Adam Smith’s view on Government

Government leaders have never read Adam Smith. I am sure of it. At least not in full.  In fact, if bureaucrats and politicians had read Smith they would understand that small government means small problems and big government means big problems. Or in the ideals of our founding fathers, ‘the government that governs least governs best’. But why is this true, what is the basis of this idea?

The Wealth of Nations was published in 1776 at the time of the start of the American revolution. It was the time of the enlightenment for philosophy and political economy.

The idea of the enlightenment was: trust the individual as innately good, support the individual in terms of freedom and education, and the individual will act in positive creative ways that the government could never engineer.

In essence, you personally, the reader are wiser than a politician with regards to your life.  In other words, you personally have the ability to run your life and bring society as a whole, to a greater good, better than a bureaucratic socially engineered solution.

When government gets big happiness decreases:  Kings to Socialists

In 1776 it was the Kings and royalty who were impeding the happiness of the common person. They followed mercantilist economic politics and laws that were partial towards and supported the upper class. In today’s world, it is the expansion of government under the guise of a greater common good. However, based on the experience of communism or societies that take the socialist route in contrast to a free market route we know the government’s expansion brings society to a lower social optimum.

Government analysts look at the cost/benefit analysis – Smith looked at overall happiness

Politicians including the local governments and county governments have a modus operandi moving forward with projects that seem to have a benefit to a society based on a cost-benefit analysis or at least sounds good. However, that does not take into account such things as opportunity cost or that private initiative would do it more efficient. They crowd out private opportunities. Therefore, governments universally view the incremental expansion of government as fair and just, however, in reality, it is determinate to society because they are not operating at the optimal. Yes, society might work, but the greatest happiness of the people is not reached. It amazes me people are not aware of this.

• In other words: Individual people, rather than government acting on their own enlightened self interest is what pushes the frontier of the general good of society as a whole.

Adam Smith pointed out not only in his Wealth of Nations but also the Theory of Moral Sentiments that governments role should be limited to the scope of large projects that at the time of his writing private enterprises did not have the critical level of capital to move forward. Yes, the government has a role, in the world of Adam Smith but was not a solution to human suffering or the fundamental problem of economics, scarcity.

Smith was a Classical political economist (Mill, Locke).  These ideas were subsequently developed by Neo-classical economists during the marginal revolution (Marshall, Jevons) and transformed into a political prescription by Libertarians and Austrian economists (Menger, Walras).  Keynesians challenge this premise, however, they are incorrect and an example is concisely described in the Grand Failure (Zbigniew Brzezinski).

• People acting on their own enlightened self interest are contrary to the general good of society as a whole.

Adam Smith pointed out just the contrary. Smith said when you give people freedom, economic freedom which means no or low taxes, because people are good in nature, people will do things unconsciously for the greater good.  The government’s idea is people are bad by nature or at least do not trust that people can find their own solutions to problems, and the government must take action and make the choice how to spend your money or the greater good will suffer.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.  Adam Smith  – Wealth of Nations

Smith’s message is people know how to spend their own money better than the government does. The government’s message is big government is needed to create a Utopian social state.

Adam Smith was not a laissez-faire anarchist. Rather he prescribed limited government and trust in the actions of the enlightened self-interest of individuals rather over the government to guide the market to equilibrium.

The government should limit its activities to administer justice, enforcing private property rights, and defending the nation against aggression.

Three main roles of government in Adam Smith:

• Protect the country from foreign invasion

The first duty of the sovereign, that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of a military force. But the expense both of preparing this military force in time of peace, and of employing it in time of war, is very different in the different states of society, in the different periods of improvement. The Wealth of Nations, Book V, Chapter 1, Part 1).

• Protect people from injustice from within the country

The second duty of the sovereign, that of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice, requires two very different degrees of expense in the different periods of society. (Wealth of Nations, Book V, Chapter 1, Part 2).

• Provide culturally positive efforts from public works to schools

The third and last duty of the sovereign or commonwealth, is that of erecting and maintaining those public institutions and those public 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 expense to 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. The performance of this duty requires, too, very different degrees of expense in the different periods of society. (Wealth of Nations, Book V, Chapter 1, Part 3).

Throughout Adam Smith’s writings, we see reference to:

• Provide for the common defense
• Education of the Youth
• Copyrights and patents of fixed duration
• Police for the preservation of freedoms and against corruption
• Regulation of paper money
• Enforcement of contracts
• Usury laws on banking and interest
• Post office
• Coinage and mint
• Maintain low to no debt of the government

Advice from an Economics professor

My recommendation if you want to consider Adam Smith and the government, view it in the context of the time. Also see Smith’s work, not as the Bible of Capitalism but rather, the beginnings of an understanding of how markets come to equilibrium, this includes government action, like the Keynesian. It is easy to beat the drum of the free market by just gazing at the sky and invoking the name of Adam Smith in an argument, and say Aha, you won the debate you are engaged in. However, my advice is to see his work as a primary source document that others expanded on. There is a certain purity in his writing because of the time, and simplicity of the economy compared to today. See if you can find a new prescriptive on his writing that others have not seen and related it to modern economic theory on government intervention vs individual initiative.