Tuesday, December 11, 2007

Did Adam Smith Favour Large Government?

A thoughtful piece on the modern issue of the size of government in modern society is penned by Jody W. Lipford and Jerry Slice, professors of economics at Presbyterian College in Clinton, S.C., and posted (from the Washington Examiner) in The Independent Institute (December 10, 2007) (here):

“The Role of Government in Modern U.S. Society: What Would Adam Smith Say?”

What would Adam Smith, the eighteenth-century Scottish moral philosopher, say about the expanded role of our modern government? For Smith, the ideal functions of government were few and well defined. In his classic work, An Inquiry into the Nature and Causes of the Wealth of Nations, written in 1776, Smith outlined three important government functions: national defense, administration of justice (law and order), and the provision of certain public goods (e.g., transportation infrastructure and basic and applied education). Clearly, government has grown beyond the bounds of these simple duties.”

When quoting from Adam Smith, writing in the 18th century, it is appropriate to consider the context. In Britain at the time, the government raised taxes and borrowed money and spent it on a lot less than what Professors Lipford and Slice describe as his ‘ideal functions of government’.

It was not so much that Adam Smith wanted government expenditures to be restricted to ‘national defense, administration of justice (law and order), and the provision of certain public goods (e.g., transportation infrastructure and basic and applied education)’ but, in important functions in that list, he wanted government expenditures to expand substantially to provide the necessary elements of the listed functions.

If we do not start from that reality, we enter a fictional, 18th century world of comparing an ideal, but unrealized, spending on essential functions with a totally different but real world of 21st century world of modern big government.

Consider, when Smith was writing, the state of roads in Britain was appalling – effectively roads did not exist on a national scale. Travelling any distance was risky – people, including Adam Smith, wrote their wills before embarking on a journey from Edinburgh to London.

Thousands of miles of national roads awaited to be built and public expense. He correctly argued that whether the roads were managed and maintained by public or private commissioners was to be decided on the basis of which of them would be better at undertaking that role. They were also to be funded by tolls paid by users, with the luxury goods of the rich charged more, and similarly, across the other infra-structure developments. (It’s in Book V of Wealth of Nations.)

Adam Smith’s proposals on education of the young were equally ambitious. In Scotland, charitable, church and publicly funded schools had existed for many decades, buildings paid for by local taxation, and teachers by stipends, supplemented by school fees charged according to ability to pay, bequests small endowments. This had raised literacy levels in Scotland, including among the poor, to levels way above that in England, thought the education itself was rudimentary.

His proposals to extend this policy across the whole country – the ‘little parish schools’ – would involve a substantial increase in public expenditure – there were about 60,000 parishes in the UK. Nothing like universal education was provided for until 1879.

Add his proposal for martial training – field exercises, drills and weapon practice –and it would also involve substantial investment and organisation. He also linked such expenditure to the palliative treatment of ‘loathsome diseases’ like leprosy, a worst case issue, which would extend, inevitably, to other less worse cases, but would also add to public expenditure.

In short, Adam Smith’s ‘ideal’ public spending would have increased actual government spending by considerable multiples. He had an extremely low opinion of government supervision of expenditure and of managing projects, which implies a need for reform to secure proper management, and where possible, to separate public funding from the implementation of the projects using either markets or surrogate markets and local competition.

The largest area of savings out of the then current public budgets was that of defence, or in the reality of the 18th century, the war fighting funding involved in British foreign policy, much of it linked to incidents arising from ‘jealousy of trade’ with European potential trading partners.

In Book IV he makes the case for terminating British involvement in the American colonies – not just in the case of the ‘recent disturbances’ but across the board, in that the colonies cost more to defend than their trade was worth (£175 millions for the 7-year war against an annual gross trade worth £20 million).

They also had the distorting effect on UK world trade, slowed the rate of growth, solidified mercantile political economy and were generally detrimental to UK interests. Commercial trade with the colonies without monopoly was preferred by Adam Smith (they could and should defend themselves).

Professors Jody W. Lipford and Jerry Slice continue with the case against welfare expenditures in their article and if I have time later I shall answer their question, ‘What would Adam Smith, the eighteenth-century Scottish moral philosopher, say about the expanded role of our modern government?’ the answer is not clear cut.

I think it was important to clear up the presupposition in their question first.


Blogger Unknown said...

One of the physiocrats' more dubious contributions to economic thought was their view that only agriculture was productive, that only agriculture contributed a surplus, a produit net, to the economy. Smith, heavily influenced by the physiocrats, retained the unfortunate concept of 'productive' labour, but expanded it from agriculture to material goods in general. For Smith, then, labour on material objects was 'productive'; but labour on, say, consumer services, on immaterial production, was 'unproductive'.

6:02 pm  

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