Additional roles taken on by governments

The Boundary of Government Spending is a Political Decision
from Adam Smith's Lost Legacy by Gavin Kennedy

Defence and Justice were regarded by Adam Smith as keystone programmes because the survival of society depended upon them. This did not mean that anything under the heading of defence was sacrosanct. He had a fairly robust view on defence and war-fighting; the former was supposed to deter the necessity for the second. In fact, Adam Smith was extremely critical for the proclivity for war in the mercantile countries of Europe, largely located in the sad exercise of ‘jealousy of trade’, in which mercantile political economy saw trading partners as engaged in zero-sum transactions – any gain they made was at the expense of their partners.

Goods crossing frontiers in trade were seen by mercantile governments as threatening, not peaceful, substitutes for armies crossing frontiers. Britain’s wars with the Dutch and the French, at root, were caused by such thinking. The massive increase in defence spending in the 18th century from 5 per cent of ‘GDP’ at its opening to 15 per cent at its close were one consequence. The defence of the colonies led to four wars with France; the 7-years war at a cost of £175 million (billions at today’s money). All for what? A monopoly of American colonial trade and an untold cost in diverted scarce capital in the UK, massive spending on unproductive labour and thereby a slower growth towards opulence.

What didn’t happened was the funding of the public works and public institutions that Adam Smith advocated until well into the 19th century, which by then Britain had embarked on a second empire that diverted millions of public spending, and in two world wars, much blood a treasure. The industrial ‘revolution’ and the spread of capitalism did deliver on continuous growth in per capita income, and the spread of and deepening of democracy. It was not a simple case of the increase in the agenda for public spending on education ‘squeezing’ investment; the amounts could grow in growing GDPs for richer economies. The 60-70 per cent of GDP that was not in the government sector in the 20th century is discretionary spending in the private sector. Taxation levels are set by democratic franchise through elected legislatures. Where the boundary is drawn is not a matter of principle; it is politics, that’s why Smith and others called it political economy.

So, the answer to “The Role of Government in Modern U.S. Society: What Would Adam Smith Say?” is not to be found in Wealth Of Nations, published in 1776. He did not write about the future; he wrote about the historical past and up to the 1780s. I suspect he would have lots to say about the familiar propensity for government waste; about many of the additional roles taken on by governments; and he would probably be surprised why governments continue to do work that the economy is not longer too poor to leave the private sector (including, in the USA: why dredging services are supplied by Army Engineers and not the excellent US private sector firms that operate around the world!).