general economic well-being. It can do so, but what has been read into such statements, as I have said many times on Lost Legacy, is that self-interest – any self-interested action – leads unquestionably to ‘general economic well being’. It does not.

Self-interest can have malign, not benign, effects of society’s well being. The self-interested monopolist, or polluter, or cheat, or intimidator, and such like, keeping just within the law, but morally lacking, acts in his or her own self-interest at the expense of the self-interest of others, including, perhaps, employees, customers, or near-by residents unlucky to be down-stream or down-wind of their operations. Society also generally loses something in higher prices that divert revenue to the monopolist and away from other providers, and in necessary expenditures to clean-up the mess created by the polluter’s actions, including the health effects of employees, residents and the public.

The miscreant monopolist or cheat, acting within the law (if they weren’t, then justice deals with them – if caught and convicted), is ‘rationally’ serving his or her self-interest; the problem is there often are conflicting self-interests in enough situations for intervention by legislation to be necessary (where voluntary restraints are too weak and their deficiencies cause public scandals on a scale too large to ignore), including ‘red tape’ regulations that add to the costs of every producer whatever their moral habits, and become charges on taxpayers for the inspectors who monitor the self-interested behaviours of those who cheat, or are likely to cheat.

Conflicts between self-interests in society if mediated by the acceptance and practice of moral conduct (Smith’s Theory of Moral Sentiments) and by negotiation of exchange relationships (Wealth of Nations), lead to benign outcomes. Otherwise they need not.

Note: Anthony Kim, a Research Data Specialist in the Center for International Trade and Economics, contributed to the research for this paper, which was presented at the Economics for Pros­perity Conference hosted by the Chambers of Com­merce and Industry South Africa (Chamsa) in Johannesburg, South Africa, on December 1, 2005.

Read the paper at:


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