The Competitiveness of Nations
in a Global Knowledge-Based Economy
April 2003
Nathan Rosenberg
Some Institutional Aspects of the Wealth of Nations
The Journal of Political Economy
Volume 68, Issue 6
Dec. 1960, 557-570.
PERHAPS as a result
of the increasingly formal nature of economics as an academic discipline, the
institutional content and preoccupations of Adam Smith’s Wealth of Nations have
suffered prolonged neglect. The
following syllogistic restatement, by Wesley Mitchell, may be taken as
representative of contemporary formulations of Smith’s central argument:
First, every individual desires to increase his own
wealth; second, every individual in his local situation can judge better than a
distant statesman what use of his labor and capital is most profitable; third,
the wealth of the nation is the aggregate of the wealth of its citizens;
therefore, the wealth of the nation will increase most rapidly if every
individual is left free to conduct his own affairs as he sees fit. [1]
The view which will be
presented here is not that this syllogism is wrong, as an interpretation of
Smith’s views, but that it is uninteresting. By jumping directly from the conception of man
as a rational creature to the policy recommendation of laissez faire and all
that, it completely short-circuits much of the real substance of Smith’s work. By visualizing the human agent as engaged in
the effort to maximize a single, unambiguous magnitude, two aspects of Smith’s
book and the crucial importance of the interplay between them are ignored: (1)
his much more elaborate conception of the conflicting forces which impel
the human agent to action and, as a direct result, (2) his sustained inquiry
into the ultimate impact, in terms of human action and its welfare
consequences, of different kinds of institutional arrangements. It is the purpose of the present paper to
examine the interrelationships between these two sets of forces.
We begin, then, by adding
what Smith regarded as certain essential components of human behavior to the
traditional image of the relentless pursuit of material gain.
In addition to the
well-known “constant, uniform and uninterrupted effort of every man to better
his condition,” Smith attached great importance to the belief that the
generality of mankind is intractably slothful and prone to indolence. A major counterbalance to the desire for and
the pursuit of wealth, therefore, is a love of ease and inactivity. “It is the interest of every man to live as
much at his ease as he can…” [2]
A critical corollary of
this position is that, although it is the desire for wealth which prods and
lures mankind to put forth his greatest efforts, the attainment and
possession of wealth are regarded by Smith as almost universally corrupting. For, once such wealth has been acquired, man
naturally gives vent to his desire for ease. “The indolence and vanity of the rich” [3] is fully as
important a force in Smith’s system as is the desire for riches
1. Wesley Mitchell, The Backward Art
of Speeding Money, Augustus M. Kelley, Inc., New York, 1950, p. 85; see
also his Lecture Notes on Types of Economic Theory, Augustus M. Kelley,
Inc., New York, 1949, Vol. 1, chap. 5.
2. Adam Smith, The Wealth of Nations,
p. 718. Subsequently
referred to as “Wealth.” All references are to the Cannan edition which was reissued in the Modern Library
Series (New York: Random House, 1937).
3. Wealth, p. 683.
557
itself. For “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.” [4]
Thus the considerable
wealth of the large landlord virtually disqualifies him from supervising the
efficient operation of his estate. His
background and opulence render him incapable of devoting unremitting attention
to details, of making those marginal calculations which are so essential to
efficiency. [5] Elsewhere, in speaking of landlords, Smith refers to “that
indolence, which is the natural effect of the ease and security of their
situation.” [6]
Perhaps even more
disastrous, because of its effects on capital accumulation, is the effect of
high profits upon the business class:
The high rate of profit seems every where to destroy
that parsimony which in other circumstances is natural to the character of the
merchant. When profits are high, that
sober virtue seems to be superfluous, and expensive
luxury to suit better the affluence of his situation. [7]
Although he does not spell
it out, there seems to be some rate of profits which may be regarded as optimum
from the point of view of achieving the maximum rate of economic growth. Higher profits are clearly regarded as
desirable up to some level, since they constitute both the major source and the
major incentive for the accumulation of capital. Beyond this unspecified optimum, however,
“parsimony... that sober virtue seems to be superfluous.” Thus Smith opposes monopoly not only because
it results in resource misallocation. Monopoly
has the equally insidious effect of retarding capital accumulation, since easily
earned profits result in prodigality. [8] Indeed, as will be seen below, the
conflicting forces which motivate man to act really establish an optimum level
of income in all economic activities.
Finally, and most
important, Smith regards it as a strategic component of the human personality
that man is naturally deceitful and unscrupulous and will quite willingly
employ predatory practices so long as such practices are available to him. “Such, it seems, is the natural insolence of man, that he almost always disdains to use the good instrument,
except when he cannot or dare not use the bad one.” [9]
Given these human
characteristics, it is plain that the mere absence of external restraints and
the freedom to pursue self-interest do not suffice, in Smith’s view, to
establish social harmony or to protect society from “the passionate confidence
of interested falsehood.” [10]
What are required,
above all, are institutional mechanisms which compel man, in his
“natural insolence,” “to use the good instrument.”
What the usual emphasis on
self-interest and individual freedom overlooks is that such self-interest can
be pursued in innumerable antisocial ways. It is not sufficient to answer that Smith
assumed a competitive framework in his analysis and policy recommendations,
because such a framework is not sufficiently specific. Atomistic competition, absence of collusion,
and mobility of resources are not nearly sufficient to establish the linkage
between unhampered pursuit of self-interest and social well-
4. Ibid., p. 766.
5. Ibid., pp. 363-64.
6. Ibid., p. 249.
7. Ibid., p. 578.
8. Ibid., pp. 578-79.
9. Ibid., p. 751. Smith’s generally low estimate of humanity is
subjected to an entertaining, tongue-in-cheek, treatment in a recent article by
Arthur H. Cole, “Puzzles of the ‘Wealth of Nations’” Canadian Journal of
Economics and Political Science, XXIV (February, 1958), 1-8.
10. Wealth, p. 463.
558
being. Smith himself
clearly realized this. Indeed, large
portions of his Wealth of Nations are specifically devoted to analyzing
the nature of the appropriate institutional framework.
Failure to stress the
relationship between Smith’s broader conception of human nature and the
institutional order with which he was so much preoccupied leads to the creation
of unnecessary problems of interpretation and “reconciliation.” Thus we have recently been told that
Smith’s reliance on moral sentiments as prerequisites
of any workable system of competition has often been lost sight of and even
denied by later generations of economists who preferred to popularize Smith’s
reference to the invisible hand as evidence of his glorification of
selfishness. Nothing could be further
from the truth. It is unthinkable that a
moral philosopher of the stature of Adam Smith, who published The Theory of
Moral Sentiments in 1759, would have abandoned his conceptions of the moral
laws governing human behavior in 1776 when he published The Wealth of
Nations, without making such a change of view explicit. It is, therefore, imperative that The
Wealth of Nations be read in conjunction with the earlier Theory of
Moral Sentiments in order to understand that Smith presupposes the
existence of a natural moral law as a result of which the prudent man was
believed to be anxious to improve himself only in fair ways, i.e., without
doing injustice to others. [11]
It will be shown below that
such an interpretation is not only totally incorrect but does a considerable
injustice to the subtlety and sophistication of Smith’s argument.
A neglected theme running
through virtually all of the Wealth of Nations is Smith’s attempt to
define, in very specific terms, the details of the institutional structure
which will best harmonize the individual’s pursuit of his selfish interests
with the broader interests of society.
Far from assuming a “spontaneous” identity of interests (in the mere
absence of government restrictions) or of being “blind to social conflicts,” [12] Smith was
obsessed with the urge to go beyond the ordinary market-structure definition of
competition and to evaluate the effectiveness of different institutional forms
in enforcing this identity.
The ideal institutional
order for Smith is one which places the individual under just the proper amount
of psychic tension. The individual
applies himself with maximum industry and efficiency when the reward for effort
is neither too low (slaves, apprentices) nor too great (monopolists, large
landowners). [13] However, more complicated than the intensity
11. K. William Kapp, The Social Costs of
Private Enterprise (Cambridge, Mass.: Harvard University Press, 1950), pp.
28-29. Smith’s general skepticism and
reluctance to attach too much force to the unalloyed operation of humanitarian
motives, even where it might appear most appropriate, is neatly conveyed in the
following quotation: “The late resolution of the Quakers in Pennsylvania to set
at liberty all their negro slaves, may satisfy us that
their number cannot be very great. Had they made any considerable part of their property, such a
resolution could never have been agreed to” (Wealth, p. 366).
12. “A sunny optimism radiates from Smith’s writing. He had no keen sense for social disharmonies, for
interest conflicts... On the whole, it is true to say that he was blind to
social conflicts. The world is for him
harmonious. Enlightened
self-interest ultimately increases social happiness” (Gunnar
Myrdal, The Political Element in the Development
of Economic Theory [London: Routledge & Kegan Paul, Ltd., 1953], p. 107).
13. “The manifest impossibility of acquiring and enjoying wealth is, of
course, completely stultifying to economic efficiency: “The experience of all
ages and nations, I believe, demonstrates that the work done by slaves, though
it appears to cost only their maintenance, is in the end the dearest of any. A person who can
acquire no property, can have no other interest but to eat as much, and to labour as little as possible. Whatever work he does beyond what is
sufficient to purchase his own maintenance, can be squeezed out of him by
violence only, and not by any interest of his own” (Wealth, p. 365).
On the other hand, as already cited: “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” (ibid., p. 766)
559
dimension of individual effort is the matter of the direction
into which this effort is channeled. Smith is, in effect, searching for the
appropriate definition of an institutional order which will eliminate zero-sum
(or even negative-sum) games. It is the
function of institutional arrangements to cut off all avenues (and they are
many) along which wealth may be pursued without contributing to the welfare of
society. Such a goal in practice
requires a careful balancing of incentive, of provision of opportunity to
enlarge one’s income, against the need to minimize the opportunities for abuse,
i.e., possibilities for increasing one’s income in an antisocial fashion.
A central, unifying theme
in Smith’s Wealth of Nations, then, is his critique of human
institutions on the basis of whether or not they are so contrived as to
frustrate man’s baser impulses (“natural insolence”) and antisocial
proclivities and to make possible the pursuit of self-interest only in a
socially beneficial fashion. Indeed, it
will become apparent below that Smith’s basic argument applies to the whole
spectrum of social contrivances and is not restricted to economic affairs. The question is, in each case, whether
institutions do, or do not, harness man’s selfish interests to the general
welfare. This is, of course, the basis
of Smith’s critique of mercantilism.
The violence of Smith’s
polemic against mercantilism lay in the fact that it enabled merchants to
better their condition in a manner which did not contribute to the nation’s
economic welfare. As a result of the
dispensation of monopoly grants, of the arbitrary bestowal of “extraordinary
privileges” and “extraordinary restraints” upon different sectors of industry
by the government, the individual merchant was able to enrich himself without
at the same time enriching the nation. For,
as Smith clearly recognizes, the pursuit of one’s economic self-interest is not
necessarily confined to the economic arena. When it spills over into the political arena,
it leads to actions which detract from, rather than add to, the economic
welfare of society. By contrast, the
competitive order which Smith advocated was an institutional arrangement which
was characterized, negatively, by the absence of all special privilege and
sources of market influence and, positively, by the all-pervasive and uninhibited
pressures of the market place. The price
system, as Smith saw it, was an intensely coercive mechanism. Its decisive superiority as a way of
organizing economic life lay in the fact that, when it was surrounded by the
appropriate institutions, it tied the dynamic and powerful motive force of
self-interest to the general welfare. Its free operation would, in most cases, leave
the individual producer no alternative but to pursue his economic interests in
a manner conducive to the national welfare. [14]
The secondary literature on
Adam Smith has devoted considerable attention to the ways in which the
establishment of a free-market network will promote economic efficiency. But the emphasis has been primarily on the allocative efficiency of the free market and too little on
the ways in which appropriate institutions contribute to the productivity of
the human agent as a factor of production - a matter of supreme importance to
Smith. Appropriate institutions increase
both the motivation and the
14. For Smith’s own qualifications of this proposition
see Jacob Viner, “Adam Smith and Laissez-Faire,”
chap. v of J. M. Clark et al., Adam Smith, 1776-1926: Lectures To
Commemorate the Sesquicentennial of the Publication of “The Wealth of Nations” (Chicago:
University of Chicago Press, 1928). I
wish to acknowledge my intellectual indebtedness to Viner’s
masterly analysis of Smith.
560
capacity of the human
agent, whereas inappropriate institutions detract from these things.
Thus Smith opposes
apprenticeship laws not only because they impede the mobility of labor between
industries but also because they constitute institutional arrangements which
pervert the incentive to industry and hard work. During his apprenticeship the young man
perceives (correctly) that there is no connection between his effort and his
reward (as would exist, e.g., under piecework), and habits of slothfulness and
laziness are therefore encouraged:
The institution of long apprenticeships has no
tendency to form young people to industry. A journeyman who works by the piece is likely
to be industrious, because he derives a benefit from every exertion of his
industry. An apprentice is likely to be
idle, and almost always is so, because he has no immediate interest to be otherwise...
A young man naturally conceives an aversion to labour,
when for a long time he receives no benefit from it... But a young man would practise with much more diligence and attention, if from
the beginning he wrought as a journeyman, being paid in proportion to the
little work which he could execute, and paying in his turn for the materials
which he might sometimes spoil through awkwardness and inexperience. [15]
Smith had much to say, of
course, about the whole complex of institutions surrounding the ownership and
cultivation of the land. His
condemnation of such feudal relics as the laws of entail and primogeniture,
which impeded the free marketability and therefore the optimum employment of
land, is well known. Here, too, however,
his search is for the most appropriate institutional scheme. Indeed, all of Smith’s historical discussion
of systems of land tenure (especially Book III, chap. 2) constitutes a highly
interesting account of how specific legal and traditional arrangements in Europe
have impeded economic progress by failing to provide proper and necessary incentives
to landlord and tenant. [16]
The excessive wealth of the
great landlord renders him incapable of efficient operation of his estate. [17] However, so long as large estates continue to exist, their
most efficient mode of operation poses a serious problem. To place the operation of the land in the
hands of a hired agent would be to sever completely the linkage between
self-interest and social welfare which the union of property ownership and
self-management ordinarily provides.
Under such an arrangement,
the country... would be filled with idle and
profligate bailiffs, whose abusive management would soon degrade the
cultivation, and reduce the annual produce of the land, to the diminution, not
only of the revenue of their masters, but of the most important part of that of
the whole society. [18]
The larger the unit of
ownership under a single proprietor, the greater the abuses we may expect from
the “negligent, expensive, and oppressive management of his factors and
agents.” [19] As a logical extension of this argument, Smith observes
that
the crown lands of Great Britain do not at present afford
the fourth part of the rent, which could probably be drawn from them if they
were the property of private persons. If
the crown lands were more extensive, it is probable they would be still worse
managed. [20]
15. Wealth, pp. 122-23.
16. For a recent treatment of the same problem, bearing numerous
parallels to Smith’s argument, see United Nations, Land Reform: Defects in
Agrarian Structure as Obstacles to Economic Development (New York: United
Nations, Department of Economic Affairs, 1951).
17. Wealth, pp. 363-64.
18. Ibid., p. 784.
19. Ibid., p. 775.
20. Loc. cit. So strongly
did Smith feel about the importance of maintaining the union between ownership
and management that he actually suggested a [form
of discriminatory taxation, contrived in such a manner “that the landlord
should be encouraged to cultivate a part of his own land” (ibid., pp. 783-84).]
HHC: [bracketed] displayed on page 562 of original.
561
Where lands were
tenant-operated, Smith attached great importance to all arrangements, either
legal or customary, which assured a close relationship between personal
diligence and reward. Thus Smith regards
long leases and security against arbitrary eviction as decisive in accounting
for English achievements, which he felt contrasted so favorably with those of
her Continental neighbors:
There is, I believe, no-where in Europe, except in
England, any instance of the tenant building upon the land of which he had no
lease, and trusting that the honour of his landlord
would take no advantage of so important an improvement. Those laws and customs so favourable
to the yeomanry, have perhaps contributed more to the present grandeur of England,
than all their boasted regulations of commerce taken together. [21]
The ideal unit of
agricultural organization, of course, is the small proprietorship, which
represents a fusion of all the Smithian virtues:
A small proprietor... who knows every part of his
little territory, who views it all with the affection which property,
especially small property, naturally inspires, and who upon that account takes
pleasure not only in cultivating but in adorning it, is generally of all
improvers the most industrious, the most intelligent, and the most successful. [22]
Within this context,
Smith’s well-known opposition to the joint-stock company should occasion no
surprise, nor should it be treated, as it occasionally is, as a quaint
(“pre-industrial”) archaism on his part. Whatever advantages the corporate form of
organization might bring, Smith regarded the offsetting disadvantages as
decisive. The divorce of ownership and
management and the consequent loss of incentive to diligence and efficiency are
precisely the same objections that he raises to the management of large estates
by persons other than the owners:
The trade of a joint stock company is always managed
by a court of directors. This court, indeed,
is frequently subject, in many respects, to the controul
of a general court of proprietors. But
the greater part of those proprietors seldom pretend to understand any thing of
the business of the company; and when the spirit of faction happens not to
prevail among them, give themselves no trouble about it, but receive contentedly
such half yearly or yearly dividend, as the directors think proper to make to
them. [23]
Moreover, all the ordinary
incentives to economize, naturally existing in the owner-operated firm, are
lost upon the managers of a joint-stock company. Smith makes it perfectly clear that he would
object to the adequacy of recent attempts to measure the effectiveness of
competitive forces by the use of industry (or product) concentration ratios. For he regards bigness itself, in the absolute
and not only the relative sense, as objectionable. Joint-stock companies destroy the incentive to
efficiency within the individual firm:
The directors of such companies, however, being the
managers rather of other people’s money than of their own, it cannot well be ex-
21. Ibid., pp. 368-69.
Elsewhere, Smith observes:
“Some leases prescribe to the tenant a certain mode of cultivation, and a certain succession of crops during the
whole continuance of the lease.” With
typical sarcasm he attributes this arrangement to “the landlord’s conceit of
his own superior knowledge (a conceit in most cases very ill founded)” (p.
783).
22. Ibid., p.
392. Notice, however, that Smith regards
it as an important virtue of the cultivating landlord that he can afford to
bear the costs of experimentation. “The
landlord can afford to try experiments, and is generally disposed to do so. His unsuccessful experiments occasion only a
moderate loss to himself. His successful ones contribute to the improvement and better
cultivation of the whole country” (ibid., p. 784).
23. Ibid., p. 699.
562
pected, 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. [24]
If an “unremitting exertion
of vigilance and attention... cannot long be expected from the directors of a
joint stock company,” [25] the mercantile projects of princes hold out even
smaller prospects of success. Such
projects
have scarce ever succeeded. The profusion with
which the affairs of princes are always managed, renders it almost impossible
that they should. The agents of a prince
regard the wealth of their master as inexhaustible; are careless at which price
they buy; are careless at what price they sell; are careless at what expence they transport his goods from one place to another.
Those agents frequently live with the
profusion of princes, and sometimes too, in spite of that profusion, and by a
proper method of making up their accounts, acquire the fortunes of princes. [26]
Thus Smith is constantly
searching out the impact of specific institutional forms upon the human actor. Given his basic conception of human
motivations and propensities, the specific kinds of behavior which we may
expect of any individual will depend on the way the institutions surrounding
him are structured, for these determine the alternatives open to him and
establish the system of rewards and penalties within which he is compelled to
operate. Indeed, Smith not only directs
some very harsh remarks at human hypocrisy but clearly implies that, once the
institutional framework is specified, human behavior becomes highly
predictable. After an extensive
criticism of the self-seeking behavior of the servants of the East India
Company, he states:
I mean not, however, by any thing which I have here
said, to throw any odious imputation upon the general character of the servants
of the East India Company, and much less upon that of any particular persons. It is the system of government, the
situation in which they are placed, that I mean to censure; not the
character of those who have acted in it. They acted as their situation naturally
directed, and they who have clamoured the loudest
against them would, probably, not have acted better themselves. [27]
Although it would occur to
few people to look to Smith for guidance in the conduct of government business,
there is much useful instruction in such matters in the Wealth of Nations (Book
V). The general lesson which has always
been drawn from Smith - especially by those who have clearly neglected to read
him (or Viner [28]) - has concerned the very limited number of functions
which a government can “appropriately” perform. Of much greater interest for our present
purposes are the rules laid down or implied by Smith as to how the government
ought to organize the conduct of its affairs, for here Smith touches, at great
length, upon the subject matter of this paper.
The guiding principle in
the organization of public affairs may be stated briefly: “Public services are
never better performed than when their reward comes only in consequence of
their being performed, and is proportioned to the diligence employed in performing
them.” [29] But this statement is neither so obvious
24. Ibid., p. 700.
25. Ibid., p.713.
26. Ibid., p. 771.
27. Ibid., pp. 605-6 (italics mine). The importance of institutional determinants
of human behavior is reinforced, in Smith’s view, by his belief that natural,
inborn differences among men are not very significant and are typically
exaggerated (see ibid., pp. 15-16).
28. Viner, op. cit.
29. Wealth, p. 678.
563
nor so platitudinous as it may sound, for the establishment
of the optimum arrangements in accordance with this principle is an
extraordinarily difficult task and even today (perhaps one should say “especially
today”) is seriously neglected. Although
reward should be “proportioned to the diligence employed,” care must be taken
that such diligence can be exerted only in socially beneficial directions. Here again it is the direction, rather than
the mere intensity, of human effort that is crucially important. For, as Smith points out, in legal proceedings
the income of attorneys and clerks of court had indeed been proportioned to
their diligence. But, unfortunately,
this diligence had been defined and measured for remunerative purposes in a too
strictly quantitative sense, i.e., in terms of the number of pages of their
written output. As a result,
in order to increase their payment, the attornies and clerks have contrived to multiply words
beyond all necessity, to the corruption of the law language of, I believe,
every court of justice in Europe. A like
temptation might perhaps occasion a like corruption in the form of law
proceedings. [30]
The administration of
justice is, indeed, rife with examples of the difficulties involved in devising
techniques which effectively link the pursuit of self-interest with the public
welfare. Although present arrangements
leave much to be desired, anything which tends to reduce the financial interest
of the lawyer in the case of his client is studiously to be avoided. “Lawyers and attornies,
at least, must always be paid by the parties; and, if they were not, they would
perform their duty still worse than they actually perform it.” [31]
Yet the administration of
justice in the broader sense ought never to be conducted primarily with
respect to financial considerations, most especially where the sovereign
himself exercises judicial authority. For
this establishes a highly improper liaison with self-interest which leads to
the flagrant abuse of justice, rather than its promotion:
This scheme of making the administration of justice
subservient to the purposes of revenue, could scarce fail to be productive of
several very gross abuses. The person,
who applied for justice with a large present in his hand, was likely to get
something more than justice; while he, who applied for it with a small one, was
likely to get something less. Justice
too might frequently be delayed, in order that this present might be repeated. The amercement,
besides, of the person complained of, might frequently suggest a very strong
reason for finding him in the wrong, even when he had not really been so. [32]
The exact methods devised
for the remuneration of judges are, therefore, of considerable importance. Fixed salaries, while limiting possibilities
for corrution, are likely to lead to indolence and
neglect, whereas allowing the judges to
30. Ibid., p. 680. Had the
Russians read their Smith with nearly the same diligence as they did their
Marx, they might not now be so plagued with problems perfectly analogous to,
but far more serious than, “the conveyances of a verbose attorney.”
“Orders from above have an entirely different effect
from that desired by the planners themselves. Thus they plan output in tons in many
ministries (including heavy machine-building and iron and steel) so that the
factories concentrate on the heavier goods within each item of the assortment
(product-mix) specified in the plan. They plan output of textiles by length and not
area, so that factories produce narrower cloths than their looms will take in
order to boost their output figures. They
plan geological surveys in metres drilled and not in
tons of minerals discovered, so that you can fulfil
the plan by doing unnecessary drilling. The
output of each factory is planned in wholesale prices as well as in physical
terms; and as wholesale prices include the cost of raw materials, factories
concentrate on those items which use more raw materials and less labour, again in order to boost their output figures.” (R. W. Davies, “Industrial
Planning Reconsidered,” Soviet Studies, April, 1957, p. 428).
31. Wealth, p. 677.
32. Ibid. ,p. 675.
564
establish and to collect fees, out of which they are to derive
their incomes, increases the possibility that the pursuit of self-interest will
lead to corrupt practices. Since, at the
same time, it is desirable that the law courts should defray the expenses of
their operation and that the judiciary should be completely independent of the
executive branch, Smith proposes a carefully contrived system whereby fees are
independently determined and standardized, means of payment precisely defined
and publicly recorded, and payment to the judges withheld until proceedings are
completed. Under these circumstances,
Smith is hopeful, judges will have practically no alternative but to mete out
justice in a fair and expeditious manner.”
The strong feelings which
Smith harbored against “that insidious and crafty animal, vulgarly called a
statesman or politician,” are too well known to require elaboration. They represented the fons et origo of
the many perversions and extravagances which Smith identified with “the
Mercantile System.” More important,
however, is the fact that Smith regards politicians and government officials as
a class of men peculiarly insulated not only from the ordinary pressures of the
market but from any other institutionalized compulsion which engages the
pursuit of their selfish interests with the public welfare. At the same time, the opportunities and
devices typically available for enriching themselves directly at the expense of
the public he regards as myriad. Just as
in the case of the servants of the East India Company, however, it must be
emphasized that Smith condemns not politicians per se but the institutional
framework within which politicians typically find themselves.
On the question of the
functions which may appropriately be undertaken by governments, Smith makes
several highly interesting observations, indicating that his antigovernment
bias was, in substantial measure, a reflection of the currently limited
possibilities for engaging the “interested diligence” of public officials upon
the efficient operation of government undertakings. For example, Smith cites approvingly the
mercantile projects carried out by small European governments. His invidious comparisons with the government
of England turn, not on a matter of principle, but upon the almost certain
incapacity of the British government to engage successfully in similar
undertakings, in contrast with the established efficiency of the (small)
governments of Venice and Amsterdam:
The orderly, vigilant, and parsimonious administration
of such aristocracies as those of Venice and Amsterdam, is extremely proper, it
appears from experience, for the management of a mercantile project of this
kind. But whether such a government as
that of England; which, whatever may be its virtues, has never been famous for
good oeconomy; which, in time of peace, has generally
conducted itself with the slothful and negligent profusion that is perhaps
natural to monarchies; and in time of war has
33. Ibid., pp. 677-81. The
system of paying fees to courts of law, Smith argues, has led in the past to
competition among different courts of justice which had highly beneficial
consequences. The competition for
litigation led not only to an expansion in the jurisdiction of courts
originally set up for specific purposes, such as the court of
exchequer, but also, as a direct consequence, to a swift and impartial
justice. Even more interesting is his
suggestion that such intercourt competition was a
dynamic force in changing the law itself and in leading to the emergence of new
legal concepts, such as the highly in~portant writ of
ejectment. Smith reports that “the artificial and
fictitious writ of ejectment, the most effectual
remedy for an unjust outer or dispossession of land,” was invented by the
courts of law to regain a considerable amount of litigation which had been
temporarily lost, in this competitive process, to the court of chancery (ibid.,
p. 679).
565
constantly acted with all the thoughtless extravagance that
democracies are apt to fall into; could be safely trusted with the management
of such a project, must at least be a good deal more doubtful. [34]
Similarly, although
cautioning that much of the information available concerning events in Asia was derived from such unreliable sources as the accounts of
“stupid and lying missionaries,” Smith concedes that roads and canals may be
operated by Asian governments with a high degree of efficiency. This is because, in such places as China and Indostan, the primary source of revenue to the sovereign is
derived from a land-tax or land-rent. Under
these circumstances, it is in the direct interest of the sovereign to provide
and maintain the most efficient possible network of transportation facilities.”
It is highly improbable, however,
“during the present state of things,” that any European government could
provide such transport facilities with any degree of efficiency because their
self-interests are not similarly engaged by their sources of revenue:
The revenue of the sovereign does not, in any part of
Europe, arise chiefly from a land-tax or land-rent. In all the great kingdoms of Europe, perhaps,
the greater part of it may ultimately depend upon the produce of the land: But
that dependency is neither so immediate, nor so evident. In Europe, therefore, the sovereign does not
feel himself so directly called upon to promote the increase, both in quantity
and value, of the produce of the land, or, by maintaining good roads and
canals, to provide the most extensive market for that produce. [36]
What is involved here,
therefore, is not only the matter of administrative competence or efficiency
but also the absence of institutional arrangements so structured as to engage
the motive and interests of those concerned.
Smith’s shrewd perception
of the impact of different organizational arrangements upon the individual
pursuit of wealth appears in the distinction that he draws between the
operation of roads and canals. Canals,
he argues, may more properly be left in private hands than roads. This is because the interested diligence of
the canal-owner requires the canal to be maintained, or it will become
impassable through neglect and therefore cease entirely to be a source of
revenue. Highways, on the other hand,
deteriorate by degrees and, although entirely neglected, may still remain passable.
If private persons are allowed to
collect such tolls, the roads will therefore suffer considerable neglect, since
such persons will lack the personal incentive to maintain them. [37]
34. Ibid., p. 770. Of
course, Smith insists that, wherever possible and appropriate, the
administration of smaller (local) units of government is to be preferred to
that of larger, national units (ibid., p. 689).
35. Ibid., p. 688; see also pp. 789-90.
36. Ibid, pp. 688-89.
37. Ibid., p. 684. In a
discussion of the appropriate investment criteria for underdeveloped countries,
Albert Hirschman recently made a proposal whose inner logic was strikingly
similar to that underlying Smith’s distinction between the operation of roads
and canals: “Priority should be given to investments, industries, and technical
processes which either hardly require maintenance or must have
maintenance because its absence carries with it a very high penalty, i.e.,
leads to accidents or immediate breakdown rather than to slow deterioration in
the quantity and quality of output. The
fact that the performance of the airlines in Columbia is excellent, that of the
railroads mediocre, and that of the roads outright poor can be explained in
terms of this criterion: non-maintenance would lead to certain disaster in the
case of airplanes, but roads can be left to deteriorate for a long time before
they finally disappear, and railroads occupy a somewhat intermediate position
from this viewpoint.” (Albert Hirschman, “Economics and Investment Planning: Reflections
Based on Experience in Columbia,” in Investment Criteria and Economic Growth
(Cambridge, Mass.: Center for International Studies, Massachusetts
Institute of Technology), p. 48; see also Albert Hirschman, The Strategy of
Economic Development (New Haven, Conn.: Vale University Press, 1958), pp.
139-43.
566
Smith’s search for an
institutional scheme which will establish and enforce an identity of interests
between the public and private spheres even carries over into his discussion of
the nation’s military establishment. After an extended discussion of the changing
technology of warfare and its consequences for the organization of a nation’s
military establishment, he concludes: “It is only by means of a standing army...
that the civilization of any country can be perpetuated, or even preserved for
any considerable time.” [38] The obvious threat which such a standing army poses to republican
principles, “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,” [39] is to be remedied by insuring that military
leadership is recruited only from among those classes whose self-interest is
indissolubly linked with the support of the existing government. Thus,
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. [40]
Smith’s further exploration
of this general theme is richly developed in his discussion of religious and
educational institutions (Book V, chap. 1, Arts. 2d and 3d). Although Smith raises strong social and
political objections to the accumulation of wealth and power by ecclesiastical
institutions, he argues that such accumulation almost certainly destroys their
effectiveness as “institutions for the instruction of people of all ages” as
well. For members of
the clergy are likely to be most zealous and industrious as teachers of
religious doctrine if they “depend altogether for their subsistence upon the
voluntary contributions of their hearers.” [41] If they are independently endowed, if their interested
diligence, in other words, is not made dependent on public assessment of the
effectiveness of their performance, they are likely to become negligent and
slothful in the fulfilment of their duties. It is this situation which prompted Smith to
make such frequent disparaging references to clergy of “ancient and established
systems… reposing themselves upon their benefices” and to the “contemptuous and
arrogant airs” displayed by “the proud dignitaries of opulent and well-endowed
churches,” etc. [42]
But, although Smith is
opposed to the “independent provision” of the clergy, he does not advocate the
alternative of leaving them to the free pursuit of their interested diligence. For the extreme tensions under which the
clergy would then be placed would tempt them to adopt reprehensible practices
which they might otherwise not choose, were the compulsions less great. Such a policy would lead to deceitful appeals
to a naive, credulous, and superstitious public and wholesale exploitation of
the gullibility of the latter - in effect, unfair ecclesiastical
38. Wealth, p. 667.
39. Ibid., p. 667.
40. Ibid., pp. 667-68.
41. Ibid., p. 740.
42. Ibid., pp. 741 and 762. A further consequence of large endowments and
benefices, to which Smith attached considerable importance, is that, by their
competitive attractions, they draw superior talents out of universities and
into the church. “After the church of
Rome, that of England is by far the richest and best endowed church in
Christendom. In England,
accordingly, the church is continually draining the universities of all their
best and ablest members” (ibid., p. 763; see also pp. 762-64).
567
practices. [43]
Thus the special
circumstances surrounding the usual functions of the clergy lead Smith to amend
somewhat his general maxim: “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.” [44]
The difficulty here
is that extreme necessity is not only likely to maximize effort and to overcome
the natural indolence of the clergy but to influence the direction of that
effort in socially disagreeable ways. Here
again Smith’s concern is not only with the maximization of effort but with the
more subtle dimensions of human behavior.
It is of considerable
interest to the argument of this paper to note that, although Smith is highly
critical of almost every religious order with which he deals, he does single
out at least one important exception. Reference
is made to the very high praise indeed which Smith accords to the Presbyterian
clergy:
There is scarce perhaps to be found any where in Europe
a more learned, decent, independent, and respectable set of men, than the
greater part of the presbyterian clergy of Holland,
Geneva, Switzerland, and Scotland. [45]
And, further:
The most opulent church in Christendom does not
maintain better the uniformity of faith, the fervour
of devotion, the spirit of order, regularity, and austere morals in the great
body of the people, than this very poorly endowed church of Scotland. [46]
One may, if one wishes,
dismiss this major exception as originating in a source of bias too obvious to
be worth recording. But this would be
doing much less than justice to the scope of Smith’s argument and to the fact that
this judgment is consistent, at least in Smith’s eyes, with criteria which he
develops and employs elsewhere. Smith
seems to feel that the mode of payment devised for the Presbyterian clergy
struck just that optimum balance between underpayment, which drove the
mendicant orders to that excessive and misplaced zeal which Smith likened to a
plundering army, [47] and overpayment from large independent endowments,
which was so often responsible for indolence, negligence, and “contemptuous and
arrogant airs.” The consistency of
Smith’s judgment and the generality of his argument are perfectly clear in the
closing paragraph of the section devoted to the clergy:
The proper performance of every service seems to
require that its pay or recompence should be, as exactly
as possible, proportioned to the nature of the service. If any service is very much under-paid, it is
very apt to suffer by the meanness and incapacity of the greater part of those
who are employed in it. If it is very
much over-paid, it is apt to suffer, perhaps, still more by their negligence
and idleness. 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. [48]
Smith’s devastating remarks
respecting the state of education are often treated as a mere curiosurn. In fact, however, Smith’s critique of
educational in-
43. See ibid., pp. 742-43, for
the extended quotation from Hume’s History of England which Smith
approvingly inserts.
44. Wealth, p. 717.
45. Ibid., p. 762.
46. Ibid., p. 76.5.
47. Ibid., p. 742: “The mendicant orders derive their whole
subsistence from (voluntary) oblations. It is with them, as with the hussars and light
infantry of some armies: no plunder, no pay.”
48. Ibid., p. 766.
568
stitutions - especially universities - is entirely consistent
with the general principles which have been referred to in this paper. Because of special privileges and independent
endowments, England’s great universities in particular lack the appropriate
institutional mechanisms which link the pursuit of self-interest on the part of
the faculty to the need to perform satisfactorily their professional duties. This is especially the case where the colleges
are not only heavily endowed [49] but where also (mirabile
dictu!) the teachers themselves constitute the
governing body. [50] Under such a self-perpetuating arrangement the incomes of
teachers bear virtually no relation to their proficiency as either scholars or
pedagogues. This sham is intensified in
those cases where class attendance is made obligatory and students are unable
to exercise their consumer sovereignty by awarding their fees to instructors of
greatest competence. In those cases
where the instructor derives his entire income from endowments, the connection
between effort and reward is completely ruptured, and the situation is
hopeless. For even if the teacher is
naturally energetic and constitutionally incapable of a life of total
quiescence, his energies will be channeled into directions other than
that of scholarship, since the marginal private gains in such pursuits have
been effectively set at zero. [51] The result is,
inevitably, a total and shameful neglect of learning. [52]
The situation, mercifully,
is not so bad in the public schools, which “are much less corrupted than the
universities.” The principal reason for
the difference, as might be expected, is that “the reward of the schoolmaster
in most cases depends principally, in some cases almost entirely, upon the fees
or honoraries of his scholars.” [53]
The central argument of
this paper may be restated as follows: Smith’s Wealth of Nations provided
the first systematic guide to the manner in which the price mechanism allocated
resources in a free-market economy, and the book has been justly celebrated for
this unique achievement. [54] At the same time, however, Smith was very much preoccupied with
establishing the conditions under which this market mechanism would operate
most effectively. His conception of
human behavior allowed for the free operation of certain impulses, motivations,
and behavior patterns which were calculated to thwart, rather
49. “The endowments of schools and colleges have
necessarily diminished more or less the necessity of application in the
teachers. Their
subsistence, so far as it arises from their salaries, is evidently derived from
a fund altogether independent of their success and reputation in their
particular professions” (ibid., p. 717).
50. Perhaps it should be added that, in Smith’s opinion, the control of
a university by some “extraneous jurisdiction” (bishop, governor, minister of
state) was likely to be ignorant and capricious in nature - as in the French
universities (ibid., pp. 718-19).
51. “… If he is naturally active and a lover of labour, it is his interest to employ that activity in any
way, from which he can derive some advantage, rather than in the performance of
his duty, from which he can derive none” (ibid., p. 718).
52 “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” (ibid., p. 718). And,
more generally: “The discipline of colleges and universities is in general
contrived, not for the benefit of the students, but for the interest, or more
properly speaking, for the ease of the masters. Its object is, in all cases, to maintain the
authority of the master, and whether he neglects or performs his duty, to
oblige the students in all cases to behave to him as if he performed it with
the greatest diligence and ability” (ibid., p. 720).
53. Ibid., p.721.
54. Cf., however, the reservations expressed by Schumpeter, to whom
nothing, except Walras’ Elements, appears to
have been sacred (J. A. Schumpeter, History of Economic Analysis [New
York: Oxford University Press, 19541, pp. 184-86).
569
than to reinforce, the beneficent operation of market
forces, and Smith was therefore very much concerned with providing an exact,
detailed specification of an optimal institutional structure. Later generations of economists have virtually
ignored this aspect of Smith’s analysis both by oversimplifying his conception
of human behavior and by merely invoking, without examination, a competitive
economy. The result has been a neglect
of some of the most fruitful and suggestive aspects of Smith’s analysis and a
distortion of the broader implications of his argument. The present paper represents a partial attempt
to restore this balance.
Recent concern among
economists with problems of economic development and with specific areas of
government policy formulation suggests a resurgence of interest in the
incidence of different institutional forms upon economic behavior. [55] Although the Wealth of Nations is certainly not the
last word on this subject, its analytical framework still constitutes a most
useful point of departure.
55. Cf., for example, W. A. Lewis, The Theory of Economic Growth (Homewood,
Ill.: Richard D. Irwin, Inc., 1955), esp. chap. iii, and the masterly analysis
of the American patent system in Fritz Machlup, An
Economic Review of the Patent System (Study No. 15 of the Subcommittee on
Patents, Trademarks and Copyrights of the Committee on the Judiciary, U.S.
Senate [Washington: Government Printing Office, 1958]).
570
The Competitiveness of Nations
in a Global Knowledge-Based Economy
April 2003