Adam Smith and the Proper Role of Government

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June 28, 2012 by galudwig

Well, it seems that my plan to write one or two posts a week has already been given up. No matter, it’s my blog and I’ll post whenever I feel like it, damnit!

Anyway, once again I was inspired by a great post on blogtruth and found that my comment was getting too large.

Smith is one of history’s greatest defenders of the division of labor and free trade (even though he accepted a post as the Scottish customs commissioner) but he was confused on morality and even economic theory. I think his reputation as the father of economics is undeserved. There were important, and better, works before the Wealth of Nations.

My plan years ago was to read the Wealth of Nations in full, but I found it impossible to get through. I don’t want to attack him too much because he definitely wrote some great things. But modern economic theory must start with the marginal revolution of the 1870s and economic theory in general as far back as the School of Salamanca of the 16th century (maybe even Aristotle?).

But anyway, more on topic, I think Atticus is right when he writes that those things the government ‘should’ do would constitute a more or less proper role for it. The problem is that it doesn’t and it won’t. Who are these ‘objective and non-biased’ people, in the words of Friedman ‘the angels who are going to organize society for us’?

Also, Smith wrote in a time of extreme regulations and his book was directed against mercantilist and protectionist thought. One needs to think only of, say, the East India Company or the Corn Laws or even the price controls of Hammurabi to realize that the idea to ‘protect the people from the excesses of the market’ is as old as history itself.

Lastly, when Atticus notes that neither the government nor the economy should be ‘too powerful’, I must respectfully disagree. The power of the government is radically different from the power of non-coercive market actors. A state mandate is backed by weapons. Economic power arises from mutually beneficial transactions and is voluntarily given by consumers.

I see the importance of Smith in a very different way. Smith acknowledged the existence of a ‘natural order’ which exists independently of government. For me, economic theory is a long stride through the centuries in which this idea is brought to its logical conclusion: coercive monopolies, no matter what their stated objectives are, are bad.

Smith applied the concept to domestic trade. Ricardo expanded it to international trade, Menger restated it to include subjective value, Bohm-Bawerk expanded it to capital, Hayek to order, Mises to money, interest and banking, Rothbard to the traditional nightwatchman-function of the state itself, Kinsella to intellectual property, Hoppe to democracy. Of course, I’m simplifying and glossing over many important contributions, but this is my general attitude.

If limited government were possible, I would be a limited-government libertarian. But, sadly, it isn’t, as the grand experiment of the United States has shown.

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One thought on “Adam Smith and the Proper Role of Government

  1. Excellent post, as usual!

    I think the major point where we may disagree is:

    “Lastly, when Atticus notes that neither the government nor the economy should be ‘too powerful’, I must respectfully disagree. The power of the government is radically different from the power of non-coercive market actors. A state mandate is backed by weapons. Economic power arises from mutually beneficial transactions and is voluntarily given by consumers.”

    When I said that the “economy” should not be too powerful I was referring to the corporations in that economy. When a corporation has the power to “play unfairly” via, wages, predatory pricing, or monopoly then in effect the corporation itself is hindering the power of the market. Although it is true that the Market would eventually adjust for this – it could take a decade or more. So with minimal government regulation a monopoly could be prevented or broken apart quickly.

    I say that with a grain of salt because in reality we all realize that there is a high potential for super-corporations to eventually enter politics and get there way via legislation anyways – then we have oligarchy.

    “Economic power arises from mutually beneficial transactions and is voluntarily given by consumers.”

    I agree, but it is not mutually beneficial when a powerful corp abuses the market…or when a transaction is not voluntary, but mandatory (like food) and prices have been artificially inflated. Although both government and corporations are guilty of that act.

    “If limited government were possible, I would be a limited-government libertarian. But, sadly, it isn’t, as the grand experiment of the United States has shown.”

    I hope you are wrong – there are a few of us out there still fighting the good fight. 🙂

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