Adam Smith and the system of natural liberty

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The physiocratic revolt against mercantilism was extended by Adam Smith in the Wealth of Nations. For Smith, the wealth of a nation consisted in the value of its produce rather than in the national stock of precious metals or the net product of agriculture, and government's role was to facilitate the growth of national wealth, so defined. In this sense, Smith demonstrated an important commonality with the mercantilist and physiocratic writers, but the accomplishment of the goal of maximizing the value of output required a very different role for government than that posited by earlier writers.

Smith's critiques of mercantilism and physiocracy were parallel; he saw their respective favoritisms as promoting flows of resources to the favored sectors in amounts greater than would otherwise obtain. The question is whether this is good for or harmful to the interests of society. Smith is unequivocal: "Every individual is constantly exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to society" (Smith, 1776, p. 421). Self-interest is not something to be suppressed, as with the Greeks and Scholastics, nor even to be shunted down a particular road, as with the incentives offered by the mercantilists and physiocrats. Rather, the free play of self-interest is said to redound to the benefit of society as a whole. In Smith's view, the individual is "led by an invisible hand to promote an end which was no part of his intention" (p. 423). Given this propensity on the part of the individual and the associated positive (if unintended) consequences:

The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (p. 423)

But it is not simply a matter of government officials being, in Smith's view, incapable; for Smith, the market system does not require such overt direction. Attempts by government to channel self-interest in some direction inhibit rather than promote the growth of wealth (pp. 650-1) and, in doing so, enrich special interests at the expense of society as a whole. Smith states the basic framework of his view of the economic role of government as follows:

All systems either of preference or restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and his capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society. (p. 651)

What, then, is the appropriate role for government within such a system? "According to the system of natural liberty, the sovereign has only three duties to attend to," the provision of national defense, the provision of civil justice, and "the duty of erecting and maintaining certain public works and certain public institutions" which could not be profitably provided by the private sector but which provide a net benefit to society (p. 651). These last include the standard roads, bridges, canals, and harbors - which serve to facilitate commerce - but also education, to counteract what he saw as the mind-numbing effects of the division of labor, temporary monopolies given to joint-stock companies to facilitate new trade avenues, and religious instruction for clergy. Smith also allows for exceptions to free trade to encourage and protect industries essential to national defense, to level the playing field for domestic products subject to tax at home, and retaliatory tariffs inducing other countries to lower their trade barriers.

Smith was not a doctrinaire advocate of laissez-faire. He was, on the one hand, in favor of doing away with the trade restrictions of the mercantilists, apprenticeship and settlement laws (which inhibited the free flow of labor), legal monopoly, and the laws of succession that impeded free trade in land. But, in addition to the basic governmental functions noted above, he supported regulation of public hygiene, legal ceilings on interest rates (to prevent excessive flows of financial capital into high-risk ventures), light duties on imports of manufactured goods, the mandating of quality certifications on linen and plate, certain banking and currency regulations to promote a stable monetary system, and the discouragement of the spread of drinking establishments through taxes on liquor (one of various regulations Smith advocated to compensate for individuals' imperfect knowledge - or diminished telescopic faculty). (For an excellent elaboration of Smith's rather broad-based conception of the appropriate functions for the state, see Skinner, 1996.)

Smith was inherently suspicious of government's ability to properly manage economic affairs, but he also recognized that there were various policies that could improve national welfare. Equally important, however, was Smith's recognition that the market does not operate without government; indeed, Smith calls political economy "a branch of the science of a statesman or legislator" (p. 397), making it, in part at least, a branch of jurisprudence. Smith found in the system of natural liberty a regulating mechanism not discerned by previous commentators - a coordinating force keeping self-interest from becoming totally destructive. But he also understood that governmental action supplies the legal-institutional process through and within which markets function. It was not government that Smith was opposed to; rather, he was after the appropriate set of policies to facilitate the growth of wealth.

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