NOTE: The Limits in Adam Smith's "Wealth of Nations" of his Attachment to Laissez-Faire

Tucking this away here so that I will be able to find it easily later...

Tucking this away here so that I will be able to find it easily later…

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People who want to claim that 1700s Scottish moral philosopher Adam Smith was devoted to laissez-faire as a matter of principle almost invariably cite one and only one short passage from his works.

It is this:

[The merchant] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it...

That is, as you may well know, from Adam Smith’s 1776 Inquiry into the Nature and Causes of the Wealth of Nations. Those who intend to promote the interest of society should, Adam Smith says here, realize that they should simply get out of the way and let the market system guide producers and merchants to maximum income and profit—that is the ticket.

But did Adam Smith really believe this? Not fully. It is overstatement. Hyperbole.

For one thing, Adam Smith really did not like it when the pursuit of market profits led merchants and manufacturers to establish monopolies. And he thought that they would nearly always try to do so:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…

For another, Adam Smith did not like it if the workings of the market system produced a society of great wealth but great maldistribution. In his view, it was essential for anything you might call a good society that it eliminate dire poverty, and be fair—no matter the (perhaps very unequal) income distribution the market system sought to produce:

No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged…

And then, Adam Smith also said, there are those activities that we would say produce large positive externality benefits—things that greatly benefit the society, but that cannot effectively or efficiently be charged for. The market system cannot incentivize the production of such. So, Adam Smith said, the government ought to do it. Adam Smith sees three categories here:

• Defense, for “in… [our] advanced state of society… it [is] altogether impossible that they who take the [battle]field should maintain themselves at their own expense… [because of the progress of manufactures, and the improvement in the art of war…”

• Courts and police—the establishment and maintenance of the rule of law.

• Public works and institutions “in the highest degree advantageous to a great society… [but] of such a nature, that the profit could never repay the expense to any… small number of individuals.”

In the categories of the last of these, Adam Smith does not stint. He calls for:

institutions… for facilitating… commerce… for the education of the youth, and for the instruction of people of all ages…. Roads, bridges, navigable canals, harbours…. A public bank… to support public credit, and, upon particular emergencies, to advance to government…. The public can facilitate, can encourage and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of education… [via] little school[s], where children maybe taught for a reward so moderate, that even a common labourer may afford it…. The study of science and philosophy… the state might render almost universal among all people of middling or more than middling rank and fortune…” And, last, Adam Smith calls for: “the state… encouraging… all those who… amuse and divert the people by painting, poetry, music, dancing; by all sorts of dramatic representations and exhibitions; [such support] would easily dissipate, in the greater part of them, that melancholy and gloomy humour which is almost always the nurse of popular superstition and enthusiasm…”

And he asks for:

institutions… for the education of the youth…. The public can facilitate, can encourage and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of education… [via] little school[s], where children maybe taught for a reward so moderate, that even a common labourer may afford it…

Finally:

institutions… for the instruction of people of all ages…. The study of science and philosophy… the state might render almost universal among all people of middling or more than middling rank and fortune…. [Plus] the state… encouraging… all those who… amuse and divert the people by painting, poetry, music, dancing; by all sorts of dramatic representations and exhibitions; [such support] would easily dissipate, in the greater part of them, that melancholy and gloomy humour which is almost always the nurse of popular superstition and enthusiasm…

We today would take Smith’s categories—defense, construction and maintenance of the property-contract order, antitrust, public goods, and Beveridgean income-distribution factors—and add on more:

• We would extend public goods to cover all Pigouvian externalities, whether public- or private-generated.

• We would add Keynesian macroeconomic externalities as well, for while the germ of those ideas is found in Adam Smith’s call for a public bank, it is only the germ.

Not, mind you, that Adam Smith is not the social theorist of the extraordinary potential benefits of the market system as a societal technology for increasing the wealth of nations. Adam Smith is the founder of economics for good reason. That reason is that he had a great and extraordinary insight: that the competitive market system is a remarkably powerful social calculating and organizing mechanism, and that the sophisticated division of labor to which a competitive market system backed up by secure and honest enforcement of property rights give rise is the key to the wealth of nations.

Some others before had had this insight in part:

• Richard Cantillon writing of how, once you have specified demands, the market does by itself all the heavy lifting that a central planner would need to do

• Bernard de Mandeville that dextrous management by a statesman can use the power of private greed to produce the benefit of public utility.

But it is Smith who sees what the power of the "system of natural liberty" that is the market could be. And it is Smith follows the argument through to the conclusion, and thus forever upsets and overturns the previous intellectual moves made in and conclusions reached by the discursive formation of Political Oeconomy.

But, while Smith discovered and built a huge hammer, he did not then mistake everything for a nail.

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Reference:

• Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan & T. Cadell. <https://archive.org/details/wealthofnations1776>.

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