Reisman Smith

Adam Smith on Market and State
Author(s): David A. Reisman

Source: Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für die
gesamte Staatswissenschaft, Vol. 154, No. 2 (Jun. 1998), pp. 357-383
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AdamSmithon Marketand State
by
David A. Reisman
AdamSmithwas nota single-minded marketinwhich

advocateofa laissez-faire
theminimalState had no morethana protective function.Rather,he was a
pragmaticsocial thinkerwho in each case selectedthe tool thatwas the best
suitedto hismeta-objectiveof rapideconomicgrowth.Contrasting Smithwith
MurrayRothbard,thepapershowsthatSmithwas a cautiousinterventionist
evenas he was a guardedlibertarian. The discussion- besidesan introduction
- is dividedintofivesectionsdealing,respectively,
withmarketefficiency,gov-
ernment failure,theprotectiveState,theproductiveStateand publicfinance.
(JEL: Β 12, Ρ 10)
/. Introduction
RothbardbelievedthatSmith,at best "a plodderin tunewiththeZeitgeist"

(Rothbard [1995,464]), at worst"a retrogression and deterioration, rather
thanan advance" (p. 417), had shuntedthecar of gain-seeking activityon to
thelinethatleads to themanagedmarketand notto individualfreedom:"In
WealthofNations. . . laissez-faire becomesonlya qualifiedpresumption rather
thana hard-and-fast rule,and thenaturalorderbecomesimperfect" (p. 465).
Adam Smithhad writtenof capital investedin domesticindustrythat the
self-interested atom"is in this,as inmanyothercases,led byan invisiblehand
to promotean end whichwas no partof his intention"(Smith[1776/1961, I,
477],emphasisadded). Smithhad observedoftheprofitmotiveand themarket
outcomethatthemyopiccalculatorcan also provetheultimatevisionary:"By
pursuinghis own interesthe frequently promotesthat of the societymore
effectually thanwhenhe reallyintendsto promoteit." (pp. 477f.,emphasis
added).WarrenSamuelshad no doubtas to theconclusionsthatfollowedfrom
theinmanyothercases,fromlhefrequently, thatseemedto himto convertthe
libertarian's principled alwaysintothepragmatist's contingent well see howwe
go: "Notice the merelytentativepropertiesattributedby Smithto market
results. . . Thereis no presumptive optimalityof marketsolutions"(Samuels
[1977,703 and 704]). Murray Rothbard was not disposedto disagreewiththis
assessment.Adam Smith,he wrotesadly,had "introducednumerouswaffles
and qualifications intowhathad been,in thehandsof Turgotand others,an
almostpure championingof laissez-faire"(Rothbard [1995, xif.]). In the
Journal
ofInstitutional
andTheoretical
Economics(JITE),Vol.154(1998)
- ISSN 0932-4569
© 1998MohrSiebeck

358 DavidA. Reisman JITE
processhe had made himself nothingless than"a necessaryprecursorof Karl

Marx" (p. xii).
Rothbard,likeSamuels,saw Smithas an advocateofeconomicengineering
and not simplyas theideologueof supplyand demand.So did RichardMus-
grave,who stressedthat"Smithwas no economicanarchist.Governmental
activityformsan inherent partof his systemof naturalliberty"(Musgrave
[1976,296]). So did Alec Macfie,who foundthatthescatteredinterventions
summedup to "a formidablestateautocracy:a socialistspreadof controls
whichwouldmakesomemodernsocialists'eyespop" (Macfie [1967,348]).The
presentpaperreachesthesamebroadconclusionas did Macfieand Musgrave,
Samuelsand Rothbard- thatthereis Stateas wellas marketin theworld- view
of an Enlightenment eclecticwho founda singledimensionneitherto histaste
nor to his measure.Divided - besidesan introduction - into fivesections
withmarketefficiency,
dealing,respectively, government theprotective
failure,
the
State,theproductiveStateand publicfinance, paper confirms thatSmith
was indeedfreefromwhatCoats calls"thatspeciesofsingle-mindedness which
makesa virtueof consistency" (Coats [1975,219]). Road to serfdomor road
itwas theviamediaofmiddleand mixwhichAdam Smithselected
to welfare,
whenhe set offforthewealthof nations.
2. MarketEfficiency
As earlyas 1755 the youngAdam Smithwas declaringa preference forthe

spontaneousprocess:"Projectors disturb naturein thecourseof heroperations
on humanaffairs, and it requiresno morethanto leaveheralone and giveher
fairplayin thepursuitof herendsthatshe mayestablishherown designs. . .
Littleelseis requiredto carrya stateto thehighestdegreeofaffluence fromthe
lowestbarbarismbut peace, easy taxes, and a tolerableadministration of
justice;all therestbeingbroughtaboutbythenaturalcourseofthings"(cited
in Rae [1895/1965, 62]).In 1759intheMoralSentiments theGlasgowprofessor
returnedto the themeof a beneficent orderthat establisheditselfwithout
consciousdirectionas the unintendedconsequenceof self-love- "hunger,
thirst,the passionwhichunitesthe two sexes,the love of pleasure,and the
dreadof pain" (Smith[1759/1976, 78f.])- heldin checkbythecountervailing
virtuesofjusticeand benevolence. He praisedthe"Authorofnature"(p. 105),
also called"an invisible hand"(p. 184),forhavingcreateda socialmachinethat
was suitedso admirablyto thetaskofensuring"theuniversalhappinessof all
rationaland sensiblebeings"(p. 237). And in 1776,writingin the Wealthof
Nationsquite specifically of materialadvance,the maturephilosopherand
sociological economist arrived at thefollowing propositionin supportof indi-
vidualliberty and thefreemarketsystem:"All systems eitherofpreference or
of restraint. . . beingthuscompletelytaken away, the obvious and simple
system ofnaturalliberty establishesitselfofitsownaccord.Everyman,as long

154/2(1998) AdamSmith andState
onMarket 359
as he does notviolatethelawsofjustice,is leftperfectly freeto pursuehisown

interesthisownway,and to bringbothhisindustry and capitalintocompeti-
tionwiththoseofanyotherman,or orderofmen"(Smith[1776/1961, II, 208]).
Adam Smithwas earlyon takento be a committed libertarianwhoselastword
on economicpolicywas believedto be thefollowing:"Open theflood-gates,
and therewillpresently be less waterabove, and morebelow,thedam-head,
and it willsoon come to a levelin bothplaces" (p. 18). His emphasison the
streamand not on thedam oughtto have appealed strongly to a latercon-
tractarianlike MurrayRothbard,who was unstinting in his supportforthe
voluntary, hisoppositionto thecoerced: "Whenthesocietyis freeand thereis
no intervention, everyonewill always act in the way that he believeswill
maximizehis utility,i.e. will raise him to the highestpossiblepositionon
his value scale . . . The factthateach man,in pursuinghis own self-interest,
furthers theinterest ofeveryone else,is a conclusion ofeconomicanalysis,not
an assumption on whichtheanalysisis grounded"(Rothbard [1962,II, 766
and 768]).
Smith'sdefenceof the marketmechanismmakes much of its allocative
efficiency. He contraststhe competitive biddingfora limitedstock witha
maximum pricelaw thathas counter-productive consequences, and hegivesthe
sad exampleof thecorndealerwho is preventedby decreefromminimising
distress:"If bynotraisingthepricehighenoughhe discouragestheconsump-
tionso little,thatthesupplyoftheseasonis likelyto fallshortoftheconsump-
tion of the season, he not only loses a part of the profitwhichhe might
otherwise havemade,buthe exposesthepeopleto suffer beforetheend of the
season, instead of the of a
hardships dearth, the dreadful horrorsof a famine"
(Smith[1776/1961, II, 30]). Smithis not seeking to defend themorality of the
businessman - witnesshis unambiguously negative attitudeto "the mean ra-
the
pacity, monopolizing spiritofmerchants and manufacturers" (Smith[1776/
1961,1,519])- butonlyto showthatprivatevicesina competitive environment
can inpracticedeliverpublicbenefits: "Everyindividualis continually exerting
himself to findout themostadvantageousemployment forwhatever capitalhe
can command.It is hisownadvantage,indeed,and notthatofthesocietywhich
he has in view.But thestudyof his own advantagenaturally, or ratherneces-
sarilyleads himto preferthatemployment whichis mostadvantageousto the
society"(p. 475). The stressis on the competitive environment, however,as
onlysignificant numberscan ensureindependent actionand, as in thecase of
thecorndealers,protectthepublicfromabuse: "The inlanddealersin corn. . .
are necessarily morenumerousthanthedealersin any othercommodity, and
theirdispersedsituationrendersitaltogether impossibleforthemto enterinto
anygeneralcombination"(Smith[1776/1961, II, 32]). Smithhad littleappreci-
ationofsignificant fixed-capitaloverheads. He did notanticipatethatmarkets
freedfromStateintervention would come underthecontrolof corporations
and cartelssuchas had builtthebureaucratic disfunctionalities of carelessness
and profusionintoprivatesectororganisations liketheEast India Company:

the"unremitting exertionof vigilanceand attention"- he warned- "cannot

be
long expected from thedirectors of a jointstockcompany"(p. 278). Given
thelargenumberof smallcompetitors thathe took to be thenorm,however,
Smithbelievedthatmutualbenefits and reciprocalassistancewouldautomati-
callybe therule.He was considerably lesssanguineaboutself-declared human-
itariansand thedeontologyof thevisiblehand: "I have neverknownmuch
good done by thosewho affected to tradeforthepublicgood" (Smith[1776/
1961,I, 478]).
All systems ofpoliticalpreference and Staterestraint cause scarceresources
to be employedless economicallythanwould otherwisehave been thecase.
Allocativeinefficiency, unattractive initselfto a puritanwhovaluedproductiv-
ityand lookeddownon waste,thushad thefurther disadvantagethatit acted
as a brakeon thegrowthof nations:"Everysystemwhichendeavours,either,
by extraordinary encouragements, to draw towardsa particularspeciesof
industry a greatershareofthecapitalofthesocietythanwhatwouldnaturally
go to it; or, by extraordinary restraints, to forcefroma particularspeciesof
industry someshareofthecapitalwhichwouldotherwise be employedin it; is
in realitysubversive ofthegreatpurpose which itmeans to promote.It retards,
the
insteadof accelerating, progress of the society towards real wealthand
and
greatness; diminishes, instead of increasing, the real value of theannual
produce of itsland and labour" (Smith[1776/1961, II, 208]). Economic growth
means risinglivingstandardsforthe lowerclasses,checksand balances in
societyand State,and a humanisationof character- "If our own misery
pinchesus veryseverely, we haveno leisureto attendto thatofourneighbour"
(Smith[1759/1976, 205])- whichstrongly recommended thewealthof nations
evento a judgmentalasceticwho,unlikeRothbardno uncompromising cham-
pion of the consumer's rightand was
sovereignty, prepared to dismiss some
revealedpreferences as "baublesand trinkets" (p. 184), some material welfare
as a "deception"(p. 183). Economicgrowthwas thekeyto social progressin
theworkofAdamSmith;and thatis whyhe was so intolerant ofanyallocative
inefficiency thatwouldcurbprofits, limitaccumulation and disturb"thenatu-
ral balancewhichwould otherwisehave takenplace amongall thedifferent
branchesof Britishindustry" (Smith[1776/1961, II, 119]).Wantingrapidad-
vance,Smithmade himselfthescourgeof wastefulmisallocation:"Everyde-
rangement of thenaturaldistribution of stockis necessarily hurtful"(p. 148).
Wantingrapidgrowth,Smithproposedthedelegationof good husbandryto
theself-interested whostoodmostdirectly to gain:"The naturaleffort ofevery
individualto betterhis own condition, when suffered to exert itselfwith free-
is so
dom and security, powerful principle,a that it is alone, and without any
assistance, notonlycapableofcarrying on thesocietyto wealthand prosperity,
butofsurmounting a hundredimpertinent obstructions withwhichthefollyof
humanlaws too oftenincumbers its operations"(pp. 49 f.).
Smithbelievedthatthemarketmechanism could safelybe trustedto deliver
consumablesand to stimulate An
growth. important reasonforhisconfidence

154/2(1998) onMarketandState
AdamSmith 361
was his convictionthatthe freeenterprise systemwas fullyin line withthe

naturalorder,at once self-enforcing in thesenseof Canuteand morallylegiti-
mate in the senseof Locke. Smithwas at all timesaware of the real-world
constraintrepresented by the momentuminherentin matter:"In the great
chess-boardof humansociety,everysinglepiecehas a principleof motionof
its own, altogetherdifferent fromthatwhichthe legislaturemightchuse to
impress on it" (Smith [1759/1976,234]). Smithtook the view that human
behaviourin exchangesituationswas demonstrably in keepingwiththeprinci-
ples and themotionsthathad to be respected.
Thus thedivisionof labouris natural:it is "not originally theeffectof any
humanwisdom"but is rootedinsteadin thein-bredand instinctual driveto
"truck,barterand exchange"(Smith[1776/1961, 1,17]).The quidproquonexus
is natural:"Man has almostconstantoccasionforthehelpofhisbrethren, and
it is in vain forhimto expectit fromtheirbenevolenceonly.He willbe more
likelyto prevailif he can interesttheirself-lovein his favour"(p. 18). The
pursuitofapprobationand "sympathy" is natural:"Nature,whensheformed
manforsociety,endowedhimwithan originaldesireto please,and an original
aversionto offendhisbrethren" (Smith[1759/1976, 116]).The "uniform,con-
stant,and uninterrupted effort of everyman to betterhis condition"(Smith
[1776/1961, I, 364]) is natural:it "comes withus fromthewomb and never
leavesus tillwe go intothegrave"(pp. 362f.).The impulsethatleadsto inquiry
is natural:"Wonder... is the firstprinciplewhichpromptsmankindto the
studyof Philosophy,of thatsciencewhichpretendsto lay open theconcealed
connections thatunitethevariousappearancesof nature"(Smith[1795/1980,
51]). Specialisation,negotiation, conscience,rank,discovery- Smithwould
appear to have put his faith in thenaturalorderin preference to theman-made
substitute whichregrettably "made thata crimewhichnaturenevermeantto
be so" (Smith[1776/1961, II, 429]).An economistas wellas a Lockean,Smith
was alwaysin favourof thenaturalorderand themarketadjustment. Except,
of course,whenhe was not.
3. Government
Failure
Smithwas friendlyto themarket.Smithwas criticaloftheState.The previous

sectionshowedthat Smithwas attractedby the ideal of efficiency through
The presentsectionshowsthathe at thesametimehad seriousreserva-
liberty.
tionsabout thewisdomof directionand guidance.Smithcould have said that
controlwas tolerablebutthatexchangewas normally themoreeffectivemeans.
Whathe said insteadwas thatthetworoadscouldnotbe seenas leadingto the
samedestination.Catallaxymeanteconomicgrowth.Managementmeantstag-
nation.The choicewas a realone and thecase againsttheStatethefollowing.
First,thegovernment was ignorantoftrade.Parliaments were"consciousto
themselves thattheyknewnothingabout the matter"(Smith[1776/1961,I,

455]); and the outcomehad been counterproductive enactmentsleadingto

low-return allocations.Statistics in Smith'stime(despitetheearlyattemptsat
data-collection madebyKing,Petty,Davenantand others)werehardlyas full
as theywerelaterto become:Smith'sobjectionto tinkering in thedark,his
sceptical"I have no greatfaithin politicalarithmetic" (Smith[1776/1961, II,
42]),mayin thatsensebe interpreted as theacknowledgement of a contingent
constraint ratherthantheendorsement of a generalprinciple.Hayek,on the
otherhand,has foundin Smithan Austrian-type awarenessthatintelligence is
alwaysand everywhere dispersed:"Adam Smithwas thefirstto perceivethat
we havestumbled uponmethodsofordering humaneconomiccooperationthat
exceedthe limitsof our knowledgeand perception"(Hayek [1988, 14]). In
supportof Hayek's assessmentis Smith'sdeclarationthat"the sovereign. . .
mustalwaysbe exposedto innumerable delusions"in theexecutionof a task
"fortheproperperformance ofwhichno humanwisdomor knowledgecould
everbe sufficient" - namelythatof "superintending the industryof private
people, and of directingit towardsthe employments most suitableto the
interestofthesociety"(Smith[1776/1961, II, 208],emphasisadded).Wherethe
Statemustalwaysbe deluded,no argument foreconomicmanagement can ever
be veryconvincing.
Second,thegovernment was wastefulof capital.Courtsare notoriousfor
theirlove of luxuryand "insignificant pageantry"suchas "not onlyprevents
but
accumulation, frequently encroaches upon the fundsdestinedformore
necessaryexpences"(Smith[1776/1961, I, 468]). Populargovernments are no
closerto the prudentfrugality of the mercantile and manufacturing classes:
witness"the thoughtless extravagancethatdemocraciesare apt to fallinto"
(Smith[1776/1961, II, 342]).Relyingheavilyon hisdefinition ofservicelabour
as unproductive and sterile, Smitharrivedat thefollowing conclusionconcern-
ing theinvolvement of the State: "Great nationsare neverimpoverished by
private,thoughthey sometimes are bypublicprodigality and misconduct. The
whole,or almostthewholepublicrevenue,is in mostcountriesemployedin
maintainingunproductivehands" (Smith [1776/1961,I, 363]). Market
economistswill objectthatpricedservicesare no less value added thanare
pricedcommodities : theywillsay thatSmithtrivialises theintrinsic wasteful-
ness of the publicsectorby placingundue emphasison the compositionof
employment. Socialdemocrats willcomment thata wiseSolon(mentioned with
respectin Smith[1759/1976, 233])can do greatgood evenifa scheming Borgia
(mentioned withcontempt in Smith[1759/1976, 217])can indeedbe an "insidi-
ous and craftyanimal" (Smith[1776/1961, I, 490]): theywillpointwithap-
provalto Smith'sconcessionthat"we talkoftheprudenceofthegreatgeneral,
of the great statesman,of the great legislator"(Smith [1759/1976,216]).
Marketeers and interventionists willtakeissuewiththedetailof Smithon the
wasteful steward.Theywillnot,however, be inanyrealdoubtas to themessage
thatSmithwas trying to getacross.Britainat anyrate"has neverbeenblessed
witha veryparsimonious government" (Smith[1776/1961, 1,367]).Kingsand

154/2(1998) onMarket
AdamSmith andState 363
ministers in thatcountryshouldtherefore contribute to thewealthof nations

by taking to heart the followingpiece of sound advice: "Let themlook well
aftertheirown expence,and theymaysafelytrustprivatepeoplewiththeirs.
If theirown extravagance does not ruinthestate,thatof theirsubjectsnever
will" (p. 367).
Third,the government was vulnerableto the "clamorousimportunity of
partial interest" (Smith[1776/1961, 1,494]), to the special pleading of "partic-
ulartribes"thatwas threatening to introduce"real disorderintotheconstitu-
tionof thestate"(p. 495). Like AnthonyDowns, Smith(referring explicitlyto
mercantilist trade-diversion and theartificiality of thecolonialsystem)stated
thatithad beentheproducersand nottheconsumers"whoseinterest has been
so carefully attendedto" : "The interest of thehome-consumer has beensacri-
fiedto thatoftheproducer... A greatempirehas beenestablishedforthesole
purposeofraisingup a nationofcustomers."(Smith[1776/1961, II, 180]).Like
Karl Marx,Smith(opposedto wage-fixing lestthenaturaljusticeof themany
be rankedbelowtheprofiton capitalthataccruedto thefew)warnedthatthe
Statehad seldombeen an impartialarbiterin theclaimsbetweentheclasses:
"Wheneverthelegislature attempts to regulatethedifference betweenmasters
and theirworkmen, itscounsellorsarealwaysthemasters."(Smith[1776/1961,
I, 158f.]).Smithbelievedthatthegovernment, disproportionately sensitiveto
the needs of "shopkeepers"(Smith [1776/1961, II, 129]), "the richand the
powerful"(p. 161),and at thesame timeall too preparedto countenancethe
neglector oppression of"thepoorand theindigent" (p. 161),had cometo speak
fora smallsectionof thewidercommunity ratherthanfortheBritishpeople
as a whole.Laissez-faire couldnotbe morebiased.Hopefully it wouldbe more
even-handed.
Fourth,thegovernment, likeanyotherlargeorganisation, is dependenton a
networkof salariedofficials.Such bureaucratscannot but prove "idle and
profligate" (Smith[1776/1961, II, 357]),"negligent, expensive, and oppressive"
(p. 347): their reward beingindependent of their efforts, theyhave "acted as
theirsituationnaturally directed"(p. 158) and theresulthas beena slippagein
prudenceand care. The incentivesand the institutions are the cause of the
inefficiency, not thecivilservantsthemselves. What thismeansin practiceis
that thereought to be a significant reductionin the numberof functions
entrusted to agentswithouta financialstakein theoutcome:"Public services
are neverbetterperformed thanwhentheirrewardcomesonlyin consequence
of theirbeingperformed, and is proportionedto the diligenceemployedin
performing them"(p. 241). Smithdoes notdiscussindetailwhatpolicieswould
be requiredto restructure thegame.Clearly,however,theexpedientofprivati-
sationshouldbe exploredwherever possible.The examplehe givesinvolvesthe
transfer oftheCrownLands to private-sector ownership (p. 349). Smallfarm-
erscan be trustedto makethingsgrow.An absentee'sbailiffhas no analogous
reasonto be industrious.

364 DavidΑ. Reisman JITE
Mismanagement is, however,no less to be expectedfromprivate-sector

bureaucrats thanitis fromcivilservants in receiptofa salary.Smithwas quick
to recognise thefamilyresemblance betweentheexecutive in a corporation and
the cog fromthe Ministry:"The directorsof such companies... beingthe
managersratherof otherpeople'smoneythanof theirown,it cannotwellbe
expected,thattheyshouldwatchoverit withthesameanxiousvigilancewith
whichthepartnersin a privatecopartnery frequently watchovertheirown."
(Smith[1776/1961, II, 264f.]).Such "negligence and profusion"(p. 265), such
"folly. . . and depredations"(p. 268), does not lead by the shortestpossible
routeto thewealthof nations;but it is preciselywhatan economistwould
predictwherebig businessesare run by managersand whereownershipis
"dividedamongan immensenumberof proprietors" (p. 267). Privatisation,
howevernecessary, wouldevidently notbe sufficientunlessand untiltheman-
agerialrevolution wereeffectively to be reversed.
Smith,as has beenarguedin thissection,had fourreasonsforbeingcritical
of the State. How he would have reactedhad governments been betterin-
formed,more economical,more independentof interestgroups- had the
privatesectorin additionbeenlesscompetitive and morebureaucratised - can
only be a matter for speculation. Such speculation, as Andrew Skinner has
observed, neednot be eitherfair or accuratein of a
respect historically-minded
social scientistwho livedso long ago: "It is not appropriateuncritically to
translateAdam Smith'spolicyprescriptions fromtheeighteenth to thetwenti-
eth century- moreover,it is quite inconsistent withSmith'sown teaching."
(Skinner[1996,206]). What is clear,however, is thatmuchof Smith'shostility
to government was relativeand notabsolute,and thathewas quickto acknowl-
edge theoutstanding successof publicenterprise in certainforeignrepublics:
witnesshisrecognition thatthegovernment of Bernedid a flourishing tradein
loans to otherStateswhilethegovernment of Hamburgran a publicpawn-
shop,wine-cellar, apothecaryand bank (Smith[1776/1961, II, 342 and 344]).
The problemwouldseemto be not all government in generalso muchas the
eighteenth-century Britishgovernment in particular.No one woulddenythat
the"orderly, vigilant,and parsimonious administration" in Veniceor Amster-
dam had beenable intelligently to carryoutcommercial projects.Whetherthe
"slothfuland negligent profusion"and the"thoughtless extravagance"of the
eighteenth-century Britishgovernment could,however,"be safelytrustedwith
themanagement ofsucha project,mustat leastbe a good deal moredoubtful"
(p. 342).
Westartfromhere.Here can moveon. It is nota cast-irondefenceof man
versustheState.MurrayRothbardknewthathe could neverfeelcomfortable
withthecontingencies ofexpediency. ConvincedthattheStatemustalwaysbe
"theinherent and overwhelmingly themostimportant enemyof ... therights
of personand property"(Rothbard [1973/1978, 47]), he arguedon principle
forthedevolutionofchoicefrom"oligarchs- in practice,government bureau-
crats"(p. 35) to purposiveactorswitha resistance to coercion:"Onlyindivid-

uals haveends,and can act to attainthem.Thereare no suchthingsas endsor

or 'States',whichdo not take place as
of actionsby 'groups','collectivities',
actionsby variousspecificindividuals."(Rothbard [1962,I, 2]). Rothbard
would have been pleased to have foundin Smitha kindredspiritwithan
uncompromising attachment to marketexchange.Whathe foundinsteadwas
a costing,benefiting
cautiousnessthatlooked"Open theflood-gates" prudent-
ly in the mouthand testedVeniceand Amsterdamforsoundnessof wind.
Expectingan alwaysand findinga sometimes, Rothbardhad in the end to
accept that Smithwas lookingto the State even as he was eulogisingthe
market:"The list of exceptionsSmithmakes to laissez-faire is surprisingly
long." (Rothbard [1995,465]).
4. The Protective
State
Adam Smithbelievedin naturalliberty. It was naturalliberty,he said,thathad

revealedto himthetrueand properfunctions of theState: "Accordingto the
systemofnaturalliberty,thesovereign has onlythreedutiesto attendto; three
dutiesofgreatimportance,indeed,butplainand intelligible to commonunder-
standings"(Smith[1776/1961, II, 208]). A book at leastas longas the Wealth
ofNationswouldbe requiredto explainSmith'sunwarranted confidencein his
his his
only, plain, intelligible and hiscommon. Be thatas it may, Smith defined
thescope foractiveStateintervention in termsof thethreedutiesof defence,
justiceand publicworksthatare thesubjectofthissectionand ofthenext.The
presentsectionis concernedwithdefenceand justice - JamesBuchanan's
"external'governor'"or "protective state"(Buchanan [1975,95]).
4.1 Defence
Smithassignedto thegovernment "thedutyofprotecting thesocietyfromthe
violenceand invasionof otherindependent societies"(Smith[1776/1961,II,
208]). This is thedutyof nationaldefence,a responsibility whichgoes beyond
the maintenanceof "a well-disciplined standingarmy"(p. 307) to embrace
economicpolicyas well.Thus,exceptionally, bountiesshouldbe paid to en-
couragetheexportation ofBritish-madesailclothand gunpowder:theartificial
inflationof the ventwould thenstimulatethe expansionof thesestrategic
industriesat home,evenifthecommodities in questioncould otherwisehave
been purchasedmorecheaplyabroad (p. 28). Again,the NavigationActs -
"perhaps,the wisestof all the commercialregulationsof England" (Smith
[1776/1961, I, 487]) - shouldbe resolutelypreserved:theyconfinedmuchof
Britishtradeto Britishships regardlessof cost, but theyalso ensuredthat
Britainwould have a good supplyof experiencedsailorsin the eventof a
sea-war.All in all, Smithwrote,"defence... is of more importancethan
opulence"(p. 487). It was a conclusionwhichled him to endorseboth the

standingarmyitselfand theeconomicpolicythatcouldbe shownto backitup.

Smithseemsnot to have appreciatedjust how open-endedthe categoryof
defence-related activitycouldultimately becomein thehandsofa gain-seeking
privatepleader.
Once,Smithsaid,thepublicgood of defencehad beensupplieddirectly by
meansofa people'smilitia.No lessrecently thanthe'45 rebellion, he recalled,
some"fouror 5 thousandnakedunarmedHighlanders tookpossessionof the
improved partsofthiscountry"(Smith[1766/1978, 540f.]),testifying eloquent-
lyto theefficacy ofa popularforce.Economicevolutionwas,however,taking
itscourse;and,whilevoluntary actioncouldbe a realistic optioninthehunting,
pastoralor agricultural stages,thefourthor commercial stageimposeda logic
ofitsownsuchthat"themartialspiritofthegreatbodyofthepeople. . . would
not,perhaps,be sufficient forthedefenceand security of anysociety"(Smith
[1776/1961, II, 307]).Opulenceand luxuryexcitetheenvyoftheforeigner while
makingour ownpeople"effeminate and dastardly"(Smith[1766/1978, 540]),
"incapableofdefending themselves" (Smith[1776/1961, II, 220]).The division
of labour makes militarytechniquea specialisedstudy:it also debases the
ordinary workmanintoa stateof"mentalmutilation, deformity, and wretched-
ness" (p. 308) so extreme thatin him the"heroic spiritis almost utterly extin-
guished"(Smith[1766/1978, 541]).The publicgood of defence can, Smith said,
be suppliedon a voluntary basisin a pre-commercial society.UnlikeFerguson
and Kames,however,he deniedthatindividualactionstillremaineda realistic
optiongiventhemodernmode of productiveactivity.Thus does themarket
economybreedStateintervention and selectivenationalisation as theeffect and
cause of flourishing enterprise.
Smithbelievedthatpublicsectorauthority was thesinequa nonforprivate
sectorautonomy:"That degreeof libertywhichapproachesto licentiousness
can be toleratedonlyin countrieswherethesovereign is securedbya well-reg-
ulatedstandingarmy"(Smith[1776/1961, II, 229f.]). Rothbard,needlessto
say, was considerablyless confidentabout so massivea concentration of
weaponryand violence:"A government thathas a permanent standingarmy
at its disposalwillalwaysbe temptedto use it ... Anystandingarmy,then,
poses a standingthreatto liberty"(Rothbard [1973/1978, 82 and 83]). Smith
acceptedthata standingarmyhelda monopolyof powerthatwas byitsvery
naturean invitation to abuse. In his perspective,however,thethreatwas first
and foremost a threatto therulinggovernment on theprecedent of Caesar or
Cromwell.Recognisingas he did thepossibility of a military coupd'état,he
proposedto containtheproblembyensuring that"thesovereign is himself the
general" and the commanding officers "thosewho have the greatest interest in
thesupportof thecivilauthority" (Smith[1776/1961, II, 229]). Such an inter-
leavingofloyaltiesis an imaginative curbto thestandingthreatin thesenseof
Smith.Not so, however,to thestandingthreatin thesenseofRothbard- who
has in mindnotthestandingthreatto Sirbutratherthestandingthreatto you
and me: "To guardagainstprivatecriminalswe have beenable to turnto the

154/2(1998) AdamSmith
onMarket
andState 367
Stateand its police; but who can guardus againstthe Stateitself?No one"
(Rothbard [1973/1978, 47]). RothbardviewsSmithon defenceas incompatible
in thelongrunwithSmithon justice.Livingin a Smith-type society,Rothbard
thelibertarianwouldlivein fearof theabrogationof theconstitution and the
knockon thedoor.
4.2 Justice
The seconddutyis "thedutyofestablishing an exactadministration ofjustice"
(Smith[1776/1961, II, 209]). Smithwas in no doubtthatthe"negativevirtue"
ofjustice- theabstentionfromharmto theperson,property or reputationof
others- was of fargreaterimmediacythanthe "positivevirtue"of benevo-
lence: "Justice... is the main pillarthatupholdsthe whole edifice.If it is
removed,thegreat,theimmensefabricofhumansociety. . . mustin a moment
crumbleintoatoms" (Smith[1759/1976, 86]). He was also convincedthatthe
taskofprotecting everymemberofthesociety"fromtheinjusticeoroppression
of everyothermemberof it" (Smith[1776/1961, II, 231]) could onlybe the
naturalmonopolyof thegovernment or "civilmagistrate":"The liberty, rea-
son,and happinessofmankind. . . can flourish onlywherecivilgovernment is
able to protectthem"(p. 325). On theone hand therewas theheliumomnium
contraomnesthatwouldbe theconsequenceof radicalindividualism: thenthe
nation"wouldbecomea sceneofbloodshedand disorder, everyman revenging
himselfat his own hand wheneverhe fanciedhe was injured"(Smith[1759/
1976,340]).On theotherhandtherewas thematerialsecurity thatmustforever
be unattainablewithoutthe nationalisationof force:"It is only underthe
shelterof thecivilmagistrate thattheownerof thatvaluableproperty, which
is acquiredbythelabourofmanyyears,or perhapsofmanysuccessivegener-
ations, can sleep a singlenightin security"(Smith [1776/1961,II, 232]).
Trappedbetweenanarchyand Leviathan,Smithbelievedthathe had no choice
but to make his peace withtheState.
JamesBuchananshareswithSmiththe middle-ground positionthat the
lesserlibertywill have to be sacrificedto authorityif the greaterlibertyis
indeedto be enjoyedby exchange.He has written as followsabout Smithon
the privatisation too far: "Adam Smithwas far too realisticto argue that
marketswouldemergeand wouldfunction effectively in theabsenceof a legal
framework. One of themostimportant lessonsof the 1776masterpiece is the
linkagebetweenthegeneralsecurity ofproperty (including theenforceabilityof
contracts) and thefunctioning ofmarkets, a security thatcouldonlybe provid-
ed by the vigilantprotectionof the sovereign."(Buchanan [1976, 273]).
Buchananacknowledges that"modernlibertarian anarchists, sometimes called
property-rights anarchists" - "theyare bestexemplified byMurrayRothbard"
(p. 272) - take theviewthatevenlaw and ordercan dependablybe supplied
along the linesthatSmithendorsedwhenhe pennedhis famousdefenceof
expediency through interest: "It is notfromthebenevolenceofthebutcher, the

brewer,or thebaker,thatwe expectour dinner,butfromtheirregardto their

owninterest. We addressourselves, notto theirhumanity butto theirself-love,
and nevertalkto themofourownnecessities butoftheiradvantages."(Smith
[1776/1961, 1, 18]). Buchananis insistent thatSmithneverexpectedhiseulogy
ofcollectiveactionthroughmarketexchangeto be extendedto theinfrastruc-
tureof the collectively itself:"Is Rothbardthe modernanalogue to Adam
Smith?Littleor no exegesisis requiredto answersucha questionemphatically
in thenegative."(Buchanan [1976,273]). Rothbardwouldreluctantly haveto
agreewiththisverdict- yetanotherreasonwhyhe clearlyholdsSmithin part
responsibleforthebetrayalof "self-ownership" (Rothbard [1973/1978, 27])
thatwas to follow:"The nineteenth-century laissez-faireliberalscame to use
laissez-faireas a vaguetendency ratherthanas an unblemished yardstick,and
therefore increasingly and fatallycompromised thelibertarian creed."(p. 31).
Unlike the libertarians, Smithdid not expectvoluntaryenforcement to
evolvespontaneously intheabsenceoftheState.The exampleoftheDark Ages
confirmed to himthatcontractsforlaw and order,like all othercontracts,
wouldsimplynotbe concludeduntilthegovernment had assumeditsrespon-
sibilitiesas theguarantorof thepublicgood: "Amongthebarbarousnations
who over-run thewesternprovincesof theRomanempire,theperformance of
contracts was leftformanyagesto thefaithofthecontracting parties."(Smith
[1776/1961, 1,107]).Unlikethelibertarians, moreover, Smithtooktheviewthat
theprivateadministration ofjusticecouldsimplynotbe madecompatiblewith
thecentralconsideration Relyingonceagainon evidencefrom
of impartiality.
thepast, he made thepointthatjusticeforsale was notjusticeat all: "The
person,who appliedforjusticewitha largepresentin his hand,was likelyto
getsomething morethanjustice;whilehe,who appliedforitwitha smallone,
was likelyto getsomething less." (Smith[1776/1961, II, 237]).Smith'sinstance
is themarketforbribes.Rothbard'sreplywouldbe thatSmith,hereas else-
where,is simplyuncovering a public-sectorfailureand blamingiton exchange.
A corruptcivilservantcan sell to thehighestbidderbecausehis monopolyis
unchallenged througha "built-incorrective mechanism"- buta privatecom-
petitorrivalledby substitute cannotaffordto let his honestyslip:
arbitrators
"The verylifeof thecourt,theverylivelihoodof a judge,willdependon his
reputation forintegrity, fair-mindedness, and thequestfortruthin
objectivity,
everycase. Thisis his 'brand name'. Should word of anyvenalityleak out,he
willimmediately lose clients."(Rothbard [1973/1978, 235]). The sameis true
ofthebutcher, thebreweror thebakerwhenhe givesshortmeasureor pockets
thechange.Rothbardcriticised Smithforopeningtheflood-gates and leaving
themhalf-closed nonetheless.
Smithwas in favourof State-sponsored law and orderbecausehe believed
thealternative to be theHobbesianhomohominilupus.In respectof theteeth
and theclaws,however,theretoo therewas greaterscope to trustthemarket.
Arguingthatprofit-seeking could cordialisetheeconomy,forexample,Smith
wrotethat"commerce. . . oughtnaturallyto be, amongnations,as among

onMarket
andState 369
individuals, a bondofunionand friendship" (Smith[1776/1961, 1,519]).Inter-

dependence and mutual need, Smith seems to be saying, are found to have a
dampening effect on the incidence of and
aggression injustice. Yet Smith also
wrotein the traditionof Locke - "Governmenthas no otherend but the
preservation of property"(Locke [1690, 79]) - and in the convictionthat
naturalharmoniousness had beenforever destroyedby accumulationand in-
equality : "Civil government, so faras itis institutedforthesecurity ofproperty,
is in realityinstituted forthedefenceof therichagainstthepoor,or of those
who have some property againstthosewho have none at all." (Smith[1776/
1961,II, 236]). Commerceis a bond of union.Ownershipof property divides.
Smith,itis clear,couldhavechosento go somewhatfurther downtheroadthat
leads to law-abidingconductas a directconsequenceof thecapitalistorder.
Anotherexampleof themannerin whichSmithcould withgreaterconfi-
dencehavelookedto themarketforthecordialisation ofconductinvolvesthe
moralsentiments. Man "has a naturallove forsociety. . . The orderlyand
flourishing stateof societyis agreeableto him,and he takesdelightin contem-
platingit." (Smith[1759/1976, 88]). Man has a humanising capacityto em-
pathiseand imagine:"How selfishsoeverman may be supposed,thereare
evidently some principlesin his nature,whichinteresthimin the fortuneof
others,and rendertheirhappinessnecessary to him,thoughhe derivesnothing
fromit exceptthepleasureof seeingit." (p. 9). Man conforms to therule-gov-
ernedorderbecausehe has instinctively internalised his society'sstandardsof
rightand wrong:"Nature. . . has not. . . abandonedus entirely to thedelusions
ofself-love. Our continualobservations upon theconductof others,insensibly
lead us to formto ourselvescertaingeneralrulesconcerning whatis fitand
propereitherto be done or to be avoided."(p. 159). Moral sentiments suchas
these- theattraction to harmony, theattribute ofsympathy, theinternalisation
of convention - suggestthatthesensitivesocial actorwillautomatically grav-
itateto his society'snormativeguidelinesand will behave withjusticeas if
guidedby an invisiblehand.
Themarketitselfappealsdirectly to thesepressures and proclivities. Thusthe
ambitiousclimberis eagerforstandingand notjust possession- "Place ... is
theend of halfthelaboursof humanlife"(Smith[1759/1976, 57]) - whilethe
risk-chasing adventurer knows that bankruptcy involves more than money,
beinga "humiliating calamity"(Smith[1776/1961, 1,363]).A manwhoglories
in hissuccesses"becausehe feelsthattheynaturally drawupon himtheatten-
tionoftheworld"(Smith[1759/1976, 51]) wouldnot,in theSmithianperspec-
tive,feelotherthana fraudand a cheatifhe knewthathe had brokentherules
ofjusticeen routeto hisgoal. Besidesthat,thesheersuccessofmarketcapital-
ism will make that much less pressingthe temptationto violatethe code:
"Beforewe can feelmuchforothers,we mustin some measurebe at ease
ourselves."(p. 205). Smithseems to be sayingthat marketefficiency lends
welcomesupportto themoralsentiments. On balance,however,he remained
a Hobbesianand a misanthropist - a frightened theoristwhoexpectedthatthe

sociableproclivities ofcompassion,generosity and fellow-feelingwouldalways

be at riskfrom"envy,malice,or resentment" (Smith[1776/1961, 231]),from
II,
theprideof man which"makeshimlove to domineer"(Smith[1776/1961, I,
412]),fromthe"anger,hatred,envy,malice,revenge. . . whichdrivemenfrom
one another"(Smith[1759/1976, 243]).Smithwas in favourofState-sponsored
law and orderbecausehe recognised thelaw ofthejunglein everyself-interest-
ed individualist and fearedtheworstfrom"so imperfect a creatureas man"
(p. 25). A moreconfident moralistwouldhave lookedinsteadto self-policing
standardsand thewealthofnationsforthatcordialisation ofconductthatthe
truelibertarian willalwaysrankabove thecoercionof theState.
Strandedon themiddleground,however,thefactis thatSmithmade it the
dutyof thegovernment (not of themarketand notof morality)to ensurethe
protection ofperson,property and reputation withoutwhichtheinterest-based
culturewouldbecomean impossibility. SmithwantedtheStateto protect.He
did notwanttheStateto invade.Believing, indeed,thattheStatein thepast
had overstepped themark,he oftenpresented thecase foreconomicliberalisa-
tionin the languageof righting a previouswrong.Opposingthe Settlement
Laws, he declaredthattheywereinequitableand not simplyinefficient: "To
removea manwhohas committed no misdemeanour fromtheparishwherehe
chusesto reside,is an evidentviolationof naturallibertyand justice."(Smith
[1776/1961, 1,157]).Attacking thecolonialsystem, heinvokedtherights ofman
as wellas theallocationofthings:"To prohibita greatpeople. . . fromemploy-
ingtheirstockand industry in thewaythattheyjudge mostadvantageousto
themselves, is a manifest violation of the most sacred rightsof mankind."
(Smith[1776/1961, II, 95]).Defendingthegraintrade,he said thatfreedom was
ethicalandnotonlyexpedient:"To hinder,besides,thefarmer fromsendinghis
goodsat all timesto thebestmarket,is evidently to sacrificetheordinary laws
of justiceto an idea of publicutility, to a sortof reasonsof state."(p. 48).
Addingup thenaturalliberty, thesacredrights, theordinary lawsofjustice,what
emerges is the diagnosis of "real encroachments" (Smith [1776/1961,I, 493])
suchas areimpossibleto reconcilewiththedutyofjusticethathas all too often
fallenvictimto thetemptation to invade.
Smithbelievedit to be in theinterests ofjusticeto rollback thefrontiers of
theState.Thus he proposedtheabolitionof laws guaranteeing primogeniture
and entails;he opposedthechartered monopoliesand thestatutesof appren-
ticeship;and he supportedthe phasingout of the exportbountiesand the
importduties.The State,he maintained, oughtto substitute simpleprotection
forunwarranted direction in instances such as these- and economicexpansion,
he madeclear,wouldthenbe an additionalgain.A freemarketin land would
stimulateproductivity whereasa caste of hereditary absentees"would soon
degrade the cultivation" (Smith[1776/1961, II, 357]). Occupationaland geo-
graphicalmobility channels labour into itsbest-paidoutletsand eliminates the
man-madeunemployment thatcan so easilyexistwherethelaw comesbetween
theworkmanand an opportunity "in anothertradeorinanotherplace" (Smith

onMarket
andState 371
[1776/1961, 1,493]). Freedomof trademeansthatScottishresourcesneednot

be wastedin theproductionof grapesbecausethegrapescan be exchangedas
importson thebasis of absoluteadvantage:"If a foreigncountrycan supply
us witha commodity cheaperthanwe ourselvescan make it,betterbuyit of
themwithsomepartof theproduceof our own industry, employedin a way
in whichwe have some advantage."(pp. 478f.).
Smithwas clearlypersuadedthatthelessinvasiveStatewas conduciveto the
growthin thewealthof nations.Importantly, however,he also called forthe
looserreinbecausehe believedit to be rightand proper.The Settlement Laws,
Smithsaid,were"a plainviolationofthismostsacredproperty" (p. 136) which
everymanhas in hisown labour;whilethegrantof a monopolyprivilege was
"contraryto thatjusticeand treatment whichthe sovereignowes to all the
differentordersof his subjects"(Smith[1776/1961, II, 171]).Confronted with
a sacredproperty and a commitment to impartiality,thereaderis embarrassed
to whisperthat economicperformance too will benefitfromthe repeal of
directivesthatgo beyondthedictatesof theprotective function.
Smithsaw justiceas a "negativevirtue"- but therewereexceptions.There
were,morespecifically, at leastthreesetsof circumstances in whichSmith-
attractedas he was bytheprincipleof "Open theflood-gates" - turnednotto
restraintremovedbut to restraint imposedforthe protectionof the public
good.
Thefirstinstanceis thatof legislationto containtheexternality of diswel-
fares.The argumentis the familiarone thatnon-contracting outsidersmust
bearno burden,that"thegreatestgood of thegreatestnumber"(Smith[1776/
1961,1,344])mustinexceptional circumstances override anynaturalrightsthat
theindividualmay possess: "Those exertionsof thenaturallibertyof a few
individuals,whichmightendangerthesecurity of thewholesociety,are, and
to
ought be, restrained by the laws of all governments." (p. 345).
Thus the State mustpreventa marketfailurein respectof fire-resistant
construction and prudentbankingpractice:"The obligationof buildingparty
walls,in orderto preventthecommunication of fire,is a violationof natural
liberty,
exactly ofthe same kind with the regulations ofthebankingtradewhich
arehereproposed."(Smith[1776/1961, 1,345]).The Statemustacceptthatfree
enterpriseis powerlessin the face of a contagionor epidemic:it mustitself
thereforeinvest"themostseriousattention"in orderto "preventa leprosyor
anyotherloathsomeand offensive disease,thoughneithermortalnordanger-
ous, fromspreadingitselfamong ... the greatbody of the people" (Smith
[1776/1961,II, 308]).The Statemustevenbe preparedto "correctwhatever was
unsocialor disagreeably rigorous"(p. 317) inthemoralsofsmallreligioussects
wherecompetition betweenthemregrettably didnotdissipate"thatmelancholy
and gloomyhumourwhichis almostalwaysthenurseof popularsuperstition
and enthusiasm"(p. 318).
The Stateis in and themarketis out- or perhapsSmithsimplythrewin his
cardswithoutappreciating just how muchthe automaticity of interest could

riseto thechallenge.The buildersand thebankswillbe drawnbyan invisible

hand to qualitycontroland depositprotectionshouldpayingcustomersbe
attractedbysafetyand security. The insurance companieswillhavean incentive
ofno lesscommercial a natureto stopthespreadofdiseasethatcan so greatly
sap theirprofits.The religioussectswilllose theirfollowers wheretheyteach
an asceticismthatin a consumerculturewill have only a minority appeal.
Insistingthatprivateenterprise is indeedtheequal of thepartywallsand the
loathsomediseases,warningthatalarmistthreats"whichmightendangerthe
securityofthewholesociety"(Smith[1776/1961, 1,345])can easilybe takenby
a dictatorialprinceas groundsforpreventive detentionor monopolyState
a libertarian
television, likeRothbardwouldno doubtcomplainthatSmithon
spilloverswouldhavedonewellto turnto theprotective marketand notto the
State.
The secondinstanceis thatof legislationto seta ceilinglimitto theinterest
rate.The UsuryLaws, imposinga maximum,interfered withtheindividual's
freedomto tradein loanablefundsat thebestpricehe could negotiate.Smith
believedthattheUsuryLaws weregood laws and that"thepresentlegalrate,
fivepercent.,is perhaps,as properas any" (Smith[1776/1961, 1, 379]). Smith
knewthata lenderwithmoneywas in a positionto commandeightor eventen
percentforhisfunds.As faras he was concerned, thatmarket-clearing bargain
had definitivelyto be blocked off by the Statelesta scarcesocial resourcebe
misallocatedbytheinvisiblehand.At eightor tenpercent,Smithwrote,"the
greaterpartof themoneywhichwas to be lent,wouldbe lentto prodigalsand
projectors,whoalonewouldbe willingto givethishighinterest ... A greatpart
of thecapitalof thecountrywouldthusbe keptout of thehandswhichwere
mostlikelyto makea profitable and advantageoususe of it,and throwninto
thosewhichweremostlikelyto wasteand destroyit" (p. 379). Smithcould
dismisscertainconsumablesas mere"trinketsand baubles" (p. 439) but he
stoppedshortofsumptuary legislation in supportofhisconsumersovereignty.
Withrespectto theinterest ratethepositionwas different. There,as Rothbard
observes,he did not hesitateto imposeupon the community his "Calvinist
contempt for luxury consumer spending" (Rothbard [1995, 467]) and to put
teethintohis "hostility to freemarkettime-preference betweenconsumption
and saving"(p. 500). Justicewas to be impartial.Spendthrifts and prodigals
were nonethelessto be suppliedwitha personaliseddiscrimination, tailor-
made.
Smithis obliviousto thepossibility thattheextravagant and thespeculative
willobtaintheirfundsillegally, and at evenhigher interestrates.Nor does he
takeintoaccounttheman-madescarcity savingsof that Bentham inhisDefence
of Usury of 1787 predicted would be a consequence of a counter-productive
policy(a criticism partiallyanswered,to be fair,by Smith'squasi-Keynesian
contentionthattherelevantsupplyschedulewas not veryinterest-sensitive).
Intoleranceand inconsistency are seriouscharges- but so are hungerand
unemployment. In China the common people,"beggingemployment" (Smith

[1776/1961, 1,80]),areforcedto dineoff"anycarrion,thecarcaseofa dead dog

or cat,forexample,thoughhalfputridand stinking"(p. 81). In GreatBritain
thewagesoflabourare "evidently more"(p. 82) thanthesubsistence minimum
and thecomplaintis commonthat"luxuryextendsitselfeven to the lowest
ranksof thepeople" (p. 87). Chinais stationary and stagnant.GreatBritainis
growingrapidly. The growth of nations is thesine qua nonforthediffusion of
well-being. The diffusion of well-being is an end thatto a utilitarian servesas
itsownlegitimation: "No societycan surelybe flourishing and happy,ofwhich
the far greaterpart of the membersare poor and miserable"(p. 88). The
accumulationof capitalis thesinequa nonforthegrowthof nations.Adam
Smithwrote:"Everyprodigalappearsto be a publicenemy,and everyfrugal
mana publicbenefactor" (p. 362). Then,sacrificing naturalliberty in orderto
procurethegreatesthappiness,he came downon theside of theUsuryLaws.
The thirdinstanceis thatof legislationto perpetuateselectedpositionsof
monopoly.Smithdescribedmonopolyas "a greatenemyto good manage-
ment"(Smith[1776/1961, 1, 165]),themonopolypriceas regrettably in excess
ofthe"naturaland properprice"(Smith[1776/1961, II, 169]).Rejectingoccu-
pationallicensure, he criticised thesinglerouteoftheuniversity degree:"When
a manhas learnthislessonverywell,itsurelycan be oflittleimportance where
or fromwhomhe has learntit" (Smith[1774/1987, 174]).Rejectingprotection
forinfantindustries, he observedthatthenationwouldhavegrownfasterstill
"had bothcapitaland industry beenleftto findouttheirnaturalemployments"
(Smith[1776/1961, 1,479]). Smithwantedto modelthepositiveon thenatural
law. Smithwantedto "Open theflood-gates," to take restraint away.
He also came down in favourof "a monopolyof the tradefora certain
numberofyears"wherea "companyofmerchants undertake, at theirownrisk
and expence,to establisha newtradewithsomeremoteand barbarousnation"
(Smith[1776/1961, II, 277]).He defended - "thepublicis afterwards to reapthe
benefit"- thesystemofpatentsand copyrights according to which "a tempo-
rarymonopoly ... of a new machine is granted to itsinventor, and that ofa new
bookto itsauthor"(p. 278). He was enthusiastic about"premiums givenbythe
public to artists
and manufacturers who excel in their particularoccupations"
(p. 29) - premiums whichstampa Stateaccolade on a differentiated product,
and do so in additionto thesuperiorrecognition whichtherationalmarketwill
itselfnormallyextendto extraordinary workmanship. In favourof competi-
tion,Smithcould also come downin favourof its restriction.
Nor can Smithbe describedas the impatientadvocate of immediatefree
trade.Barriersshould be reducedgraduallyratherthan all at once lest the
revolution ofcheap importstoo abruptly"deprive. . . manythousandsof our
peopleof theirordinaryemployment" (Smith[1776/1961, I, 491]). Tariffscan
be reimposedas a retaliatory measureor to persuadeothercountriesto remove
theirownobstructions: "The recovery of a greatforeign marketwillgenerally
morethancompensatethetransitory inconveniency" (p. 490). Exportprohibi-
tioncan be convertedinto "a legal exportationsubjectto a tax" in orderto

afford"a revenueto thesovereign"(Smith[1776/1961, II, 172]).At theendof

thedaythereis thecompromise withexpediency and thetriumph ofthesecond
best:"To expect,indeed,thatthefreedomof tradeshouldbe entirely restored
in GreatBritain,is as absurdas to expectthatan Oceana orUtopiashouldever
init" (Smith[1776/1961,
be established 1,493]).Somepositionsofimperfection
wereclearlyto continueprotected,some priceschargedto theconsumerto
remainsupra-competitive. It is understandable thata libertarian suchas Roth-
bard should have showna certainimpatiencewiththe prevaricationof a
yes-butmarketeer too afraidto go all theway to thegoal.
5. The Productive
State
Overand above theprotective functionsofdefenceandjustice,Smithassigned

a thirddutyto theState.Thiswas "thedutyoferecting and maintaining certain
publicworksand certainpublic institutions, whichit can neverbe forthe
interestof anyindividual,or smallnumberof individuals, to erectand main-
tain"(Smith[1776/1961, II, 209]).Nothingis lesscertainthancertainunlessit
be never.AlexanderGrayknewa blankchequewhenhe saw one: "This third
dutythrowsopen whattheTreasuryused to call a 'seriousdoor' . . . Heaven
knowswhat far-flung activitiesmightnot be pressedunderthiscapacious
umbrella"(Gray [1976,541]).
Smith'scriterion is thattheprojectsbe in thepublicinterest (althoughhow
thisis to be definedand by whomhe does not explain)and that theybe
unattractive to privateenterprise (and thusdemonstrably at variancewiththe
"naturalorder"and the"invisiblehand"). One examplewouldbe thecompul-
soryregistration ofleases(Smith[1776/1961, II, 359]).Anotherwouldbe "the
sterlingmark uponplate, and the stampsuponlinenand woollencloth"(Smith
[1776/1961, I, 136]). In cases such as thesetheStatesetsout to givethecon-
sumera guaranteeof security and quality,arguablyas muchtheprecondition
foreffectiveexchanging as is thelegalenforcement ofcontracts(p. 107) bythe
protectiveState. The State takes over theprecondition, Smithis saying,because
"it can neverbe fortheinterest"(Smith[1776/1961, II, 209]) of theprivate
sectorto delivertheserviceforitself.Sincegain-seeking registrars wouldhave
theincentiveof fees,sincecommercialcertifiers could make stampingintoa
profit-seeking business,it is possiblethatSmith,fallingvictimto thetyranny
ofthestatusquo,was too quickto pronouncea sentenceofneveron themarket.
He might,of course,havemeantneversatisfactorily whenhe wrotenever.He
mighthavehad in mindtheshortcomings ofnaturalmonopolyand conflict of
interestwhichon a calculusofcostsand benefits mighthaveadded up forhim
to theState.It is likelythatitwas relativeperformance andnotneverthatSmith
had in mindin respectoftheregistering and ofthestamping. It is likelyas well
thata crucialstep in the argumentwas, here as elsewhere,missedout for
publicationby a nervousreclusewho was reluctant to be too precise.

154/2(1998) onMarketandState
AdamSmith 375
Smith'sneveris evenmoreof a problemin thecase of theRoyal Mintand

ofthePost Office.The Mintbelongsin theStatesectorbecauseit is a money-
makerin morewaysthanone: coinage"not onlydefraysitsownexpence,but
affordsa smallrevenueor seignorageto thesovereign"(Smith[1776/1961, II,
246]).The Post belongsin theStatesectorbecauseit is evenmoreof a success
than the Mint: "Over and above defraying its own expence,[it]affordsin
almostall countriesa veryconsiderable revenueto thesovereign"(p. 246). The
Post Office,Smithreported, was alwaysa sourceof profitforits owner,the
State: "It is perhapstheonlymercantile projectwhichhas been successfully
managedby, I believe, every sort of government. The capitalto be advancedis
notveryconsiderable.Thereis no mystery in thebusiness.The returns are not
onlycertain,but immediate"(p. 343). Smithis heredefending the State-run
businessin thelanguagenotofneverbutofmoney.Libertarians willseizeupon
thesame evidencewhentheycall forprivatisation and not fortheState.
A further instanceof publicprovisioninvolvesthenation'sinfrastructure -
"good roads,bridges,navigablecanals,harbours"(Smith[1776/1961, II, 245]).
Here thestandardof neveris seenquiteexplicitly to standforneververywell·.
"At manyturnpikes, it has beensaid,themoneyleviedis morethandoubleof
whatis necessaryforexecuting, in thecompletest manner,theworkwhichis
oftenexecutedin a veryslovenlymanner,and sometimes notexecutedat all"
(p. 248). The privatesectorhad a positionof naturalmonopolyand was in
additionin need of capital.The privatesectorhad proveddeficient;and the
publicsectorhad to becometheresidualsupplier.Even so, theinfrastructure
providedwas whereverpossibleto be renderedself-financing throughtolls:
thesechargeswouldat once generatefundingforthefacilities and ensurethat
theywere"madeonlywhere. . . commerce requiresthem"(p. 246). Shouldtolls
proveinsufficient forthe servicea subsidyshould be paid - but the tax to
financeit shouldthenbe local and provincial,not a nationalburden:"It is
unjustthatthewholesocietyshouldcontribute towardsan expenceof which
the benefitits confinedto a part of the society"(p. 339). An even closer
personalisation of the expenseand the benefitwould, of course,have been
securedthroughtheuse of market-clearing prices.
Marketfailurecan be a failureof demandand not of supply.Smith'smost
literaland irreducible neverrefersto just such a case - to thefailureof "the
labouringpoor, thatis, thegreatbody of thepeople" (Smith[1776/1961, II,
303]) to demandevena modicumof schooling:"These are thedisadvantages
of a commercialspirit.The mindsof menare contractedand renderedinca-
pable of elevation[and] educationis despisedor at least neglected"(Smith
[1766/1978, 541]). Natureherselfis at fault,foron theone hand she endowed
manwiththepropensity to specialisewhileon theothershecondemnedhimto
"grossignoranceand stupidity" (Smith[1776/1961, II, 308])as a consequence
of thedivisionof labour.Natureherself is evidentlyto blamefortheexistence
ofa largeworking classthat,brutalised and irrational, can easilyprovea threat
to thestabilityof thewhole.

That is, "unlessgovernment takessomepains to preventit" (Smith[1776/

1961,II, 303]) - unlesstheState,in otherwords,deliberately seeksto tinker
withtheautomaticity of eventsthroughtheprovisionof the "mostessential
partsofeducation"to "thosewhoarebredto thelowestoccupations"(p. 305).
Sucheducationwillnotovercomethealienatingeffects of over-concentration,
butitwillpossiblyraisetheproductivity oftheoperative(as wherehe is taught
"to read,write,and account"(p. 305),and also (p. 306) "theelementary parts
of geometry and mechanics")and it willprobablyrendertheworkman"less
liable... to thedelusionsofenthusiasm and superstition" (p. 309),"less apt to
be misledinto any wantonor unnecessaryoppositionto the measuresof
government" (p. 309).Theseideologicalspillovers (reinforced, arguably, bythe
slightequalisationof opportunity associatedwiththemoderateinvestment in
skill)are ofvalue to thenationas a whole.The benefitbeingnon-specific, the
cost,Smithsaid,"may,therefore, withoutinjustice, be defrayed bythegeneral
contribution of thewholesociety"(p. 340). MurrayRothbardwas alwayson
his guardwhenthecollectivists of sui generisappealednot to theeach but to
theall·."Thereis no existingentitycalled 'society';thereare onlyinteracting
individuals."(Rothbard [1973/1978, 35]).In thecase ofSmithon educationhe
was in no doubt thatit was manipulationand propagandathatwas being
proposed.The Statewas beingmaderesponsible for"governmental education
inorderto inculcateobedienceto itamongthepopulace- scarcelya libertarian
or laissez-faire doctrine"(Rothbard [1995,466]).
Rothbardwas opposedto nationalisation: State-run schooling"requiresthe
of
imposition uniformity and the stamping out of diversity and individuality in
education"(Rothbard [1973/1978, 126]).Rothbard was in favour ofcompeti-
tion:thefreemarketthrowsup "a hostofdiverseschools... to meetthevaried
structure ofeducationaldemandsbyparentsand children"(p. 128). In respect
of educationfor the middleand the upperclasses, Smith'sprescription of
privateprovision,competitive choice was clearly in line with that of the later
libertarian.Particularly evocativeis his instanceof the Oxfordprofessors.
Prohibitedfromreceiving any "honoraryor fee"(Smith[1776/1961, II, 284])
fromtheirpupils,promiseda salaryforlifeirrespective of theirwork,someof
theprofessors had retreated intothe"exploded. . . [, the]antiquated. . . [, the]
useless. . . [and the]obsolete"(pp. 294 and 301) whileothers- the "greater
part"- had "givenup altogether eventhepretence ofteaching"(p. 284).Things
wouldbe different at Oxford,Smithreflected, if,consumerchoicerestored, the
incomesoftheteacherswere to be made dependent upon their abilityto attract
payingstudents. As withOxfordprivilege, moreover, so withthebasicprimary
- wherethe mastershould be "partly,but not whollypaid by the public;
because,ifhe was wholly,or evenprincipally paid byit,he wouldsoon learn
to neglecthisbusiness"(p. 306). In respectof Oxford,Smithwas a libertarian
and an antecedent ofRothbard.In respectofsecondary educationforthelower
classes,however,he was visiblymoreinterventionist. The teacherwas to be
partlypaid by the community. The syllabus was to be to some extentpre-

onMarket
andState 3ΊΊ
scribed.The authorities could legitimately offer"small premiums, and little

badges ofdistinction" to inspirethe "children of the common people" (p. 306)
to take theirlessonsseriously.The authorities could also, smallinducements
havingfailed,"imposeupon almostthewholebodyof thepeoplethenecessity
of acquiringthosemostessentialpartsof education"(p. 306). Subsidiesand
prizes,prescription and conscription - at one withSmithon Oxford,Rothbard
no doubtwishedthatSmithon theeducationof thelowerclasseshad had the
courageto trustin themarket.
In one area of publicpolicyat least,Smithand Rothbardwerein complete
agreement. Writing of incomemaintenance and welfare,Rothbardhad thisto
say about the relief
of destitution: "What, then, can thegovernment do to help
thepoor?The onlycorrectansweris also thelibertarian answer:Get outofthe
way."(Rothbard [1973/1978, 162]).It is a recommendation withwhichSmith
would not have wantedto take exception.SmithbarelymentionedthePoor
Laws. He evidently tooktheviewthatithad beenevenpoorerlawssuchas the
laws of settlement and apprenticeship which,impedingthemobilityoflabour,
preventing a "super-abundance" in one sub-market fromcomingto therelief
of a "scarcityof hands" (Smith[1776/1961,I, 157]) in another,had forced
self-respecting meninvoluntarily "to come upon theparish"(p. 151). A freer
labourmarketand a rapidlygrowingeconomyare themselves thebestformof
poor reliefpossible.The economyis fullyemployed- considerthe"hundred
thousandsoldiersand seamen"absorbedwith"no sensibledisorder"at theend
oftheSevenYearsWarin 1763(p. 492). Totaldemandis notlikelyto fallshort
- "Whatis annuallysavedis as regularly consumedas whatis annuallyspent,
and nearlyin thesametimetoo." (p. 359). Smithbelievedthattherewerejobs
forall who wantedto workand thatKeynes-type discretionary policieswere
notneededto generatetherequisiteopportunities. The poor,"beggingemploy-
ment"(p. 80), livedin China wheretheeconomicclimatehad frozenup. In a
post-mercantilist Britaintheable-bodiedwould be betterplaced to earntheir
welfareby meansof thequidpro quo.
The Marshallianresiduumremained,however,on the ouside lookingin.
Smithhad littleto say about the old-elderly, thementallyhandicapped,the
paraplegic. No doubt he was assumingthat,so frequently cared forin the
family,they would benefit at one remove from the dynamismof upgrading.
Besidesthat,risinglivingstandardswould make possiblethe translationof
innatebenevolenceintoprivatecharityin themannerthathe had emphasised
so stronglyin 1759: "The reliefand consolationof humanmiserydepend
altogetherupon our compassionfor . . the poor and the wretched."(Smith
[1759/1976, 225f.]).Wheneventhatfails,Smithhad written, thewidowsand
theorphanscouldalwaysconsolethemselves withthehopeofjusticein Heaven
and thedreamof the"lifeto come" (p. 91).
Thewidowsand theorphansaredirectedto stoicismand acceptance.Equally
in keepingwithSmithon benevolence - and on security - would,however,be
thealternative visionof a welfaregovernment thatfillsthevacuum.Smithin

1759 and 1776 could not have anticipatedthemiseryof theearlynineteenth

century.Faced withtheurbanisation, theover-crowding, thedisease,theunem-
the
ployment, hunger, the child labour, itwould havebeenentirelyin character
forthepragmatic interventionist to havetreatedtheDickensianimperatives of
the IndustrialRevolutionas the analogueto the partywalls thathad to be
regulated,thelower-classeducationthathad to be empowered.Laissez-faire
was not,afterall,generaland universal in Smith'spoliticaleconomy,butrather
theparticulardrugfora particulardisease.It would therefore be correctto
conclude,withJacobViner,thatTheWealthofNationswas inno smallmeasure
"a tractforthetimes,a specificattackon certaintypesofgovernment activity
whichSmithwas convinced,on botha prioriand empiricalgrounds,operated
againstnationalprosperity . . . Smith'sprimaryobjectivewas to securethe
terminationof theseactivitiesofgovernment . . . Everything
elsewas to a large
degreesecondary."(Viner [1928/1961,139]). Everything else was to a large
degreepossible.Includingthe welfareparishand the government that gets
involved.
6. PublicFinance
Smithestablishedtwoobjectivesforthescienceofpoliticaleconomy.The first
of theseconcernsrisingincomesper head of thepopulation- "to providea
plentifulrevenueor subsistence forthepeople,ormoreproperly to enablethem
to providesucha revenueor subsistence forthemselves."(Smith[1776/1961, 1,
449]). The secondrelatesto publicfinance- "to supplythestateor common-
wealthwitha revenuesufficient forthe public services"(p. 449). The latter
the
topic, subject of the presentsection,takesup almosta thirdof The Wealth
ofNations,mainlythroughBook V, thelongestof thefivecomponentbooks.
Thepage-count initselfis a reminderoftheextenttowhichSmith,thesuccessor
to Pettyand thecontemporary of Steuart,regardedhis workas a manualof
statecraft.
Rothbardrecognised thatpublicfinancewas effectively themirrorimageof
theprotective and productiveState: "Therehas ... been a greatamountof
uselesscontroversy about whichactivity ofgovernment imposestheburdenon
the privatesector: taxationor government spending.It is actuallyfutileto
separatethem,sincetheyare bothstagesin thesame processof burdenand
redistribution." (Rothbard [1962,II, 793]). RothbardacceptedthatAdam
Smithhad devotedconsiderableattentionboth to the plus side and to the
minus.He complained,however,that the resulthad simplynot repaidthe
investment. Withrespectto publicexpenditure, Smithhad madeno estimateof
the overallburden: "If, for example, as in thecase of Smith,thegovernment
is supposedto supplypublicworks,howmanyshoulditprovideand howmuch
shouldbe spent?Therehave been almostno preferred criteria."(Rothbard
[1995,469]). With to
respect public finance, moreover, Smithhad vacillated

betweenthe obvious and theincorrect:"Like the restof his work,it was a

confusedmixtureof thebanal and thefallacious."(p. 470). Rothbardis here
referring especiallyto thefourcentralmaximsaroundwhichSmithstructured
his theoryof tax. The firstmaximwrong,the othermaximsbland, it was
Rothbard'sviewthatall fourprinciples couldusefully be scrappedin favourof
thefollowing meta-principle which said it all: "Regardlessofpopularsanction
. . . Taxationis Robbery."(Rothbard [1973/1978, 24 and 25]). Convincingor
notto a libertarian suchas Rothbard,Smith'sfourcentralmaximsat anyrate
are as follows.
First,equality:"The subjectsofeverystateoughtto contribute towardsthe
support of the as as in
government, nearly possible, proportion to their
respec-
tiveabilities;thatis,in proportion to therevenuewhichtheyrespectively enjoy
undertheprotection oftheState.The expenceofgovernment to theindividuals
of a greatnation,is liketheexpenceof management to thejoint tenantsof a
greatestate,who are all obligedto contribute in proportion to theirrespective
interests in theestate."(Smith[1776/1961, II, 350]).
Smithwould seem here to be makingthe Lockean assumptionthat the
citizen'sstakein hiscountryis proportional to theproperty whichhe has and
wishesto protect.Confusingly, however,he accompanieshis reference to re-
spectiveinterests (thebenefits) withanother,quiteseparatereference to respec-
tiveabilities(thecosts).Musgrave,examining thedual criterion as presented in
themaxim,all butaccusesSmithofusingwordsto paperoverthecracks:"The
'thatis' clausenicelybegstheissuesinceifability-to-pay dependson income,
and incomeis earnedundertheprotection of theState,thetwoversionsmay
be said to yieldthesameresult."(Musgrave [1976,367]). Respectiveinterests
mightbe in excessof respective abilities:thiswouldbe thecase whereperson
or reputation wereabnormally at riskbutwherenetworthweremodest.Also,
thestockofproperty mightnotbe a good proxyforability-to-pay : therevenues
of thetradition-bound landownerwillbe less in proportionto his estatethan
willbe thereturns ofthemaximising merchant to an equivalentcapital.Smith
would presumably have treatedsuch occurrences as exceptionsand merecu-
riosa.To himit was theinterchangeability of thethatis thatwas expectedto
be therule.
Smith'sfirstmaximwas proportionalsacrifice.One illustration of its use
would be his observationconcerningtaxes on consumablesthat theyre-
distribute wealthin defianceofneutrality : "Theydo notalwaysfallequallyor
proportionately upon therevenueof everyindividual."(Smith[1776/1961, II,
426]).Proportional sacrificewas apparently notforall seasons,however,since
Smithin someplaces actuallywelcomeda risingscale as equitableand good:
"It is not veryunreasonablethat the rich should contributeto the public
expence,notonlyin proportionto theirrevenue,butsomething morethanin
thatproportion."(p. 368). Smithis hererecommending the introduction of
highertax-ratesforlargerhousesforthesimplereasonthatlargerhousesare
occupiedby wealthiertenants.He goes even further whenhe calls for the

impositionof discriminatory tolls(cross-subsidising thetransportation of ne-

of
cessities)upon "carriages luxury": in thisway "the indolence and vanityof
therichis made to contribute in a veryeasymannerto thereliefof thepoor"
(p. 246). The case oftheturnpike tollsshowsthatSmithwas preparednotonly
to bash therichbut to bash theirrevealedpreferences as well.His attackon
luxury, indolence and vanity - ascetic,Calvinistand judgmentalin its thrust-
impliesa philosophical standardwhichidentifies fairness withfunction and not
witheven-handedness. It is thesame criterion whichled Smithto defendthe
UsuryLaws lesttheidlewasteon frivolities thecapitalthattheparsimonious
wouldhavecommitted to productive labour.The criterion is growth- butthe
maximis equality.The twoconsiderations need not yieldthesame result.
Second,certainty: "The tax whicheach individualis boundto pay oughtto
be certain,and not arbitrary."(Smith[1776/1961, II, 350]). Smith'ssecond
maximoftaxationis an argument forimpersonal assessment, a rejectionofthe
"insolence"as wellas the"corruption" (p. 351)and the"powerofthetax-gath-
erer"(p. 350),whichhad so oftenmadefiscalpolicyso randomand so unjust.
Smith'ssecond maximis a call for impartialrule-enforcement in place of
administrative discretion. It is hardto believethatanyonebutthebribableand
theevasion-minded could objectto that.
Third,convenience:"Everytax oughtto be leviedat the time,or in the
manner,in whichit is mostlikelyto be convenient forthecontributor to pay
it." (Smith[1776/1961, II, 351]). It is convenient fortaxes on rents to become
payableaftertherentsthemselves havedulybeencollected.It is convenient for
taxeson consumablesto be demandedat thetimewhentheshopperproceeds
withthepurchase.It is inconvenient, on theotherhand,forthetax-billto arrive
beforecash-flow has generated thewherewithal forsettlement. Stoneshaveno
blood to spare fordonation.Tax-inspectors - banal but true- should not
demandtheimpossiblefromtheircharges.
Fourth,economyin collection:"Everytax oughtto be so contrived as both
to takeoutand to keepoutofthepocketsofthepeopleas littleas possible,over
and above whatit bringsintothepublictreasury of thestate."(Smith[1776/
1961,II, 351]). Smithis hereconcernedthattimeshouldnot be wasted"by
subjectingthe people to the frequentvisitsand odious examinationof the
tax-gatherers" (p. 352); that no obstructionto industryshould resultthat
wouldcost"greatmultitudes" their"maintenance and employment" (p. 351);
and,ofcourse,thatso manytax-collectors shouldnotbe setto workas would
"eat up thegreaterpartoftheproduceofthetax" (p. 351). The threatfromthe
transaction costobviouslylimitstheextentto whichtaxescan be madepropor-
tionalto the ability-to-pay. In thatsensetherewould seem to be a tension
betweenSmith'sfourthmaximof taxationand his first.
The fourmaximsare,ofcourse,separateand discrete. Smithdoesnotseeany
needto integrate his principles, to resolvethetensionsor to specifytheideal.
The result,as Alan Peacockhas pointedout,is a classificatory schemabutnot
a programme or a mix:"Whatis noticeably missing from his exposition is any

onMarket
andState 381
attemptto weighttheimportance of each maxim,so thatno finalconclusion

is drawneitherabouttherelativemeritsofdifferent formsoftaxationor about
the'package of taxes'whichwould bestaccordwithSmith'sown normative
propositions."(Peacock [1975,562]).Nor shouldit be supposedthatSmith's
fourmaximsnecessarily exhausttherelevantconsiderations. Referring specifi-
cally to Smith's surprising neglectbothof revenuemaximisation and of polit-
ical acceptability, Stiglerhas concludedthata Chancellorof the Exchequer
wouldbe hard-pressed to findwhatheneededinSmith'sfourrules:"Theyform
a whollyinadequatebasis forjudgingindividualtaxes."(Stigler [1971,130]).
Smithhimself, didnotstopshortat thefour.Fourmaximswere
interestingly,
made explicit.The fifth is onlyidentifiable fromtheshadowon thewall. The
fifthis engineered reallocation.Directive, manipulative, unfree, Smith'simplied
fifthmaximconfirmsRothbard'ssuspicionsthat public financecan easily
degenerate intopublicshepherding.
Smithwas preparedto see taxes leviednot only to generatefinancefor
defence, justiceand publicworksbutalso to containcertainchoices,to stimu-
late others.The taxationof alcohol illustrates thescope fordiscouragement.
The taxationof rentillustrates thecontribution of theconstructive hand up.
In thecase of alcoholicdrink,Smithsupporteda tax to restrict thenumber
ofoutlets:"It mayto manypeopleappearnotimproperto givesomediscour-
agementto themultiplication oflittlealehouses."(Smith[1776/1961, II, 380]).
Different ratesof taxcould simultaneously be introducedin orderto skewthe
micro-choices withinthe framework of thewhole: "Spirituousliquorsmight
remainas dearas ever;whileat thesametimethewholesomeand invigorating
liquorsof beerand ale mightbe considerably reducedin theirprice."(p. 422).
Smithknewthatthemarkethad reacheda decisionconcerning theconsump-
tionof thecommodity. Preferring a tax to a prohibition,he was proposinga
revisionoftheincentive-structure in orderto inducethemarketto thinkagain.
The taxationof rentis an instanceof paternalism not to reducebut rather
to expand.An abatementcould be offeredto an improving landownerwho
reinvestedhis rentin drainsand manuresor even moved into cultivation
himself:"His capitalis generally greaterthanthatof thetenant. . . The land-
lordcan affordto tryexperiments" (Smith[1776/1961, II, 357]). The rentin
kindcould be taxedat a higherratethantherentin moneyin orderto price
outa practicewhichdeprivedfarmers oftheirproductivity-boosting surplus:in
thisway"a practicewhichis hurtful to thewholecommunity mightperhapsbe
sufficientlydiscouraged"(p. 357). A rentrisein place ofan evengreaterlump-
sumfineuponrenewalofleasecouldbe mademoreattractive bya two-tier tax
thatpenalisedthelattersystem, so littlecompatiblewithinvestment and activ-
ity:"By rendering thetax upon suchfinesa good deal heavierthanupon the
ordinaryrent,thishurtful practicemightbe discouraged."(p. 356).
All taxationofrent,moregenerally, is at theend of theday a burdenon the
landowner.The windfall natureofthedemand-ledsurplusmakessuchtaxation
at oncelegitimate and welcome:"A taxuponground-rates wouldnotraisethe

382 David Α. Reisman JITE
rentsof houses.It would fallaltogether upon theownerof theground-rent,

whoactsalwaysas a monopolist, and exactsthegreatestrentwhichcan be got
fortheuse of hisground."(Smith[1776/1961, II, 370]). Discriminatory treat-
mentwould be a violationboth of equalityas proportionality (Smith'sfirst
maxim)and ofjusticeas impartiality (Smith'spromiseof protection). On the
otherhand,"no discouragement willtherebybe givento anysortofindustry"
(p. 370) and thewealthof nationscountsabove thefrivolity of theindolent.
The landownerwillclaimthathe is beingmuggedbytheStateforno better
reason than the factthathe "shudderswithhorrorat the thoughtof any
situationwhichdemandsthecontinualand longexertionofpatience,industry,
fortitude,and applicationof thought"(Smith[1759/1976, 56]). Rothbardwill
cometo thedefenceofthisresoluteindividualist, victimised byhisgovernment
because he has no wishto play withthe team. Smith,however,will be less
permissive,lesspreparedto "Open theflood-gates" to an equilibrium thatis a
waste.Smithsaw marketand Stateas alternative routes,as competing means
and notas absoluteends.Rothbardwouldreplythatwithfriends likeSmiththe
marketneed have no fearof thesocial democratsat thedoor.
References
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-- [1976],"PublicGoods and NaturalLiberty,"pp. 271-286 in: T. Wilsonand A. S.
Skinner(eds.), TheMarketandtheState: EssaysinHonourofAdamSmith,Claren-
don Press:Oxford.
Coats, A. W. [1975],"Adam Smithand theMercantileSystem,"pp. 218-236 in: A. S.
Skinnerand T. Wilson(eds.),Essayson AdamSmith,ClarendonPress:Oxford.
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Reprinted in: JohnC. Wood (ed.), 1984,AdamSmith:CriticalAssessments, Vol.I,
CroomHelm: London,pp. 530-545.
Hayek, F. A. [1988],TheFatal Conceit,Routledge:London.
Locke,I [1690],SecondTreatiseonCivilGovernment. Reprintedin: E. Barker(ed.), 1947,
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Mache, A. L. [1967], The MoralJustification ofFreeEnterprise: A Lay Sermonon an
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London,pp. 342-350.
Musgrave,R. A. [1976],"Adam Smithon PublicFinanceand Distribution," pp. 296-
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Peacock, A. [1975],"The Treatment of thePrinciplesofPublicFinancein The Wealth
of Nations',"pp. 553-567 in: A. S. Skinnerand T. Wilson(eds.), Essayson Adam
Smith,ClarendonPress:Oxford.
Rae, J.[1895/1965], LifeofAdamSmith,AugustusM. Kelley:New York.
Rothbard,M. N. [1962],Man, Economy, andState: A TreatiseonEconomicPrinciples,
Van Nostrand:Princeton, NJ.
-- [1973/1978], For a NewLiberty, LibertarianReviewFoundation:New York.
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Thought, I, Edward Elgar: Aldershot,United Kingdom.

154/2(1998) AdamSmithon Marketand State 383
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Reprinted in: JohnC. Wood (ed.), 1984,AdamSmith:CriticalAssessments, Vol. I,
CroomHelm: London,pp. 698-714.
Skinner,A. S. [1996],A SystemofSocial Science:PapersRelatingto AdamSmith,2nd
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and A. L. Macfie,ClarendonPress:Oxford.
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reprinteditedbyR. L. Meek,D. D. Raphael
and P. G. Stein,ClarendonPress:Oxford.
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David A. Reisman
Professor
DepartmentofEconomics
SchoolofHumanSciences
University
of Surrey
Guildford
SurreyGU2 5XH
UnitedKingdom


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Adam Smith on Market and State

Author(s): David A. Reisman

This content downloaded from 144.173.223.62 on Mon, 2 Dec 2013 04:51:48 AM

AdamSmithwas nota single-minded marketinwhich

RothbardbelievedthatSmith,at best "a plodderin tunewiththeZeitgeist"

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processhe had made himself nothingless than"a necessaryprecursorof Karl

As earlyas 1755 the youngAdam Smithwas declaringa preference forthe

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as he does notviolatethelawsofjustice,is leftperfectly freeto pursuehisown

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the"unremitting exertionof vigilanceand attention"- he warned- "cannot

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was his convictionthatthe freeenterprise systemwas fullyin line withthe

Smithwas friendlyto themarket.Smithwas criticaloftheState.The previous

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455]); and the outcomehad been counterproductive enactmentsleadingto

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ministers in thatcountryshouldtherefore contribute to thewealthof nations

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Mismanagement is, however,no less to be expectedfromprivate-sector

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uals haveends,and can act to attainthem.Thereare no suchthingsas endsor

Adam Smithbelievedin naturalliberty. It was naturalliberty,he said,thathad

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standingarmyitselfand theeconomicpolicythatcouldbe shownto backitup.

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brewer,or thebaker,thatwe expectour dinner,butfromtheirregardto their

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individuals, a bondofunionand friendship" (Smith[1776/1961, 1,519]).Inter-

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sociableproclivities ofcompassion,generosity and fellow-feelingwouldalways

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[1776/1961, 1,493]). Freedomof trademeansthatScottishresourcesneednot

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riseto thechallenge.The buildersand thebankswillbe drawnbyan invisible

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[1776/1961, 1,80]),areforcedto dineoff"anycarrion,thecarcaseofa dead dog

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afford"a revenueto thesovereign"(Smith[1776/1961, II, 172]).At theendof

Overand above theprotective functionsofdefenceandjustice,Smithassigned

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Smith'sneveris evenmoreof a problemin thecase of theRoyal Mintand

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That is, "unlessgovernment takessomepains to preventit" (Smith[1776/

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scribed.The authorities could legitimately offer"small premiums, and little

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1759 and 1776 could not have anticipatedthemiseryof theearlynineteenth

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betweenthe obvious and theincorrect:"Like the restof his work,it was a

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impositionof discriminatory tolls(cross-subsidising thetransportation of ne-

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attemptto weighttheimportance of each maxim,so thatno finalconclusion

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rentsof houses.It would fallaltogether upon theownerof theground-rent,

Buchanan, J.M. [1975],TheLimitsofLiberty, Universityof ChicagoPress:Chicago.

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Samuels,W.J.[1977],"The PoliticalEconomyofAdamSmith,"Ethics,87(1), 189-207.

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