Thursday, August 03, 2006

Smith's Third Duty of Government an Empirical Test, Not a Case for Laissez Faire

Roderick T. Long announces the contents of the current issue of the Journal of Libertarian Studies and one entry from Valentin Petkantchin caught my attention. I have not yet read a copy, so my remarks are preliminary and subject to revision until I acquire and read it.

In The Wealth of Nations, Adam Smith maintained that “the sovereign has only three duties to attend to.” The first two are national defense and the administration of domestic justice; then, famously, comes the third duty: “the duty of erecting and maintaining certain publick works and certain publick institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain.” Opponents of free markets often seize on this passage with glee, pointing out that even Adam Smith recognized a necessary role for the state in the provision of public goods.Of course, even if this is true of Smith, invoking it against libertarianism would be a mere appeal to authority, not an argument. But is it true of Smith?

In “Is The Wealth of Nations’ Third Duty of the Sovereign Compatible With Laissez Faire?,” Valentin Petkantchin argues that the “third duty” passage has traditionally been misunderstood, and that Smith’s “publick works” are not governmental entities, but merely governmentally chartered joint-stock companies – “public” in the sense of a “public corporation,” but privately funded and administered, and so not the concession to interventionism that they have usually been taken to be.”

I am not inclined to get into a tussle with either those who are ideologically opposed to markets (the equivalent of witch-doctors, shamans and pagan religionists of the ‘rude’ age of humankind) or those who oppose any form of state provision of almost anything (the equivalent of Adam Smith’s ‘men of system’, who, on this occasion, appeared in the advanced, capitalist, fifth age of humankind, not while Smith was alive).

The ‘third and last duty’ of the ‘sovereign or commonwealth’ for ‘facilitating the Commerce of the Society’ is that of ‘erecting and maintaining those publick institutions and those publick 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 expence of 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.’ (WN V.i.c.1: p 723;)

He added, that the ‘erection and maintenance of publick works’ (such as roads. Bridges, navigable canals, harbours. &c.,) ‘must require very different degrees of expense in the different periods of society, is evident without any proof’. (WN V. i.d.1: p 724)

I will have yet to see the details of what Valentin Petkantchin describes as ‘governmental entities … merely governmentally chartered joint-stock companies – “public” in the sense of a “public corporation,” but privately funded and administered’, before judging the merits of that particular assertion.

The public works project were intended to be funded by government and managed by them or by private contractors, but the idea that Smith meant to impose the ‘government chartered joint-stock company’ model for them, given his trenchant critique on the existing Royal chartered companies (all such companies for overseas trade had Royal Charters), I cannot accept.

It was the experience of the chartered joint-stock companies, monopolies to their core, that turned Smith against the joint-stock form of company organisation, with the separation of managers from owners of the shares, and led him to oppose (Book IV, Wealth of Nations) what was to become in the 19th century the main instrument of large scale commercial organisation.

In 1772, Smith and Hume exchanged correspondence on the then depression (which Lew Rockwell will be pleased to note had a banking problem at root), and the experience of the Carron Iron works, owned by Dr Roebuck, a friend of Smith’s, underlined his belief in the probity of personal bankruptcy for failure, not limited by joint-stock liabilities companies. However, I shall read Valentin Petkantchin’s article and consider the case it makes.

I can say with confidence, however, that Adam Smith was not an advocate of laissez-faire. That is a myth emanating from the environs of Chicago University (the 'Chicago Adam Smith') and not from the environs of Kirkcaldy (the 'Kirkcaldy Adam Smith') (a neat designation we owe to Jerry Evensky).


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