Adam Smith laissez faire theory

July 20, 2015
Laissez-faire 1920s

You only have to turn over a British twenty pound note, to see arguably one of the most influential philosophers of all times, Adam Smith. Smith formulated one of the most crucial social sciences in understanding human interactions – economics – in his renowned book ‘The Wealth of Nations’. The book is considered his magnum opus and earned Smith a massive contemporary reputation as well as a legacy as ‘the father of modern economics’, and has often been labelled the first advocate of laissez-faire capitalism. His association with laissez-faire economics is so strongly believed that a British think tank that espouses laissez-faire views is named after him – The Adam Smith Institute. However, Smith’s reputation as an advocate of laissez-faire capitalism has caused debate over whether this is an overstated misreading of his philosophy. The purpose of this article is to look at how persuasive the view that Smith was not a laissez-faire advocate is.

Firstly, it would be helpful to define the term laissez-faire economics before we can assess whether or not Smith was an advocate of such a system. Laissez-faire economics is an economic system in which there is a competitive market economy where prices are determined by supply and demand. The economy is ‘free of any government intervention’ in the strictest sense – government’s sole duty is to protect property rights. The market therefore is left to work off the principle of market forces to self-regulate, which is, undeniably, a Smithian idea. Laissez-Faire Economics

Smith saw the idea of self-regulating markets as working through an invisible hand. For Smith, the invisible hand was a metaphor to describe the free-market as a social mechanism that channelled ambition towards meeting the needs of society, even if the ambitious had no benevolent intentions. However, it is important to note that he only used the term three times in his writings. Many economists have jumped on the bandwagon in over emphasizing Smith’s belief in the invisible hand and argue, incorrectly, this was the main idea within ‘The Wealth of Nations’- it was not. The central purpose of ‘The Wealth of Nations’ was to criticise mercantilism and to argue that a nation’s wealth should be judged not by its store of bullion but by the total production of specialised commerce. It would appear that the idea Smith’s invisible hand is grounded in support of such a laissez-faire economy – a term never actually used by Smith – has been overstated.

Most free-market economists will fight strongly against any sort of taxation, especially a progressive taxation which they often dismiss as at best ‘interventionist’, at worst ‘socialist’. It is therefore interesting to note of Smith’s support for citizens paying taxation: “The subjects of every state ought to contribute towards the support of the government.”
Smith even proudly boasted that: “Every tax, however, is, to the person who pays it, a badge, not of slavery, but of liberty.” Which is rather odd for a man often labelled as the ‘father of the free-market’, when most modern free-market thinkers believe taxation to be a form of state violence and outright theft.

Some free-market advocates may compromise at a flat rate of taxation yet, in two places in the ‘Wealth of Nation’s Smith vigorously defends a progressive system of income taxation:

“[taxation should be contributed] in proportion to the revenue which they respectively enjoy under the protection of the state.”

“The rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

Specifically naming taxes that he thought should be required by the state further supports the idea that Smith saw some intrinsic economic benefit of taxation; amongst his listed taxes were a luxury goods taxes and tax on rent. He believed that tax laws should be as transparent as possible and that each individual should pay a “certain amount, and not arbitrary”.

As a free-marketeer, we would assume Smith would be totally opposed to any sort of government intervention. Granted, Smith viewed government intervention in the market with great scepticism, yet he was prepared to accept intervention in the specific cases where he judged intervention would be most beneficial and not undermine the otherwise free operation of the system. Additionally, Smith even outlined the proper expenses of the government including:

  • Enforce contracts and provide justice system
  • Grant patents and copyrights
  • Provide public goods
  • Provide national defence
  • Regulate banking

Smith, however, went as far as to favour direct state provision of certain services. He argued it was the role of the government to provide goods: “of such a nature that the profit could never repay the expense to any individual”, leading Smith to support public education and religious institutions as they providing general benefit to the society beyond the reach of the market.
Perhaps yet more damaging to Smith’s free-market reputation is his belief that a government monopoly should subsidise newly formed industry. That said, he did fear that as new businesses grew they would be unwilling to surrender the government help that was, ultimately, anti-competitive and against his idea of a market economy.

Spiegel

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