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What Adam Smith Really Said About Government

What Adam Smith Really Said About Government

July 29, 2012 7:36 amComments are Disabled

I am a little late to the party, but I read Adam Gopnik’s piece on Obama’s “you didn’t build that” comment, and I am a little disappointed that he fails to understand Adam Smith’s message, or if he does, he has failed to represent his position correctly.  Gopnik should know this, having reviewed Nicholas Phillipson’s Adam Smith: An Enlightened Life (a book I happen to have read just two weeks ago), with its elucidation of the humanistic tradition of the Scottish enlightenment where Smith had his intellectual genesis.  Although Gopnik is correct on one front–that Smith’s theory of free markets was really not a theory of free markets at all, but a sweeping indictment of the British mercantilist class, whose unprecedented wealth and prosperity was founded upon the control of the levers of government commercial policy–he is wrong on another, that “Smith was for a government that intervened regularly and actively on behalf of consumers and against the natural tendency of “producers”—i.e., very wealthy people, whether aristocratic landowners or manufacturers or, perhaps, financial-leverage experts—to band together for their own benefit.”  Just because Smith opposed a government that was in the pocket of the monied classes, it does not follow that he advocated an activist government to oppose the monied classes in the interests of consumers.  His genius was to recognize that a government of this nature would very quickly become virtually identical to the one it was originally created to prevent, as we can very clearly see in our society today.

It didn’t take a genius in Smith’s time–nor does it take one now–to recognize the crass oligarchy of the mercantilists and the guild system’s merchant class opulence at the expense of the poor.  Their monopolies were enforced and guaranteed by government fiat–only approved vendors could trade in tobacco, for example, and these vendors came from the monied class who regulated their own industry’s rules.  This monopoly was what Smith sought to break.  But Smith’s prescription for the madness of the plutocrats was to increase the freedom of the marketplace and thus decentralize their power.  He did not advocate a greater role of government in the economy; in fact, the breakthrough for which he is most famous–first examined in the Theory of Moral Sentiments and then analyzed in Wealth of Nations–was the recognition that people organized voluntarily and privately for their own interests create more wealth and prosperity for society on the whole even though such a result was never part of their intention, whereas individuals who “affect to trade for the public good” often cause great harm to society even though such a result was never part of their intention.

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he 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 not 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. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

The latter (highlighted) part of this invisible hand–called by Milton Friedman the inverse invisible hand–is often ignored by critics of liberalism when they pursue an active government intervention in the economy.  The solution for the unfair distribution of wealth caused by government-created monopolies and trade restrictions was not the re-assignment of this distribution to a different entity led by different interests.  Smith’s solution was the opposite: to lesson the undo influence of monied interests who would “affect to trade for the public good” and thus cause greater economic harm to society on the whole.

The America of today is one that closely resembles 18th century Britain. We, too, have our trade guilds, but we call it “lobbying.”  Almost every industry has a lobbying group that seeks to pass favorable legislation to benefit it, whether it be in the form of subsidy or tax breaks (corn and oil lobby) or in the form of restricting competition from similar industries (tobacco lobby).  Our biggest guilds are, for some reason, immune in the public sphere from criticism, such as the National Education Association, also known as the national teachers’ union, which exists solely to break any competition in the education industry, or our vaunted trade groups such as the American Medical Association or American Legal Association, who determine the legal status of their own practitioners and thus restrict innovation and competition and crush dissent.  Trade associations function as legal cartels–in the US mostly not violent ones, but cartels nonetheless.  Smith saw much the same problems in Britain, and prescribed a wide-ranging set of reforms to address these problems, including, among other things, the elimination of barriers to free trade, both inside and outside national borders.  Jobs and wages, he wrote, should be commensurate with experience and skill, and relate directly to the relationship established between the buyer and seller, not established by fiat, often enforced by thuggery and violence.  (Meanwhile, do you know what happens in the US if you try to open a hair salon without approval from your competition in the hair salon industry?)

Smith’s prescription for today’s America would not be to increase the influence of monied interests.  His prescription would be to decrease their influence by opening up the markets to competition.  This opening up necessitates the absence of government, not its expansion.  To the claim that the government is necessary to open the market–or that such a thing is even possible–Smith’s inverse invisible hand quite clearly shows us the folly of such magical thinking.  In the efforts the US government has made in the last century–ostensibly under the influence of Keynesianism–to make the market “more free” have only resulted in less freedom, and often at the expense of the very people the markets are supposed to help.  The late Interstate Commerce Commission is a good example of this notion–known as regulatory capture–but examples can be found almost everywhere regulatory bodies exist.  The government’s role in the markets provides a perfect opportunity for monied interest to control these regulatory bodies and ultimately use their power for their own advantage.  We have seen, under the proliferation of banking regulation, the number of banks decrease–not increase–and thus the options available to consumers in order to better protect their deposits shrink.  This was probably not the intention of the regulators attempting to improve competition, but it is quite apparently the result.

Gopnik is right that Smith envisioned a role for government included very many things that could be called public goods–roads, bridges, etc.  But this is not where the US government spends most of its money, and this is not what people mean when we say “regulation.”  Regulation for its own sake is not the solution–that sort of assumption leads to justifying every intervention in the so-called service of any constituency.  Price supports to benefit farmers.  Tax breaks to benefit oil companies.  And yes, entitlements to pay for healthcare and old age annuities at the expense of the public at large.  The very things that Gopnik criticizes–for example, the situation that causes “people with undue influence on the government to have a lower tax rate than people who don’t”–is a result of regulation.  We have a pretty giant regulation–the Internal Revenue Code–which was constructed originally to benefit the public at large but has since been hijacked by special interests who use it to their advantage.  Or we can look at the biggest bonus of all, the $1.6 trillion in taxpayers’ money that was spent to impoverish American citizens to the benefit of a few bankers on Wall Street, who have since used their magic security blanket to gamble more money in the markets.  They have achieved this bailout and these results as the result of a revolving door of regulators, treasury secretaries and finance CEOs that have worked with each other to reinforce their own wealth and power at the expense of the public at large.  This is the definition of plutocracy, and it is an outrage that the forces most in favor of bailing out the banks are the liberal elite who most bemoan the undue power and influence of bankers.

We need a government that will guarantee fair adjudication of contracts, protect private property, keep law and order, protect our borders, and, in rare instances, protect those common resources which we all use and thus have a common obligation to pay for.  If Smith truly was a believer in the good of all people–which he was–he would want us to depend on our common morality and decency to support each other in times of need (which we do) and share the fruits of our labor for our own benefit as well as that of others (which we do) and to trust government to protect us from harm (which we do).  But the goodness of people is not so much in question as much as the danger of giving good people the power to do things that they think are good for the public and in doing so, harm society on the whole.  Diagnosing this problem and prescribing a solution–that was the genius of Smith.

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