Adam Smith’s View on Government Intervention

As a Ph.D. student of Economic history, I love Adam Smith’s ideals. However, I want to clarify some binary thinking that is pervasive in the collective unconsciousness about the economic theory of Adam Smith. Adam Smith was a free-market economist. I am not taking that away from him. But his stance on government was not a pure free market. In terms of the definition of property rights and education, and public goods such as roads, bridges, and enforcing the law and a justice system, he clearly saw the role of government. But it essentially stopped there. Let’s take a closer look.

Adam Smith and the role of Government

Adam Smith believed in a limited role of government in the economy. He believed that the government should provide essential public goods and regulate markets that were not morally or legally optimal for society. Still, the market is best suited to allocate resources and create wealth. In his famous work, “The Wealth of Nations,” Smith argued that the “invisible hand” of the market, guided by self-interest, would lead to efficient and equitable outcomes. However, he also recognized that government intervention was necessary to correct market failures, such as monopolies and externalities.

For an academic article on the subject, this is one of the best examples of Adam Smith’s role of government.

In contrast, my article summarizes his general views clearly, minus the academic speech. However, check out the article above; it is in PDF. Also, by the book here: The Wealth of Nations by Adam Smith.

roads of gold
Some believe that without government, the roads would be paved with gold. Is this true? I think so.
  • If you want to make a country rich, simply drop thousands of copies of Adam Smith’s book via helicopter in its towns and cities and come back in twenty-five years and see the effect.

Did Adam Smith believe in Fiscal Policy?

Yes, surprisingly, Adam Smith believed in using the government’s spending to regulate the economy in a minimal way. But in no way, shape, or form did he believe in fiscal policy as it is known today, in the post-Keynesian form. He believed the government could use taxation and spending to influence the economy. In “The Wealth of Nations,” he wrote that “a man must be perfectly crazy who proposals to load himself with those heavy taxes, merely to kill, ruin, and destroy those he governs.” However, Smith also warned against excessive government debt, arguing that it could lead to future tax burdens and inflation. Overall, Smith saw fiscal policy as a necessary tool for the government to manage the economy, but he emphasized the importance of using it wisely and in moderation.

Are there any organizations that believe in Adam Smith’s philosophy today?

Yes, several organizations and individuals today consider themselves to be followers of Adam Smith’s philosophy. Some of these include classical liberal, libertarian, and conservative think tanks, such as the Cato Institute, the Heritage Foundation, and the Fraser Institute. These organizations advocate for limited government intervention in the economy, low taxes, and free-market capitalism. They believe that Smith’s principles of individual freedom, property rights, and the market as the best mechanism for allocating resources are still relevant today. Additionally, there are economists and scholars who study and promote Smith’s work and ideas. One caveat is Smith was an open-minded thinker and not holding a rigid political view. So to crystallize his thinking in one way or another politically is not the way to read Adam Smith. However, if he were alive today, maybe he would be a member of the Cato institute.

Adam Smith School
Adam Smith believed School was a needed public good

What was Adam Smith’s view on money and monetary policy?

I am a monetary economist. One thing I can say is classical thinkers like Smith did not have a developed monetary theory, rather money was a medium of exchange, not an artifact of the central bank to be played with.

Adam Smith had a nuanced view of money and monetary policy. He believed that money was a crucial component of the market economy, as it facilitated trade and exchange. In “The Wealth of Nations,” he argued that the value of money was determined by the supply and demand for it in the market.

With regard to monetary policy, Smith believed rising prices harmed the economy by eroding the value of people’s savings and making it more difficult for them to repay their debts. It was more of a quantity theory approach. But in Smith’s time, there was no such thing as a monetary policy like there is today.

Smith also believed that a free banking system, where banks were allowed to issue their own currency, was preferable to a central bank controlling the money supply. He thought that competition among banks would lead to a more stable monetary system and prevent the government from using the money supply for political purposes.

Overall, Smith saw the role of money as a facilitator or trade, not a policy tool

Adam Smith Potrait
Adam Smith thinking – Looks like he could be on a dollar bill

What is the legacy of Smith’s thinking on government?

The United States, for one. The USA was founded on the idea of enlightened self-interest. Since the founding of the US and the Publication of the wealth of nations were both in 1776, it would not be argued the founding fathers read Smith, but rather the ideas were in the air. He influenced subsequent US economists, which was transmitted through the political process.

Adam Smith is the father of modern economics and has had a profound influence on the development of economic thought. Some of the economists who his ideas have influenced include:

  1. Jean-Baptiste Say: Say, a French economist, was influenced by Smith’s ideas on the role of markets and the division of labor.
  2. David Ricardo: Ricardo, a British economist, built upon Smith’s theories to develop his own ideas on comparative advantage and international trade.
  3. John Stuart Mill: Mill (Had a high IQ speaking classical languages as a toddler), a British philosopher and economist, was influenced by Smith’s ideas on the role of markets and the importance of individual liberty.
  4. Friedrich Hayek (follower of Mises): Hayek, an Austrian economist, was heavily influenced by Smith’s views on the market economy and the importance of individual freedom.
  5. Milton Friedman (And Anna Schwartz): Friedman, an American economist, was influenced by Smith’s ideas on the role of markets and the limitations of government intervention in the economy.

Smith’s influence can also be seen in the development of classical economics and the advocacy of laissez-faire policies. His ideas continue to shape economic thought and policymaking to this day. To answer the question. Smith only saw government policy as a facilitator of the free market, not an interference or architect. It helped people through education and just laws, and then the people themselves would steer the economy.

If you want to know more about Adam Smith, I have his book for free; you know Wealth of Nations. Write me if you have questions or see Smith from another interpretive view.

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2 responses to “Adam Smith’s View on Government Intervention”

  1. Gozo

    As someone else who has paid some direct attention to Adam Smith’s thought through his two, major books, I arrive at a profoundly different take on his published views than, say, the Heritage Foundation seems to. Dr. Smith’s focus was on our innate desire to do good for others. As I understand it, he specifically cautioned against misusing humans, laborers, as another sort of commodity. But considering Labor to be but one Commodity in the world of economics is precisely what the Conservative model does. At least, over the last forty years or so. Above, you mention that Dr. Smith was not a rigid ideologue. ‘Rigid ideologue’ may be the most-generous label one could apply to a movement, the Conservative movement, which’s counter-democratic disavowal of the Founding Fathers’ sense of Compromise for making our democracy a success is key to what has led to the downfall of the once-Conservative Republican Party. [Whew! I tried to squeeze a lot into this comment, in overly abbreviated form. I’m new to your work, but look forward to reading through more of your insights into Adam Smith’s work. Capitalism is humanity’s best economic system by far—but not so long as rigid ideologues continue to abuse it like This.]

    1. Mark Biernat

      Maybe my view of Smith reflects my reading of him based on my views of the world. I personally dislike rigid thinking, and I think few minds seeking the truth do. That is why I included those two links in the post. The academic article is a good read; however, a little long.

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