ADAM SMITH AND ECONOMIC POLICY

Smith's theoretical model and his attitudes towards policy questions were part of a single package. He regarded economic growth as the basic goal, the desirability of which was beyond dispute.

When judged by these criteria, the mercantilist pattern of state regulation and control -

which Smith saw as an expression of privilege and favouritism - was clearly objectionable. Its net effect, in his view, was to thwart the widening of the market and to divert economic activity from its natural course. For that matter virtually all government intervention - apart from the discharge of such essential functions as the maintenance of law and order, the administration of justice, and provision for national defence - was suspect. Governments were as misguided when they legislated to protect the poor as when they favoured the rich with royal charters and monopolistic privileges. Smith's attack on poor relief did not spring, however, from lack of sympathy with the plight of the less fortunate. Instead he argued that the administration of the existing Poor Laws, which called for residence within a particular parish as a condition of eligibility for benefits, restricted the mobility of labour and thereby suppressed the rate of economic growth.

Though Smith aimed much of his fire at the 'mercantile system', his argument fell short of the level of analytical sophistication reached earlier by his friend, David Hume. In the 1760s Hume had attacked mercantilism by invoking a theory linking the general level of prices to the quantity of money. The larger the supply of money, he had argued, the higher the price level was likely to rise; higher prices, in turn, would tend to make exports less competitive in foreign markets and imports more competitive in home markets.

Within the framework of his analytical system, Smith could quite consistently oppose many of the practices of European governments. But it did not follow directly from this part of his analysis that a regime of laissez-faire led to the best of all possible worlds. As he himself had recognized, unregulated private interests - fully as much as governments - might behave in ways that would suppress the progress of improvement.

How was this difficulty to be resolved? Smith's solution, though largely left implicit in his writing, amounted to the view that economic growth and a competitive order were mutually reinforcing. His case against mercantilism rested on the assumption that competition maximized growth. But effective competition could only be taken for granted in an atmosphere of economic expansion. The progress of improvement thus took on an instrumental as well as an intrinsic value; it was the essential catalytic agent for the conversion of potential discord into harmony and the solvent to the barriers to effective competition.

needed to neutralize the power of capitalists to take advantage of unorganized workers. If competition was desirable as a spur to growth, economic expansion was no less important to the promotion of effective competition.

The happy results that Smith saw from an expanding competitive society involved yet another assumption: that the benefits of growth would be shared by all orders of society. Smith himself, as we have seen, was generally confident that this would be the case. But at least some parts of his argument could later be interpreted as suggesting that difficulties might lie ahead. Improvements in real wages for members of the working class might, of course, be offset by subsequent population growth; further, the redistribution of incomes between the various income shares to the net advantage of landowners might also give rise to complications. These themes can be heard in The Wealth of Nations but only in muted tones.

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