Monday, April 04, 2011

Book Review, Wealth of Nations Book 5


Smith switches gears in this chapter to deal with what the role of government should be (what services it should provide) and how best to pay for those. He seems to be prescribing best policies to government officials. He compares various tax structures in Europe to Great Britain and seems to favor Great Britain's system as better than most.

A primary role of government is to defend the state from invasion. A nation can either be defended by a citizen militia or by a more expensive standing army, and Smith explores pros/cons of both.

Men of republican principles have been jealous of a standing army, as dangerous to liberty. It certainly is so, wherever the interest of the general, and that of the principal officers, are not necessarily connected with the support of the constitution of the state. The standing army of Caesar destroyed the Roman republic. The standing army of Cromwell turned the long parliament out of doors. But where the sovereign is himself the general, and the principal nobility and gentry of the country the chief officers of the army; where the military force is placed under the command of those who have the greatest interest in the support of the civil authority, because they have themselves the greatest share of that authority, a standing army can never be dangerous to liberty. On the contrary, it may, in some cases, be favourable to liberty.

Another crucial role of government is to defend property rights and exercise justice. Smith notes that this system benefits the rich more than the poor but there is quid pro quo:
Men of inferior wealth combine to defend those of superior wealth in the possession of their property, in order that men of superior wealth may combine to defend them in the possession of theirs.
He examines how various countries pay their judges and legal clerks and points to some unintended consequences and conflicts of interest that arise. Smith then turns to other roles of government, provision of pure public goods and educating the populace:
After the public institutions and public works necessary for the defence of the society, and for the administration of justice, both of which have already been mentioned, the other works and institutions of this kind are chiefly for facilitating the commerce of the society, and those for promoting the instruction of the people. The institutions for instruction are of two kinds: those for the education of the youth, and those for the instruction of people of all ages.
Smith notes that various companies were chartered or subsidized by the British Crown, and as such were charged to build things to protect their interests, like armed outposts overseas. Smith spends part of this chapter showing that state-funded companies tend to become parasites that otherwise would be bankrupt. GM, Chrysler anyone?
If the trading spirit of the English East India company renders them very bad sovereigns, the spirit of sovereignty seems to have rendered them equally bad traders. While they were traders only, they managed their trade successfully, and were able to pay from their profits a moderate dividend to the proprietors of their stock. Since they became sovereigns, with a revenue which, it is said, was originally more than three millions sterling, they have been obliged to beg the ordinary assistance of government, in order to avoid immediate bankruptcy.

"Pro-business" government policies are typically anti-market policies that favor a few companies at the expense of the citizenry. Smith sees a role for the government in education and is operating from a context where primary education was religious in nature. He gives a history of higher education from ancient Greece to modern Europe. He gives a brief history of the church in England and Scotland after the Reformation. Smith was an avowed Presbyterian in order to hold the Chair of Moral Philosophy at Glasgow. But this chapter is one of the few that showed respect he had for the Church.

Smith basically applies his thoughts on the market to church-- competition being a good thing as opposed to a state-dominated monopoly. I think he clearly favors separation of Church and State the way our founders drew it up-- no government-sanctioned monopoly allowed.

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, and, in this case, no doubt, have been, a great multitude of religious sects. Almost every different congregation might probably have had a little sect by itself, or have entertained some peculiar tenets of its own. Each teacher, would, no doubt, have felt himself under the necessity of making the utmost exertion, and of using every art, both to preserve and to increase the number of his disciples.
Smith things competition for disciples is good because it creates a variety and moves society away from extremism:

The interested and active zeal of religious teachers can be dangerous and troublesome only where there is either but one sect tolerated in the society, or where the whole of a large society is divided into two or three great sects...But that zeal must be altogether innocent, where the society is divided into two or three hundred, or, perhaps, into as many thousand small sects, of which no one could be considerable enough to disturb the public tranquillity. The teachers of each sect, seeing themselves surrounded on all sides with more adversaries than friends, would be obliged to learn that candour and moderation which are so seldom to be found among the teachers of those great sects, whose tenets, being supported by the civil magistrate, are held in veneration by almost all the inhabitants of extensive kingdoms and empires...and the concessions which they would mutually find in both convenient and agreeable to make one to another, might in time, probably reduce the doctrine of the greater part of them to that pure and rational religion, free from every mixture of absurdity, imposture, or fanaticism, such as wise men have, in all ages of the world, wished to see established; but such as positive law has, perhaps, never yet established, and probably never will establish in any country; because, with regard to religion, positive law always has been, and probably always will be, more or less influenced by popular superstition and enthusiasm.
This is fascinating. "Positive law" is apparently some true universal law agreed on by everyone. But it is influenced by popular "superstition and enthusiasm" by various sects espousing their own points of view. More competition means finding more common ground and moving away from religious dogma toward some sort of ecumenicism. Smith decries the State using the Church to coerce people through fear. The Roman Catholic church could frighten people with the threat of excommunication, for example, if their sovereign became a Protestant. The reformation stripped away this fear and created the idea that kings and peasants are equal in the eyes of God.

In some countries, as in Scotland, where the government was weak, unpopular, and not very firmly established, the reformation was strong enough to overturn, not only the church, but the state likewise, for attempting to support the church.
Smith explains that as Protestants groped for agreement in doctrine, you had a battle between Lutherans and Calvinists. Smith examines church governance in both sects. Calvinist congregations elected their own ministers. Lutheran ministers were appointed. Smith says the Calvinist model:

(S)eems to have been productive of nothing but disorder and confusion, and to have tended equally to corrupt the morals both of the clergy and of the people. The latter part seems never to have had any effects but what were perfectly agreeable...As long as the people of each parish preserved the right of electing their own pastors, they acted almost always under the influence of the clergy, and generally of the most factious and fanatical of the order...So small a matter as the appointment of a parish priest, occasioned almost always a violent contest, not only in one parish, but in all the neighbouring parishes who seldom failed to take part in the quarrel.
Smith then praises the Presbyterian church. He points out that in many cases in Europe the church no longer needed funding from the State to operate, the tithes were sufficient to run the operations. It appears that in many instances the wealthy and sovereign people would give property to the church as an act of piety. The church would then use that land to farm and run a business (Rodney Stark talks about this some in Victory of Reason), making the citizenry respectful and dependent upon the church. But Smith warns against clergy becoming wealthy themselves, or at least living like they're wealthy:

A man of a large revenue, whatever may be his profession, thinks he ought to live like other men of large revenues; and to spend a great part of his time in festivity, in vanity, and in dissipation. But in a clergyman, this train of life not only consumes the time which ought to be employed in the duties of his function, but in the eyes of the common people, destroys almost entirely that sanctity of character, which can alone enable him to perform those duties with proper weight and authority.
Smith deals heavily with taxation. Government operations have to be paid for, including allowing the sovereign to live a decent and fashionable life. Smith gives four principles for taxation (paraphrase):

1. Citizens should be taxed according to their means, or according to the proportional benefit they gain by having a government. (Ie: wealthier people benefit more from having their property protected, they should pay more taxes).

2. The amount, method, and due date of the tax should be clear and uncomplicated.

3. Every tax should be levied at the time when it's most convenient to pay it.

4. The tax should be as low as possible to fund the state.

Smith delves into detail about land taxes, consumption taxes, import tariffs and custom duties, taxes on interest and wages, etc. All have benefits and drawbacks. Some are progressive, some are regressive. In regards to sales taxes, Smith notes that the burden falls on the "necessitous person," or on whoever's curve is most inelastic. However, there are several points where he makes the mistake of saying the tax incidence "always falls on the producer." We have the idea of what is modernly derided as a "Laffer curve," which is all about price elasticity of demand.

High taxes, sometimes by diminishing the consumption of the taxed commodities, and sometimes by encouraging smuggling frequently afford a smaller revenue to government than what might be drawn from more moderate taxes...When the diminution of revenue is the effect of the diminution of consumption, there can be but one remedy, and that is the lowering of the tax.
(ie: sometimes you increase tax revenue by lowering a tax). Don't tell conservatives, but Smith also favors a progressive income tax (emphasis mine):
It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

Smith seems to be naive about corruption of sovereigns and dictators. He never met Gaddafi:

Even a bad sovereign feels more compassion for his people than can ever be expected from the farmers of his revenue. He knows that the permanent grandeur of his family depends upon the prosperity of his people, and he will never knowingly ruin that prosperity for the sake of any momentary interest of his own.

Smith ends the chapter dealing with government debt. He says it never ends well, a nation always ends up either defaulting or defacto defaulting by devaluing its currency. A country that runs deficits in peacetime is going to have to borrow heavily in wartime (hmmm). But a nation of merchants seems to be able to lend to the government without eliminating their capital stock:

The same confidence which disposes great merchants and manufacturers upon ordinary occasions, to trust their property to the protection of a particular government, disposes them, upon extraordinary occasions, to trust that government with the use of their property. By lending money to government, they do not even for a moment diminish their ability to carry on their trade and manufactures; on the contrary, they commonly augment it. The necessities of the state render government, upon most occasions willing to borrow upon terms extremely advantageous to the lender.
This is a great example of how history repeats itself:

The progress of the enormous debts which at present oppress, and will in the long-run probably ruin, all the great nations of Europe, has been pretty uniform. Nations, like private men, have generally begun to borrow upon what may be called personal credit, without assigning or mortgaging any particular fund for the payment of the debt; and when this resource has failed them, they have gone on to borrow upon assignments or mortgages of particular funds... Like an improvident spendthrift, whose pressing occasions will not allow him to wait for the regular payment of his revenue, the state is in the constant practice of borrowing of its own factors and agents, and of paying interest for the use of its own money.
Two solutions, says Smith: Either find a way to raise more taxes without making it onerous, or cut government spending.

The chapter ends abruptly dealing with the pressing issue of the war with the American colonies. Britain has already incurred huge debts defending its colonies, who have contributed very little back to the British treasury. Taxing them more would warrant representation in Parliament, which Smith dealt with in a previous book. Here is the last sentence:
If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expense of defending those provinces in time of war, and of supporting any part of their civil or military establishment in time of peace; and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.
Okay, that's a very long review. I will write one final post summarizing my thoughts on the entire book.

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