A few days ago I noted (recall) that Adam Smith starts the Wealth of Nations with his chapter on the division of labor that introduces the moral (and economic) significance of the art of government: “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.” (WN 1.1.10, p. 22.) I then went on to point out that very first functions of established government are mentioned in the chapter on “The Origin and Use of Money,” including institutions that regulate ‘measures, weights, and coinage,’ including of key staples like wool and linen. I noted that these functions presuppose considerable technological and epistemic competence and, while conducive to good order and commerce, also provide epistemic public goods.
I also (recall) noted (echoing Foucault in 1978) that for Rousseau (in the Discourse on Political Economy), the development of the art of government is a means to introduce economy into the managing of state apparatus. And Rousseau emphasizes that is a response to the vulnerabilities caused by the advanced division of labor. In today’s post I want to show how Smith extends this insight.
Deep in book V of Wealth of Nations, Smith notes a very important pay-off from uniform coinage that reinforces its significance to the art of government. It occurs in material that has received attention from Ryan Hanley (writing in APSR here) and myself (here). The passage I have in mind begins with a discussion of the “public police” (we would say public policy or public administration) in China. Here’s the introduction to it:
In China…the executive power charges itself both with the reparation of the high roads, and with the maintenance of the navigable canals. In the instructions which are given to the governor of each province, those objects, it is said, are constantly recommended to him, and the judgment which the court forms of his conduct is very much regulated by the attention which he appears to have paid to this part of his instructions. This branch of publick police accordingly is said to be very much attended to…particularly in China, where the high roads, and still more the navigable canals, it is pretended, exceed very much every thing of the same kind which is known in Europe. (WN 5.1.d.17, p. 729)
Usually when people focus on Smith’s account of China they are interested in his theory of the stationary state. But here Smith praises China for its good public management and maintenance of important public works (high roads and navigable canals). At first sight, his explanation for this, is that the center provides good incentives to the provincial governors. But Smith goes on to cast doubt on the reliability of the reports about this.
He then suggests an alternative explanation (which may well be compatible with the one he seems to reject). In this explanation the sovereign’s income is derived from land-taxes and land-rents and these rise with land productivity. So, it is in the sovereign’s interest to generate as wide a market as possible and so create a cheap and efficient national infrastructure:
In China…the revenue of the sovereign arises almost altogether from a land-tax or land-rent, which rises or falls with the rise and fall of the annual produce of the land. The great interest of the sovereign, therefore, his revenue, is in such countries necessarily and immediately connected with the cultivation of the land, with the greatness of its produce, and with the value of its produce. But in order to render that produce both as great and as valuable as possible, it is necessary to procure to it as extensive a market as possible, and consequently to establish the freest, the easiest, and the least expensive communication between all the different parts of the country; which can be done only by means of the best roads and the best navigable canals. (WN 5.1.d.17, p. 730.)
Smith’s underlying argument about the mechanism is itself not original. One can find it in Hobbes and Hume. And I would not be surprised if it’s in many others. Smith himself complains that European governments fail to avail themselves of this good practice (and reiterates his doubts about his sources): “Though it should be true, therefore, what I apprehend is not a little doubtful, that in some parts of Asia this department of the publick police is very properly managed by the executive power, there is not the least probability that, during the present state of things, it could be tolerably managed by that power in any part of Europe.” (WN 5.1.d.17, p. 730)
Smith suspects it could be managed much better in China. In fact, much of his treatment of Chine political practices involve the temptations toward corruption and petty tyranny by so-called ‘inferior mandarins’ (what Judith Butler calls ‘petty sovereigns’.) And at one point, later in the book, he notes,
a publick revenue, which was paid in kind, would suffer so much from the mismanagement of the collectors, that a very small part of what was levied upon the people would ever arrive at the treasury of the prince. Some part of the public revenue of China, however, is said to be paid in this manner. The Mandarins and other tax-gatherers will, no doubt, find their advantage in continuing the practice of a payment which is so much more liable to abuse than any payment in money. (WN 5.2.d.7, p. 839)
So, lurking in Smith is another argument about the pay-off to the art of government from the state’s capacity to maintain institutions that regulate ‘measures, weights, and coinage:’ they can generate a more effective and less corrupt tax regime that combines the interest of the sovereign in raising revenue and the people’s interests in having access to a well-functioning and cheap public infrastructure without suffering the petty tyranny of corrupt and often brutal local tax collectors. In this example, the technology needed to maintain institutions that regulate ‘measures, weights, and coinage’ provide epistemic public goods and introduce better economy into the management of the state apparatus.
Modern states create epistemic reductions in public goods (i.e., bads). In Smith's day the government paid their bills by debasing the coinage. The modern equivalent of such deabsement is far and away more subtle and damaging. When governments routinely spend in excess of tax collections, the central bank buys enough gov debt in the open market to enable the selling bond investors to buy the entire new debt issue, thus indirectly financing the entire new issue with new credit money creation. The resulting inflation reduces the real value of wealth by whatever is required to equal the resource cost of the government's expenditure. Indeed, the function of the market economy is to inflate it enough to pay for the governments excess spending. This analysis gives you a way of thinking about the inflationary process and how long it will last in principle. By getting the principle right we set the stage for better measurement a la Adam Smith. It is not evident to me that either the government authorities or the central bankers understand the process that they cause as both become enmeshed in irrelevant interest rate policy to control the inflation they jointly caused. The way to prevent inflation is for the central bank not to finance the government spending. Then the spending will be restrained by the willingness of bond investors to buy and hold the new bond issue. That will budget constrain the government, which is not now the case.