What Would Adam Smith Do?
By Dr. Harold A. Black
blackh@knoxfocus.com
haroldblackphd.com
I read Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations” in my junior year at Georgia – yes, we actually had to read books when I was in college. It changed my life by reinforcing my decision to major in economics. The brilliance of explaining the benefits of trade, the woes of mercantilism, wealth building, free markets, the division of labor, comparative advantage and productivity made perfectly good sense to me. I was astounded to find all of this in a book published in 1776.
Smith was the father of laissez-faire. Smith said that individuals acting in their own self-interest created a greater benefit to the economy than actions taken by the government. This is Smith’s “invisible hand.” In that the government did not have a profit motive, it had no incentive to minimize costs, which necessarily led to waste. He was not opposed to the government but argued that markets were more efficient and less wasteful. But the government had a role. For Smith, government was responsible for national defense, the administration of justice, enforcing private property rights and the provision of public goods. A public good is one where there is market failure, which is a precise term meaning that markets will misprice a public good.
Consider the following. You could have toll roads throughout your city and toll booths at the entrance to each neighborhood. But it would be frightfully inefficient. So collect tax revenues and let the government build and maintain them. In the same vein, Smith advocates for the role of the government in education. Here, it is the investment in human capital that benefits future generations, but is paid for by the current one. Although I have the feeling that Smith might favor publicly funded private education, his view is that education is a public good.
As to the administration of justice, Smith says that the duty of the government is to protect “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.”
Lastly, individual private property and property rights are essential to Smith. Here again, the individual acting in their own self-interest furthers the welfare of the society. Smith is against constraining trade, both domestically by individuals and by businesses, as well as the constraint of trade by one country toward another. Hear that, Donald Trump?
Thus, given the state of the government today, one would ask, “What would Adam Smith do?” Smith would say that if the government is outside its prescribed roles, then its actions are necessarily wasteful and harmful to the economy. Spending financed by issuing government debt raises market interest rates and makes borrowing more expensive in the private sector. The harmful impact is that there is less capital accumulation and lower levels of economic growth. There will also be higher levels of inflation lowering the real income of residents. Thus, Smith would pooh pooh the budget slashing and federal employment rollbacks coming from Trump and DOGE unless the cuts were permanent.
But Trump’s and Musk’s efforts are only transitory and short-term in nature. Adam Smith would call for the complete elimination of much of today’s government. Trump, while trying to restrain the growth of the government by downsizing its current components, is doomed to fail. The real task is to limit the scope of government. This would mean eliminating most of the cabinet-level agencies completely. No more departments of education, energy, transportation, commerce, interior, agriculture and labor. No more HHS. No more HUD. No more Veterans Affairs. It would mean preventing the agencies from expanding their mission and reach. How many undersecretaries do we really need? Do you know that there are over 4,000 presidentially appointed positions in the federal government? Adam Smith would be appalled at a government spending $7 trillion a year. The fact that we are not appalled is a sad commentary on how we have allowed the government to grow like Topsy with politicians handing out billions for purposes related more to their own welfare rather than the public good.
