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2022 | OriginalPaper | Chapter

5. The Proper Role for Government, Game-Theoretically, for Smith

Authors : Andreas Ortmann, Stephen J. Meardon, Benoît Walraevens

Published in: Adam Smith’s System

Publisher: Springer International Publishing

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Abstract

We sketch out in simple game-theoretic terms the numerous public-goods provision and externalities problems on display in particular in Book V of The Wealth of Nations. Casting these problems in these terms highlights the strategic nature of the thinking that Smith brought to the analysis of these problems. It leads us to claim that Smith—while he did not use these terms—understood well the pervasive nature of inter- and externalities, as well as the related issue of reputational enforcement.

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Footnotes
1
Interactions involving more than two players can be presented in the 2 × 2 paradigm as follows: The players are one person in a population versus all other people in the population: since all players are assumed identical and face the same payoffs, the “Row” player is one person and the other (“Column”) player is taken to be a representative of all the other people. This reduces the game to the 2 × 2 game that we analyze here.
 
2
Fehr and Gächter (2000) and the more than 2,000 online references attached to the original article in the AEA website.
 
3
See West (1990), Chapter 7. See also West (1976), on canal building near Montpellier.
 
4
Smith was adamant that monopoly privileges granted by government be strictly temporary, not perpetual. The former “may be vindicated upon the same principles upon which a like monopoly of a new machine is granted to its inventor …” (WN, V.i.e.,30, p. 754). The latter, however, will “merely enable the company to support the negligence, profusion, and malversation of their own servants …” (WN, ibid.).
 
5
Sagar (2021) discusses the conspiracy of merchants, very much in line with what we discuss above under the heading of the collusion by “captains of industry”. In fact, he motivates his study with the quote that we use as epigraph for that section. Sagar wants to understand why and how, in Smith’s opinion, the merchants were able to exert such disproportionate influence in modern societies. He starts his argument with merchants’ advocacy of a faulty economic theory—the balance of trade—which “enabled them to deceive political rulers into granting vast networks of monopolies, drawbacks, and bounties, that enriched the merchants whilst impoverishing the rest of the nation” (p. 465). Sagar’s key argument is (p. 475) that the employees of the East India Company—i.e., private merchants—acted as just that, short-term profit maximizers when in fact they were de facto sovereigns that should have a long-term profit maximization perspective. “Yet because the merchants saw themselves as British, and India as simply a foreign place to extract profit before leaving for home, they never made this connection” (ibid.). The consequences were costly in that the entire colonial system could ultimately be sustained only by violent oppression that relied on military force. Pack (2010, in particular pp. 71 - 73), curiously not even referenced by Sagar, makes a very similar argument. He stresses that the questionable behavior of merchants, against which Smith railed, was designed by them and reflected their ability in the England of their time to extract more than their fair share.
 
6
In this game, the optimal result is reached when both choose to cooperate. Yet, Smith underlines that when laborers work hard and capital owners pay them by the piece it can lead to a suboptimal outcome. The reason lies in the workers’ tendency to overwork (WN, I.viii.44, p. 100). Doing so, they “ruin their health” and become less productive than people who make moderate but constant efforts (ibid.). Here, the workers’ faculty to calculate has failed. Maybe it is an unfortunate consequence of the deleterious effects of the division of labor on workers’ mind and understanding (see above), the latter being defined as an essential component of prudential behavior in TMS. But it is not Smith’s first and foremost argument. According to him, this failure of the employer-employee relationship comes from capitalists’ inability to “listen to the dictates of reason and humanity” (ibid.). Capital owners are blinded by the love of domination and the quest for profit (Dellemotte & Walraevens 2015).
 
7
“The expense of maintaining good roads and communications is, no doubt, beneficial to the whole society, and may, therefore, without any injustice, be defrayed by the general contribution of the whole society. This expense, however, is most immediately and directly beneficial to those who travel or carry goods from one place to another, and to those who consume such goods. The turnpike tolls in England, and the duties called peages in other countries, lay it altogether upon those two different sets of people, and thereby discharge the general revenue of the society from a very considerable burden” (WN, V.i.i.4, p. 815).
 
8
“When the institutions or publick works which are beneficial to the whole society, either cannot be maintained altogether, or are not maintained altogether by the contribution of such particular members of the society as are most immediately benefited by them, the deficiency must in most cases be made up by the general contribution of the whole society” (WN, V.i.i.6, p. 815).
 
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Metadata
Title
The Proper Role for Government, Game-Theoretically, for Smith
Authors
Andreas Ortmann
Stephen J. Meardon
Benoît Walraevens
Copyright Year
2022
DOI
https://doi.org/10.1007/978-3-030-99704-5_5