To my North American readers, happy 4th of July! In my previous post, we saw Adam Smith’s scathing critique of farm subsidies. (This critique appears in Additions #8 and #9 (pp. 10-12) of his 1784 pamphlet.) As it happens, the Scottish customs commissioner — recall that Smith had been serving as a royal customs official in Edinburgh since 1778 — picks up right where he left off in Addition #10 (p. 13). Here, Smith makes two further points about subsidies (“bounties”). First off, Smith launches a blistering attack on the “country gentlemen” (i.e. farmers) who have lobbied the government for farm subsidies:

“They loaded the public revenue with a very considerable expense; they imposed a very heavy tax upon the whole body of the people; but they did not, in any sensible degree, increase the real value of their own commodity; and by lowering somewhat the real value of silver, they discouraged in some degree, the general industry of the country, and, instead of advancing, retarded more or less the improvement of their own lands, which necessarily depends upon the general industry of the country.” (Smith 1784, p. 13) [*]

Next, Smith draws a general distinction between bounties upon exportation (i.e. subsidies designed to promote the exportation of the goods being subsidized) and bounties upon production (i.e. subsidies designed to promote local jobs):

“To encourage the production of any commodity, a bounty upon production, one should imagine, would have a more direct operation than one upon exportation. It would, besides, impose only one tax upon the people, that which they must contribute in order to pay the bounty. Instead of raising, it would tend to lower the price of the commodity in the home market; and thereby, instead of imposing a second tax upon the people, it might, at least, in part, repay them for what they had contributed to the first.” (Id.)

In other words, bounties designed to promote jobs should generate positive economic effects overall compared to bounties designed to promote exports. But Smith concludes Addition #10 with the following wry observation: “Bounties upon production, however, have been very rarely granted.” (Id.) But that said, there was at least one major “bounty upon production” in Britain at this time: the bounty for white-herring fish.

For his part, Smith was not only aware of this particular subsidy; he devotes 13 pages and 50-plus paragraphs of his 1784 pamphlet to this subject (Addition #11, pp. 13-22), where he shows how the herring bounty wastes taxpayer money, destroys local jobs, and increases food prices. I will therefore proceed to Addition #11 on Monday, 6 July (the 13th anniversary of this blog); in the meantime, the following questions are worth pondering: why do governments continue to subsidize production? (See, for example, the infographic pictured below.) Why has Adam Smith’s scathing critique of government subsidies fallen on deaf ears? (To be continued.)

* = This passage was placed at the end in paragraph 24 of Chapter 5 of Book IV of the third and subsequent editions of The Wealth of Nations, where Smith is discussing “our country gentlemen”.