prior probability

“The institutions for the instruction of people of all ages are chiefly those for religious instruction. This is a species of instruction of which the object is not so much to render the people good citizens in this world, as to prepare them for another and a better world in a life to come.” (WN, V.i.g.1; my emphasis)

Adam Smith turns to the most contentious and controversial topic of his day in the third and last major subsection (“Article 3”; available here) of Part 3 of Chapter 1 of Book V of his magnum opus. Although Article 3 is titled “Of the Expense of the Institutions for the Instruction of People of all Ages” (WN, V.i.g), these institutions (plural in Smith’s subtitle) boil down to just one: religion.

So, what does Smith have to say about religion? It turns out the Scottish scholar has a lot of things to say — this chapter contains 42 paragraphs in all and spans 45 pages of the Glasgow edition of The Wealth of Nations — but for me the most original and important thing Smith says is this: the market for religion should be just as free as the market for goods and services — in other words, not just free markets, but also free minds! — or in the immortal words of Adam Smith:

“But if politics had never called in the aid of religion, had the conquering party never adopted the tenets of one sect more than those of another when it had gained the victory, it would probably have dealt equally and impartially with all the different sects, and have allowed every man to choose his own priest and his own religion as he thought proper. There would in this case, no doubt’ have been a great multitude of religious sects. Almost every different congregation might probably have made a little sect by itself, or have entertained some peculiar tenets of its own.” (WN, V.i.g.8)

In other words, let a thousand religious sects bloom:

“But though this equality of treatment should not be productive of this good temper and moderation in all, or even in the greater part of the religious sects of a particular country; yet provided those sects were sufficiently numerous, and each of them consequently too small to disturb the public tranquillity, the excessive zeal of each for its particular tenets could not well be productive of any very harmful effects, but, on the contrary, of several good ones: and if the government was perfectly decided both to let them all alone, and to oblige them all to let alone one another, there is little danger that they would not of their own accord subdivide themselves fast enough so as soon to become sufficiently numerous.” (WN, V.i.g.9)

For Smith, the more religious sects the better because the more sects there are, the less likely any one religion will be able to dominate the others! Historically speaking, however, “Times of violent religious controversy have generally been times of equally violent political faction.” (WN, V.i.g.7; my emphasis) Why? Because politics and religion have always been closely connected: “… each political party has either found it, or imagined it, for its interest to league itself with some one or other of the contending religious sects. But this could be done only by adopting, or at least by favouring, the tenets of that particular sect.” (ibid.)

In short, instead of allowing people the freedom to choose their own religion, governments have tended to join the religious fray, pick sides, and declare the victors the “established” or official church of the state — like the Anglican Church in England — thus putting an end to future religious strife be awarding the spoils in the form of permanent government subsidies to the victor! On this note, Smith includes an extended quotation from pp. 30-31 of Volume 3 of David Hume’s History of England (see WN, V.i.g.3-6) in which Hume sings the praises of “established” religions like the Anglican Church in England, but Hume’s song is a sardonic one:

“‘And in the end, the civil magistrate will find that he has dearly paid for his pretended frugality, in saving a fixed establishment for the priests; and that in reality the most decent and advantageous composition which he can make with the spiritual guides, is to bribe their indolence by assigning stated salaries to their profession, and rendering it superfluous for them to be farther active than merely to prevent their flock from straying in quest of new pastures. And in this manner ecclesiastical establishments, though commonly they arose at first from religious views, prove in the end advantageous to the political interests of society.'” (WN, V.i.g.6, quoting David Hume) [1]

Alas, the existence of an “established” or official church might be “advantageous to the political interests of society” by putting an end to sectarian violence and open religious warfare, but at the same time, Smith warns us against the perils of monopoly in the market for religion:

“… in general every religious sect, when it has once enjoyed for a century or two the security of a legal establishment, has found itself incapable of making any vigorous defence against any new sect which chose to attack its doctrine or discipline. Upon such occasions the advantage in point of learning and good writing may sometimes be on the side of the established church. But the arts of popularity, all the arts of gaining proselytes, are constantly on the side of its adversaries.” (WN, V.i.g.1)

In other words, when an established church enjoys a government monopoly in the market for religion, it will lose its zeal or spiritual energy over time and thus lose its original appeal to the masses. On this note, Smith specifically compares and contrasts the polished refinement of the clergy of such established religions with the entrepreneurial zeal of Catholic priests:

“The clergy of an established and well-endowed religion frequently become men of learning and elegance, who possess all the virtues of gentlemen, or which can recommend them to the esteem of gentlemen: but they are apt gradually to lose the qualities, both good and bad, which gave them authority and influence with the inferior ranks of people, and which had perhaps been the original causes of the success and establishment of their religion.” (WN, V.i.g.1)

By contrast:

“In the Church of Rome, the industry and zeal of the inferior clergy are kept more alive by the powerful motive of self-interest than perhaps in any established Protestant church. The parochial clergy derive, many of them, a very considerable part of their subsistence from the voluntary oblations of the people; a source of revenue which confession gives them many opportunities of improving. The mendicant orders derive their whole subsistence from such oblations. It is with them as with the hussars and light infantry of some armies; no plunder, no pay. The parochial clergy are like those teachers whose reward depends partly upon their salary, and partly upon the fees or honoraries which they get from their pupils, and these must always depend more or less upon their industry and reputation.” (WN, V.i.g.2; my emphasis)

In other words, incentives matter! The clergy of “established and well-endowed” religions are subsidized the government — they are the established or official religion of the state, after all! — so they get paid regardless of how compelling or boring their sermons are. A priest, by contrast, receives most of his remuneration from his parishioners, not from the government; so he has a powerful incentive to attend to the needs of his flock.

Although Adam Smith is a champion of religious liberty (including, presumably, the Humean freedom to choose no religion at all), he identifies one major downside of allowing people the freedom to choose their own religion. I will explore this religious-freedom trade off — as well as Smith’s proposed remedy — in my next two posts.

[1] As an aside, here Smith also refers to David Hume as “by far the most illustrious philosopher and historian of the present age” (WN, V.i.g.3) Given that Hume was considered by many people in Smith’s day to be a notorious atheist and “infidel”, Smith’s description of Hume as the “most illustrious” scholar of his time is itself quite revealing!

“For a very small expense the public can facilitate, can encourage and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education.” (WN, V.i.f.54, my emphasis)

Happy Pi Day 3.14! Did you attend a public school or a public university? If so, then you have Adam Smith to thank for that opportunity! To see why, let’s pick up where we last left off: Paragraph 50 of Article 2 of Part 3 of Chapter 1 of Book V of The Wealth of Nations. As we saw at the end of my previous Adam Smith post, Smith explores the dark side of the division of labor in that crucial paragraph. More specifically, he warns that specializing in simple, repetitive tasks can render workers as “stupid and ignorant as it is possible for a human creature to become.” (WN, V.i.f.50) So, what is to be done? For Smith, the answer is compulsory public education, a bold and radical proposal at the time.

To see just how bold and radical Smith’s proposal is, we must go back in time — to 1776, the year The Wealth of Nations was published — when child labor was a far more common practice than it is today. In Smith’s day, children as young as five years old performed daily household chores, such as planting, feeding livestock, or mending fences, while many others were apprenticed or worked as servants. In short, the children of the common people were expected to work; their labor was necessary for family survival. [1]

Smith, however, wants to separate little children — boys and girls! — away from the watchful of eye of their parents during most of the day. Worse yet, not only does Smith want to “impose” education on all children (WN, V.i.f.54) and thus deprive parents of the labor of their children; Smith also wants force these already hardscrabble and impoverished parents to pick up some of the tab for their children’s compulsory education:

“The public can facilitate [compulsory education] by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business.” (WN, V.i.f.55; my emphasis)

Talk about the road to serfdom, to borrow F. A. Hayek’s wolf-cry! Whatever happened to natural liberty, laissez-faire, and “free” markets? Why is Smith so willing to disrupt people’s lives by exempting education from market forces?

To appreciate the logic of Smith’s bold and radical proposal we must first, as Smith himself does, compare and contrast the educational opportunities of two groups of children in 1776: those of “people of some rank and fortune” and those of “the common people.” (WN, V.i.f.52-53) Smith’s verdict: the children of parents of “some rank and fortune” have many opportunities to further their education, while the children of “the common people” have none:

“[The children of the common people] have little time to spare for education. Their parents can scarce afford to maintain them even in infancy. As soon as they are able to work they must apply to some trade by which they can earn their subsistence. That trade, too, is generally so simple and uniform as to give little exercise to the understanding, while, at the same time, their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even to think of, anything else.” (WN, V.i.f.53)

To remedy this educational asymmetry and counteract the dark side of the division of labor, Smith makes his bold and radical proposal. In Smith’s ideal world, not only would there be a “little school” in “every parish” (WN, V.i.f.55); parents would also be forced(!) to send their children to these schools during daylight hours, and furthermore, his proposed system of nation-wide education would be subsidized “partly” (ibid.) by the government.

But how does the Scottish philosopher justify this unprecedented (in Smith’s day) expansion in the role of government? What is so special about education? Simply put, as we have seen many times already, Smith is a pragmatist, not an ideologue. It looks like he has carefully weighed both the social benefits against the private costs of compulsory public education, and for Smith the benefits to society outweigh the costs to individual parents:

“A man without the proper use of the intellectual faculties of a man, is, if possible, more contemptible than even a coward, and seems to be mutilated and deformed in a still more essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people, besides, are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it.” (WN, V.i.f.55; my emphasis)

In other words, if we subsidize a “little school” in every parish for the common people and make education compulsory, we are not taking the road to serfdom; instead, compulsory public education is the road to freedom, for an educated people will be less likely to place their trust in dangerous demagogues like a Donald Trump or a Bernie Sanders. For Smith, education is one of the most important public works of all. Why? Because education is essential for liberty.

Nota bene: I will proceed to Article 3 of Part 3 of Chapter 1 of Book V on Monday, 16 March.

[1] See, e.g., Michael Schuman, “History of child labor in the United States—part 1: little children working”, Monthly Labor Review, U.S. Bureau of Labor Statistics (January 2017), https://doi.org/10.21916/mlr.2017.1

“In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.” (WN, V.i.f.8)

If Adam Smith were alive today, what would he have to say about academic tenure, i.e. the practice in higher ed by which a small group of privileged professors are provided lifetime appointments, protecting them from being fired without just cause? Is tenure a necessary evil to promote academic freedom, or is it just another protectionist pretext to limit free competition and inflate consumer prices?

We now turn to Articles 2 & 3 of Part 3 of Chapter 1 of Book V of The Wealth of Nations (WN, V.i.f-g). By way of background, all three subsections of this part of Smith’s magnum opus are devoted to the third duty of government — public works and institutions — but Article 2 deals with the education of youth, while Article 3 explores the education of adults. More importantly, it is here — in both Articles 2 & 3 of Part 3 of Chapter 1 of Book V — that Adam Smith reveals himself to be not only a champion and a critic of education but also a populist of sorts, for he includes “the education of the common people” as one of the three duties of government. (WN, V.i.f.52) [1] But before we explore Smith’s populist side, I want to single out five passages in particular from the first 50 paragraphs in Article 2:

1. In praise of competition. What motivates men to accomplish great things? Smith begins this section with a general observation about the incentive effects of competition:

“In every profession, the exertion of the greater part of those who exercise it is always in proportion to the necessity they are under of making that exertion. This necessity is greatest with those to whom the emoluments of their profession are the only source from which they expect their fortune, or even their ordinary revenue and subsistence. In order to acquire this fortune, or even to get this subsistence, they must, in the course of a year, execute a certain quantity of work of a known value; and, where the competition is free, the rivalship of competitors, who are all endeavouring to justle one another out of employment, obliges every man to endeavour to execute his work with a certain degree of exactness. The greatness of the objects which are to be acquired by success in some particular professions may, no doubt, sometimes animate the exertion of a few men of extraordinary spirit and ambition. Great objects, however, are evidently not necessary in order to occasion the greatest exertions. Rivalship and emulation render excellency, even in mean professions, an object of ambition, and frequently occasion the very greatest exertions. Great objects, on the contrary, alone and unsupported by the necessity of application, have seldom been sufficient to occasion any considerable exertion. In England, success in the profession of the law leads to some very great objects of ambition; and yet how few men, born to easy fortunes, have ever in this country been eminent in that profession!” (WN, V.i.f.4)

Before proceeding, notice the punctuation at the end of this crucial paragraph. It one of only nine exclamation points in Smith’s entire magnum opus.

2. Sophistry and speculation. Smith compares and contrasts the wisdom and sophism of the ancients: “The ancient Greek philosophy was divided into three great branches; [A] physics, or natural philosophy; [B] ethics, or moral philosophy; and [C] logic.” (WN, V.i.f.23) But at the same time, although “[t]his general division seems perfectly agreeable to the nature of things” (ibid.), Smith also notes how no less than two of these three branches of ancient education — natural and moral philosophy — are consist mostly of gross sophistry and unfounded speculation:

“Different authors gave different systems both of natural and moral philosophy. But the arguments by which they supported those different systems, for from being always demonstrations, were frequently at best but very slender probabilities, and sometimes mere sophisms, which had no other foundation but the inaccuracy and ambiguity of common language. Speculative systems have in all ages of the world been adopted for reasons too frivolous to have determined the judgment of any man of common sense in a matter of the smallest pecuniary interest. Gross sophistry has scarce ever had any influence upon the opinions of mankind, except in matters of philosophy and speculation; and in these it has frequently had the greatest….” (WN, V.i.f.26)

3. Higher ed is overrated. After explaining why sophistry reigns supreme in natural and moral philosophy (see #2 above), Smith explains why the leading universities of his day have become “sanctuaries” of sophistry and speculaton:

“The improvements which, in modern times, have been made in several different branches of philosophy have not, the greater part of them, been made in universities, though some no doubt have. The greater part of universities have not even been very forward to adopt those improvements after they were made; and several of those learned societies have chosen to remain, for a long time, the sanctuaries in which exploded systems and obsolete prejudices found shelter and protection after they had been hunted out of every other corner of the world. In general, the richest and best endowed universities have been the slowest in adopting those improvements, and the most averse to permit any considerable change in the established plan of education. Those improvements were more easily introduced into some of the poorer universities, in which the teachers, depending upon their reputation for the greater part of their subsistence, were obliged to pay more attention to the current opinions of the world.” (WN, V.i.f.34)

4. Education of women. Next, Smith compares and contrasts the education of boys and girls:

“There are no public institutions for the education of women, and there is accordingly nothing useless, absurd, or fantastical in the common course of their education. They are taught what their parents or guardians judge it necessary or useful for them to learn, and they are taught nothing else. Every part of their education tends evidently to some useful purpose; either to improve the natural attractions of their person, or to form their mind to reserve, to modesty, to chastity, and to economy; to render them both likely to become the mistresses of a family, and to behave properly when they have become such. In every part of her life a woman feels some conveniency or advantage from every part of her education. It seldom happens that a man, in any part of his life, derives any conveniency or advantage from some of the most laborious and troublesome parts of his education.” (WN, V.i.f.47)

5. The division of labour has a dark side. Last but not least, Smith explores the dark side of the division of labor:

“In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” (WN, V.i.f.50)

This observation about the dark side of the division of labor creates a crucial inflection point in Smith’s work, for it sets the stage for one of the most populist and revolutionary parts of Smith’s pro-liberty and pro-consumer agenda in The Wealth of Nations: his call for the public education of all children, rich and poor alike!

Nota bene: I will pick up where we have left off (the rest of Article 2 as well as Art. 3 of Part 3 of Ch. 1 of Book V) in my next post. In the meantime, let’s return to the question I posed up top: what would Adam Smith say about academic tenure? Isn’t the answer now obvious?

[1] On this note, see especially Paragraphs 51 to 61 of Article 2. (WN, V.i.f.51-61).

The second half of Article 1 of Part 3 of Chapter 1 of Book V of The Wealth of Nations (WN, V.i.e.1-40) is ostensibly about “Public Works and Institutions [that] are necessary for facilitating particular Branches of Commerce”, such as the Royal African Company (WN, V.i.e.19-20), the Hudson’s Bay Company (WN, V.i.e.21), the South Sea Company (WN, V.i.e.22-25), and the English East India Company (WN, V.i.e.26-28). In addition, Adam Smith also compares and contrasts “regulated companies” with a new form of private governance — new, that is, in Smith’s day: the “joint-stock company” or limited liability corporation.

By way of background, a regulated company was a privately-owned business that was authorized by a royal government charter to operate in a specific foreign market. The owners of the regulated company thus had the right to trade in that foreign market under company rules, but they did so using their own individual capital. A joint-stock company, by contrast, had the ability to issue shares of ownership in the company to private investors and to limit their financial risk to the amount invested in the company. But unlike traditional regulated companies, a joint-stock company was not run by its owner-investors. It was run by a small group of directors. This structure not only allowed the owners of a joint-stock company to pool their capital and minimize their legal risks; it also separated ownership and control.

With this historical background in mind, we can now proceed to Smith’s analysis of “regulated companies” and “joint-stock companies.” To begin, Smith has nothing good to say — and rightfully so, as we shall see in the passages below — about regulated companies:

“The usual corporation spirit, wherever the law does not restrain it, prevails in all regulated companies. When they have been allowed to act according to their natural genius, they have always, in order to confine the competition to as small a number of persons as possible, endeavoured to subject the trade to many burden some regulations. When the law has restrained them from doing this, they have become altogether useless and insignificant.” (WN, V.i.e.7)

“In all trades, the regular established traders, even though not incorporated, naturally combine to raise profits, which are no-way so likely to be kept, at all times, down to their proper level, as by the occasional competition of speculative adventure.” (WN, V.i.e.10)

But what about joint-stock companies? What does Smith have to say about them? In short Smith has mixed feelings about joint-stock companies. On the one hand, the incentives of a corporation’s directors are aligned with that of the company itself:

“The directors of a joint stock company, on the contrary, having only their share in the profits which are made upon the common stock committed to their management, have no private trade of their own of which the interest can be separated from that of the general trade of the company. Their private interest is connected with the prosperity of the general trade of the company, and with the maintenance of the forts and garrisons which are necessary for its defence. They are more likely, therefore, to have that continual and careful attention which that maintenance necessarily requires.” (WN, V.i.e.11)

But at the same time, the incentives of the directors and those of the shareholders might not be aligned, after all. In fact, they might even be diametrically opposed:

“This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of…. The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” (WN, V.i.e.18)

How does Smith resolve this internal tension in corporate governance? In short, he imposes a two-part litmus test of sorts:

“To establish a joint stock company, however, for any undertaking, merely because such a company might be capable of managing it successfully; or to exempt a particular set of dealers from some of the general laws which take place with regard to all their neighbours, merely because they might be capable of thriving if they had such an exemption, would certainly not be reasonable. To render such an establishment perfectly reasonable, with the circumstance of being reducible to strict rule and method, two other circumstances ought to concur.” (WN, V.i.e.36; my emphasis)

So, what are these two circumstances or conditions? Here, Smith draws a distinction between (a) large-scale “undertaking[s]” or ambitious projects that will require a lot of capital to get off the ground and (b) presumably small-scale “common trades” that can be carried out by one person — Smith’s famous butcher, baker, and brewer immediately come to mind — or a small group of partners:

First, it ought to appear with the clearest evidence that the undertaking is of greater and more general utility than the greater part of common trades; and secondly, that it requires a greater capital than can easily be collected into a private copartnery [partnership]. If a moderate capital were sufficient, the great utility of the undertaking would not be a sufficient reason for establishing a joint stock company; because, in this case, the demand for what it was to produce would readily and easily be supplied by private adventures.” (ibid.; my emphasis)

Smith thus reveals his legalistic side — for his litmus test requires the “clearest evidence”, a heightened standard of evidence that reminds me of “the clear and convincing standard” used in certain types of law cases (e.g. punitive damages) — as well as his utilitarian side. Smith’s litmus test, however, has a blind spot: who is the judge or arbiter who is supposed to apply this test? Why not leave the question of utility to the market, to the investors themselves?

N.B.: I will proceed to Article 2 of Part 3 of Chapter 1 of Book V of The Wealth of Nations (WN, V.i.f.1-61) in my next two posts.

“That the erection and maintenance of the public works which facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbours, &c. must require very different degrees of expence in the different periods of society is evident without any proof. The expence of making and maintaining the public roads of any country must evidently increase with the annual produce of the land and labour of that country, or with the quantity and weight of the goods which it becomes necessary to fetch and carry upon those roads. The strength of a bridge must be suited to the number and weight of the carriages which are likely to pass over it. The depth and the supply of water for a navigable canal must be proportioned to the number and tonnage of the lighters which are likely to carry goods upon it; the extent of a harbour to the number of the shipping which are likely to take shelter in it.” (WN, V.i.d.1; my emphasis)

Thus begins Article 1 of Part 3 of Chapter 1 of Book V of The Wealth of Nations (“Article 1”). To paraphrase Adam Smith: the government must erect and maintain harbours and highways and other channels of commerce — see, for example, the “&tc.” at the end of Smith’s initial list above — and the cost of these public works will be greater the more commerce is being carried out through them.

After establishing this fundamental premise, Smith then devotes the rest of Article 1 to the following question, Who should finance these “necessary” works: the taxpayers as a whole or the actual users of these public goods? And on this crucial first-order question Smith is clear: it is the actual users or direct beneficiaries who should pay. Or in the immortal words of Adam Smith:

“It does not seem necessary that the expence of those public works should be defrayed from that public revenue, as it is commonly called, of which the collection and application are in most countries assigned to the executive power. The greater part of such public works may easily be so managed as to afford a particular revenue sufficient for defraying their own expence, without bringing any burden upon the general revenue of the society.” (WN, V.i.d.2; my emphasis)

In fact, Smith tells us that some public works might generate so much public revenue that the government might even end up making a profit(!):

“A highway, a bridge, a navigable canal, for example, may in most cases be both made and maintained by a small toll upon the carriages which make use of them: a harbour, by a moderate port-duty upon the tonnage of the shipping which load or unload in it. The coinage, another institution for facilitating commerce, in many countries, not only defrays its own expence, but affords a small revenue or seignorage to the sovereign. The post-office, another institution for the same purpose, over and above defraying its own expence, affords in almost all countries a very considerable revenue to the sovereign.” (WN, V.i.d.3; my emphasis)

So, Smith asks, should the revenue generated by tolls and port-duties go into the government’s general fund, or should such user fees be narrowly circumscribed, allocated only for the erection and maintenance of highways and harbours? On this second-order finance question, Smith is also clear. If the revenue generated by tolls and port-duties were to go into the general fund, the government will most likely try to squeeze too much revenue out of its highways and harbours, and such a move would be counter-productive and self-defeating because high tolls and port-duties might have the effect of reducing commerce instead of promoting it:

“… if the tolls which are levied at the turnpikes should ever be considered as one of the resources for supplying the exigencies of the state, they would certainly be augmented as those exigencies were supposed to require…. But the turnpike tolls being continually augmented in this manner, instead of facilitating the inland commerce of the country as at present, would soon become a very great incumbrance upon it.” (WN, V.i.d.12; my emphasis)

Now, what about “those public works which are of such a nature that they cannot afford any revenue for maintaining themselves, but of which the conveniency is nearly confined to some particular place or district”? (WN, V.i.d.18) That is, what about small-scale or “local” public goods that do not generate any revenue, such as street lamps or traffic signals? Yet again, Smith’s answer is crystal clear: small-scale public works that benefit a local community should be erected, maintained, and paid for by a local or municipal government unit:

“Even those public works which are of such a nature that they cannot afford any revenue for maintaining themselves, but of which the conveniency is nearly confined to some particular place or district, are always better maintained by a local or provincial revenue, under the management of a local or provincial administration, than by the general revenue of the state, of which the executive power must always have the management. Were the streets of London to be lighted and paved at the expence of the treasury, is there any probability that they would be so well lighted and paved as they are at present, or even at so small an expence? The expence, besides, instead of being raised by a local tax upon the inhabitants of each particular street, parish, or district in London, would, in this case, be defrayed out of the general revenue of the state, and would consequently be raised by a tax upon all the inhabitants of the kingdom, of whom the greater part derive no sort of benefit from the lighting and paving of the streets of London.” (WN, V.i.d.18; my emphasis)

The Scottish philosopher then concludes the first half of Article 1 (WN, V.i.d.1-19) with a general observation about the relative scale or magnitude of local versus national government corruption. To paraphrase Adam Smith, all government units are corrupt, but some government units are more corrupt than others:

“The abuses which sometimes creep into the local and provincial administration of a local and provincial revenue, how enormous soever they may appear, are in reality, however, almost always very trifling in comparison of those which commonly take place in the administration and expenditure of the revenue of a great empire. They are, besides, much more easily corrected.” (WN, V.i.d.19; my emphasis)

But as they say in those low-budget but mildly-entertaining late-night TV infomercials: But wait, there’s more! For Adam Smith has yet many more important things to say about “Public Works and Institutions [that] are necessary for facilitating particular Branches of Commerce” in the second half of Article 1: WN, V.i.e.1-40. (To be continued …)

“The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.” (WN, V.i.c.1)

Adam Smith surveys the third and last major duty of government in Part 3 of Chapter 1 of Book V of The Wealth of Nations (available here or here): the provision of public goods. More specifically, Smith identifies two major types of public goods and public institutions:

A. Public works “facilitating the commerce of the society” (V.i.c.2), and

B. Education or public institutions “promoting the instruction of the people” (ibid.).

The Scottish philosopher further subdivides these two major categories — public works and education — into four distinct subcategories: transportation infrastructure (e.g. roads, bridges, street lamps, etc.), overseas military bases (e.g. forts and garrisons) to protect the property of British companies doing business overseas, education of youth (school age and college age), and adult education. As a result, Part 3 of this chapter has the following structure:

1. Article 1 is devoted to transportation infrastructure (V.i.d) and overseas military bases (V.i.e);
2. Article 2 is devoted to the education of school-age children and college-age youth (V.i.f); and
3. Article 3 is devoted to adult education or to “institutions for the instruction of people of all ages” (V.i.g).

Before proceeding any further, however, it is worth asking, If Adam Smith were alive today, what else would he add to his laundry list of public goods? Smith would no doubt add such essential public works as clean drinking water, sewage systems, and traffic signals, but what about “public art” or “affordable housing” or “universal health care” or a “universal basic income”? Do those more ambitious public programs count as public goods? With this key question in mind, I will proceed to Article 1 of Part 3 of Chapter 1 of Book V of Smith’s magnum opus in my next few posts.

An Inquiry into the Nature and Causes of the Wealth of Nations was published on this day (9 March) in 1776. I will resume my survey of Smith’s magnum opus in my next post; in the meantime, to mark this occasion, check out Ronald Coase‘s 1976 essay on “Adam Smith’s View of Man” (available here or here), Maria Pia Paganelli‘s previous tribute to Smith’s magnum opus, as well as the Smith installment of the late Professor Michael Sugrue‘s legendary lecture series on “The Great Minds of the Western Intellectual Tradition”:

Bonus link: “An Inquiry into the Nature and Causes of the Wealth of Nations, first edition”

To mark the 250th anniversary of the publication of The Wealth of Nations (9 March 1776) and Adam Smith’s timeless defense of natural liberty, I am reposting Shervin Hajipour’s haunting anthem “Baraye”, which he composed in response to his government’s brutal repression of the 2022 Mahsa Amini protests in Iran. As the child of Cuban exiles, the lyrics of this poetic protest song resonate with me. May the sons and daughters of Iran — and Cuba! — both be free of their religious and secular tyrants soon!

Alternative title: Adam Smith, an Enlightened legal realist

Among other things, Plato’s Republic contains a dialogue between Socrates and Thrasymachus about the nature of justice. Most educated people already know who Socrates was, but who was Thrasymachus? By all accounts, he was a 5th-century BC sophist and teacher of rhetoric. In his dialogue with Socrates in Book 1 of Plato’s Republic (see lines 336b to 354c, available here), Thrasymachus famously defines “justice” as nothing more than “the interest of the stronger.” In other words, justice is merely a convention imposed by the powerful to protect their own interests.

For his part, Adam Smith appears to take sides with Thrasymachus in Part 2 of Chapter 1 of Book V of The Wealth of Nations. Here, Smith surveys the second duty of government, “that of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice ….” (WN, V.i.b.1) But as we shall see below, Smith does not paint an idyllic or idealized picture of law, for he has no illusions about the true nature of justice. Instead, the Scottish philosopher makes the following five timeless and realist points about law and government:

POINT #1 — THE ORIGINS OF LAW AND GOVERNMENT: PROPERTY RIGHTS

First off, government becomes necessary when people start to accumulate private property: “The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none that exceeds the value of two or three days labour, civil government is not so necessary.” (WN, V.i.b.2; my emphasis)

POINT #2 — LAW AND GOVERNMENT ARE THE INTEREST OF THE STRONGER

Secondly, Smith takes a Thrasymachean stance towards government: “Civil government supposes a certain subordination. But as the necessity of civil government gradually grows up with the acquisition of valuable property, so the principal causes which naturally introduce subordination gradually grow up with the growth of that valuable property.” (V.i.b.3; my emphasis) Smith leaves no room for doubt on this crucial point, for he further writes: “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.” (V.i.b.12; my emphasis)

POINT #3 — JUSTICE IS NOT FREE

There are no free lunches in law: “Justice, however, never was in reality administered gratis in any country.” (V.i.b.18; my emphasis)

POINT #4 — THE COST OF JUSTICE SHOULD BE PAID BY FIXED USER-FEES

Unlike Socrates or even Thrasymachus, Smith explores the economics of the administration of justice, and he proposes charging litigants fixed fees when they take their disputes to court:

“The whole expence of justice, too, might easily be defrayed by the fees of court; and, without exposing the administration of justice to any real hazard of corruption, the public revenue might thus be discharged from a certain, though, perhaps, but a small incumbrance. It is difficult to regulate the fees of court effectually where a person so powerful as the sovereign is to share in them, and to derive any considerable part of his revenue from them. It is very easy where the judge is the principal person who can reap any benefit from them. The law can very easily oblige the judge to respect the regulation, though it might not always be able to make the sovereign respect it. Where the fees of court are precisely regulated and ascertained, where they are paid all at once, at a certain period of every process, into the hands of a cashier or receiver, to be by him distributed in certain known proportions among the different judges after the process is decided, and not till it is decided, there seems to be no more danger of corruption than where such fees are prohibited altogether. Those fees, without occasioning any considerable increase in the expence of a law-suit, might be rendered fully sufficient for defraying the whole expence of justice.” (V.i.b.20; my emphasis)

POINT #5 — JUDGES MUST BE INDEPENDENT

Because law and government are the interest of the stronger, the judicial branch of government must be independent from the other branches, especially the executive:

“When the judicial is united to the executive power, it is scarce possible that justice should not frequently be sacrificed to what is vulgarly called polities. The persons entrusted with the great interests of the state may, even without any corrupt views, sometimes imagine it necessary to sacrifice to those interests the rights of a private man. But upon the impartial administration of justice depends the liberty of every individual, the sense which he has of his own security. In order to make every individual feel himself perfectly secure in the possession of every right which belongs to him, it is not only necessary that the judicial should be separated from the executive power, but that it should be rendered as much as possible independent of that power. The judge should not be liable to be removed from his office according to the caprice of that power. The regular the good-will or even upon the good œconomy payment of his salary should not depend upon of that power.” (V.i.b.25; my emphasis)

Nota bene: this Monday (9 March) is the 250th anniversary of the publication of The Wealth of Nations, so my next two blog posts will mark this occasion with some fun surprises. Then, on Tuesday (10 March), we will proceed to Part 3 of Chapter 1 of Book V of Smith’s magnum opus, to the third and last of the three duties of government: the provision of public goods.