Adam Smith’s Theory of the State

A partial discussion of Adam Smith’s view of the role, and extent, of the state, largely, but not entirely with reference to An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Book V (Of the Revenue of the Sovereign or Commonwealth) up to V.i.e.

There is full discussion of the two most basic functions of the state, which everyone who agrees that there should be such a thing as a state, should be state functions: national defence and the administration of justice.  Smith looks at the different ways the defence function is undertaken in different societies.  In the earliest societies of hunters, armies must be small and not very effective as hunters live in small scattered groups and do no develop many skills.  The second state of society is that of shepherds.  Shepherds are more militarily effective as herding societies concentrates population, allowing large armies to be recruited.  Shepherds cannot be away from livestock for very long though, and while they can support themselves during war, they cannot do so for long.  An agricultural community/a community of husbandmen has greater concentrations of population, but allows less leisure time for military training.  An urban community/community of artificers has even greater concentrations of population, but even less leisure time for training. Furthermore, the skills of artificers are less relevant to warfare.

Large armies formed by societies at an earlier social stage often defeat great states and empires, because the population of the great state may be less suited to war.  Its people are busy with non-military pursuits, its aristocracy lives in the capital city and does not have a military lifestyle.  Armies are formed of mercenaries who are not loyal, and who are paid with taxes which make the population less loyal to the government.  The people of a great state may side with barbarian armies, as happened at the end of the Roman Empire in the west.  This is an example of how Smith thinks that history and state development do not always go in a progressive direction, though on the whole he thinks that is the case.

Differences in military strength also relate to the differences between militia armies and standing armies.  A militia army is a part time citizen army and is less strong than a standing army of full time professional soldiers.  The Roman Empire had to move from militia to standing army in order to win wars and become a great state.  However, that produced the problem we have already seen, of disloyal and expensive mercenaries.  In addition it poses the danger of an army that is stronger than the people or state, leading sometimes to despotic military government.  This danger is avoided by ensuring that the army is under the ultimate command of civil authorities.

The origins of the state’s judicial functions are non-ideal for Smith.  In early history rulers accept money to decide on legal disputes.  Both sides are charged for judicial services and those who cannot afford such expenses do not have access to legal justice.  The justice system in such times works to keep the poor away from the property of the rich, and does little for the poor.  The judicial function is early on carried out by the chieftain of the society, but as societies become more complex, professional judges have to be employed.  Justice starts to become less personalised, though it is still largely for the benefit of the rich.  Historical development require a larger and larger judicial system which is paid for by taxes rather than charges which become bribes extorted from those seeking a favourable judgement.  In this way, a state that is less connected with the person of the monarch and more concerned with general justice emerges.

Smith discusses the economic aspects of public goods and state limits with regard first to roads and then to trading companies.  Roads can be provided in a purely private way by charging for use.  However, Smith argues, there cannot be a purely private system, because experience shows that private road owners can make large amounts of money charging for inadequate roads.  This is is not just bad for the individuals using those roads, but for everyone since the economy slows down if movement of goods and people slows down.  Smith still thinks state run roads can raise charges and suggests dangers from state operation, in that charges for roads may become a major source of revenue for the state, which may end up making road unaffordable for most people through high charges.  He notes that in France, there has been some success in provision of roads by provincial officials, suggesting that local responsibility has many benefits.  Discussing London, he suggests it is fairer and more efficient for people in London to pay for local roads and lighting than tax payers in other parts of the country.  Going back to France, he says there are sometimes bad roads there as well, and that too much money is put into big roads.  These are noticed  by the aristocracy, bringing greater prestige and political influence than a good system of small roads which benefits more people, but in a way which is not noticed. That is a problem discussed now of how politicians favour projects which bring strong benefits to a few and charge a bit to most people through taxes, rather than cheaper projects which bring slight improvement to most people: the problem of concentrated benefits and dispersed costs.

On trading companies, Smith discusses companies which traded with Africa, India, and the Ottoman Empire (‘Turkey’) and which were a form of semi-private colonialism, in that they often administered territory in those regions under the guise of trade, or at least sought trading terms which benefitted the company rather than the host state.  The most famous of these companies was the East India Company which colonised large parts of the subcontinent, before it was replaced by an official British empire in India.  Smith was not an enthusiast for colonialism but saw it as inevitable in situations were trade was dangerous, since then merchants needed fortresses to protect them, the fortresses needed soldiers and a territory with population to provide soldiers, taxes to finance all of this, etc.  Smith notes the many ways that these kinds of company with privileged relations to the state distort trade to their advantage and everyone else’s disadvantages.  They try to prevent competing traders and competing producers where it threatens their economic welfare.  He also discusses how these companies work internally, which is a more positive story of how investors get together and find ways of protecting their investments without necessarily harming anyone else.  Smith’s overall lesson is that the state should provide the administration of justice necessary for trading companies to have a stable existence, but should avoid protecting their interests or coming under their influence.  The state should only do what brings genuine general benefits (public goods), making use of charges and local responsibility where that brings about the most benefits.

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