Political Economy: Policy
Smith is famous for at least supposedly being a thoroughgoing advocate of an economic- liberal policy regime, aimed at minimizing the role of the state and its involvements or interventions in economic life and activity.
Indeed, that liberal temper is nicely captured in his prescriptive definition of political economy:PoLiTiCAL (economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects; first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the publick services. It proposes to enrich both the people and the sovereign. (WA: IV.1)
Notice the two asymmetries here, in relation to the people versus the state: plenty for the former but just sufficiency for the latter; and rather than providing for the people, enabling them “to provide... for themselves”, whereas the state is implicitly treated as unable to so self-provide. Smith’s notion of the “unproductive” character of government activity and labour ultimately rests upon a conception of the public sector as, largely, if not quite entirely, not producing capital in Smith’s sense but merely using up as inputs commodities produced by the private sector (Aspromourgos 2009: 166-9). At another level, at least some part of the infrastructure of government, notably, that required for ensuring property rights, is essential to the very existence of liberal capitalism (not his term) or “commercial society”, and orderly private economic activity. Smith, the historian and theorist of property rights in the lectures on jurisprudence was by no means oblivious to that fact.
Hence WA is not merely a work of economic theory in the contemporary sense, though Smith certainly is self-consciously utilizing political economy understood as a system of “theory” in the book (Aspromourgos 2009: 10-17, 238-40).
WN is also a vigorous, sustained and polemical critique of “the policy of Europe” or “the mercantile system” (WN: I.x.b.8, II.v.37, IV.viii.46-IV.ix.3) understood as systems of government regulation which constrain the liberty of the owners of labour, produced means of production and land, and hence, obstruct the free mobility between alternative uses of these potentially productive inputs, or which discriminate in their treatment of different economic activities. “Mercantilism” is the shorthand which has come down to us to characterize the object of Smith’s attack, and it is an expression of his success that this term remains in common use. However, it may be emphasized that restrictive or discriminatory policy with respect to imports, exports and international financial flows (the usual latter-day sense of mercantilism) is by no means the whole target. For example, legal restrictions on entry to professions and trades, and other restrictions on the liberty of workers to choose both location and occupation of work, are important considerations in Smith’s critique.The underlying theoretical position supporting this general policy stance is that economic activity levels and growth depend upon the overall quantity of capital advanced in production and the rate of overall capital accumulation over time; and that restrictive and discriminatory policies cannot favourably influence these, but rather, will serve only to reduce overall value added or output growth. However, as mentioned above in the context of Smith’s theory of growth, there is nothing in that theory to ensure that capital utilization and capital accumulation are not constrained by the level of the demand for the outputs of the capital stock (for a fuller account of this issue, see Aspromourgos 2009: 205-9, 214-18, 223-5). The later divide between marginalist orthodoxy and Keynes, as to whether economic activity levels and growth are supply-determined or demand-determined, is relevant here. These later contending theoretical approaches both have something Smith lacks: a theory of the coordination of saving and investment at the system level, in a decentralized economy.
In any case, while Smith certainly has a general presumption in favour of economic liberalism, in WN he in fact allows what add up to a very considerable number of exceptions to that general rule. These are comprehensively detailed in Aspromourgos (2009: 225-8), following the lead given by Viner (1927) and Skinner (1996: 183-208), and include, for example: sumptuary laws; restriction of paper money and credit; product quality validation; legal prohibition of wage payments in kind rather than money; laws obliging private owners to cultivate their land, at pain of forfeiture; preventative public health policies; and allowance that government can successfully run commercial enterprises (postal services being the best example). Smith even makes some mild recommendations in favour of progressive taxation (WN: V.i.d.5; V.ii.b.6n; V.ii.e.6). More generally and more fundamentally, in book V, chapter i of WN he examines the three legitimate roles (“duties”) of government, in enforcement of justice, external defence and public works (WN: IV.ix.51-2), the latter in particular involving transport infrastructure and education.
In relation to the second of these, there also arises a further notable exception to thoroughgoing economic liberalism: the requirements for external defence must prevail over economic freedom if the two come into conflict; hence Smith’s support for navigation acts that protect the nation’s naval capacity (WN: IV.ii.30). But the first two duties do not, in and of themselves, constitute government “intervention” in the conventional sense. In truth, they amount to something more fundamental: the provision of the legal and enforcement infrastructure to enable the very existence of “private” economic activity via individual liberty and secure property rights, pointing to the fact that the “system of liberty”, however “natural” (WN: IV.vii.c.44, IV.ix.51), is not a spontaneously self-creating order. (That which is “private” - beyond the intrusion of the state - is defined by the state or by law.) Provision of this infrastructure also requires taxation, which is effectively a form of restriction upon private property rights.
In relation to the third duty, Smith also endorses compulsory education (WN: V.i.f.57). There is one particular aspect of the role of education which is further revealing of the rather nuanced character of his stance towards liberal capitalism or “commercial society”, as against mere unqualified endorsement of the system. In the opening chapters of WN, division of labour appears as the vehicle for ongoing technical progress and rising labour productivity. Together with free competition and the high capital accumulation that Smith expects to occur in competitive commercial society, these dynamics are predicted to generate high, rising and widely distributed consumption per capita, an outcome he strongly favours (Aspromourgos 2009: 205-14) - though this is consistent with real wages growing less rapidly than labour productivity and so, rising inequality (edWN: 567). But in book V of WN (V.i.f.50-61) it is argued that this labour specialization, in rendering labourers machine-like, greatly degrades their minds and their sensibilities. Education is Smith’s suggested solution for this problem. Whether or not that response may be regarded as adequate, by so fully acknowledging this negative consequence of a central dynamic in his conception of liberal capitalism, Smith strikingly evidences that he is not an ideologue. An ideologue or mere apologist for liberal capitalism would suppress or downplay such uncomfortable consequences.
However extensive in Smith’s political economy the roles of government and the exceptions to strict non-interventionism may be, he is an economic liberal. That is his general policy presumption. But at a deeper level, concerning the relation between theory and practice, Smith is very self-consciously a moderate in his view of how theory should inform policy. He does not embrace the conclusion that policy should be a mere straightforward application of right theory; correct policy is not necessarily a simple embodiment of the ideal. He pursues this line of thought consciously, and at many points in his writings; so much so, that one may say Smith has the rudiments of a kind of meta-theory of the relation between theory and practice.
The moderateness, the aversion to intellectual and political zealotry, is not merely an instinct of temperament on Smith’s part; it is a thought out, reasoned conclusion. His science of political economy is certainly for the service of legislation or policy. But Smith takes the view that the authentic legislator will exercise prudence, particularly by way of taking into account the history and situation of the particular nation under policy consideration. He firmly repudiates engineering society on the mere basis of theoretical reasoning or principles, even sound theory, without attention to the concrete situation and the history from which that situation has arisen (for detailed textual exegesis, see Aspromourgos 2009: 241-7). This temper is bolstered by a certain confidence in human nature, even under imperfect policy regimes:in the political body, the natural effort which every man is continually making to better his own condition, is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political (economy, in some degree, both partial and oppressive. Such a political reconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. (WN: IV.ix.28)